As filed with the Securities and Exchange Commission on May 29,
1998 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)
_______________________
Maryland 65-0503831
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
Jeffrey H. Fisher
Innkeepers USA Trust
306 Royal Poinciana Plaza 306 Royal Poinciana Plaza
Palm Beach, Florida 33480 Palm Beach, Florida 33480
(561) 835-1800 (561) 835-1800
(Address, including zip (Address, including zip
code, and telephone code, and telephone
number, including area number, including area
code, of registrant's code, of agent for
principal executive service)
offices)
_________________________
Copies to:
David C. Wright, Esq.
Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219-4074
(804) 788-8200
Approximate date of commencement of proposed sale to the
public: From time to time after the effective date of this
Registration Statement as determined by market conditions and
other factors.
If the only securities being registered on this form are
being offered pursuant to dividend or interest reinvestment
plans, please check the following box.
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
plants, check the following box.
Proposed
Title of Maximum Proposed
Each Aggregate Offering Maximum
Class of Amount Price Aggregate Amount of
Securities To Be Per Unit Offering Registration
Registered Registered (1)(2) Price(1) Fee(2)
Common 1,572,861 $14.125 $22,216,662 $6,554
Shares,
$.01 par
value
(1) Estimated solely for purposes of calculating the
registration fee.
(2) The registration fee has been calculated in accordance
with Rule 457(c) under the Securities Act of 1933, as amended,
and based on the average of the high and low sales price of the
Common Shares as reported on the New York Stock Exchange on May
28, 1998.
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 the Registration Statement
shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
CROSS-REFERENCE SHEET
Item Number and Caption Heading in Prospectus
1. Forepart of the Outside Front Cover Page
Registration Statement
and Outside Front Cover
Page
2. Inside Front and Outside Inside Cover Page;
Back Cover Pages of Outside Back Cover Page
Prospectus
3. Summary Information, Risk Outside Front Cover Page;
Factors and Ratio of Prospectus Summary; Risk
Earnings to Fixed Factors; The Company;
Charges Shares Available for
Future Sale; Federal Income
Tax Considerations
4. Use of Proceeds Not Applicable
5. Determination of Offering Outside Front Cover Page;
Price Plan of Distribution
6. Dilution Not Applicable
7. Selling Security-Holders Selling Shareholder
8. Plan of Distribution Outside Front Cover Page;
Plan of Distribution
9. Description of Securities Description of Shares of
to be Registered Beneficial Interest;
Description of Units
10. Interests of Named Not Applicable
Experts and Counsel
11. Material Changes Not Applicable
12. Incorporation of Certain Incorporation of Certain
Information by Reference Documents by Reference
by Reference
13. Disclosure of Commission Not Applicable
Position on
Indemnification for
Securities Act Liabilities
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 29, 1998
PROSPECTUS
1,572,861 Shares
INNKEEPERS USA TRUST
Common Shares
This Prospectus relates to (i) the possible issuance by
Innkeepers USA Trust (the "Company") of up to 1,477,307 common
shares of beneficial interest (the "Redemption Shares"), par
value $.01 per share ("Common Shares"), of the Company if, and to
the extent that, certain current holders (the "Limited Partners")
of common units of limited partnership interest ("Units") in
Innkeepers USA Limited Partnership (the "Partnership"), of which
a wholly-owned subsidiary of the Company is the sole general
partner, tender such Units for redemption and, pursuant to the
terms of the agreement of limited partnership of the Partnership
("the Partnership Agreement") the Company elects to acquire the
Units for Common Shares and (ii) the offer and sale from time to
time of up to 95,554 Common Shares (the "Secondary Shares") that
may be issued to a selling shareholder named herein who is an
affiliate of the Company (the "Selling Shareholder") upon
presentation by the Selling Shareholder of Units to the
Partnership for redemption by such persons. The Partnership
issued 1,572,861 Units (the "Redemption Units") in connection
with the purchase of certain hotel properties. Pursuant to the
Partnership Agreement, the holders of the Redemption Units may
tender the Redemption Units to the Partnership for redemption at
any time on or after June 20, 1998. In such event, the Company
may elect to acquire directly such Redemption Units tendered for
redemption in exchange for Common Shares, on a one-for-one basis,
or for cash. The Redemption Shares and Secondary Shares will be
issued if and to the extent that the Company acquires the
Redemption Units for Common Shares. If the Partnership (rather
than the Company) redeems the Redemption Units, or if the Company
acquires Redemption Units for cash, Redemption Shares will not be
issued. See "The Company" and "Plan of Distribution."
The Common Shares are traded on the New York Stock Exchange
under the symbol "KPA." To ensure compliance with certain
requirements related to the Company's qualification as a real
estate investment trust ("REIT") under the Internal Revenue Code
of 1986, as amended, the Company's Declaration of Trust limits
the number of Common Shares that may be owned by any single
person or affiliated group to 9.8% of the outstanding Common
Shares (the "Ownership Limitation") and restricts the
transferability of Common Shares if the purported transfer would
prevent the Company from qualifying as a REIT. See "Description
of Shares of Beneficial Interest-Certain Provisions of Maryland
Law and of the Company's Declaration of Trust and Bylaws."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR CERTAIN
FACTORS RELATING TO AN INVESTMENT IN THE COMMON
SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Selling Shareholder may transfer his Redemption Units to
third parties prior to redemption. The Selling Shareholder or
his transferees from time to time may offer and sell the
Secondary Shares directly or through agents or broker-dealers on
terms to be determined at the time of sale. To the extent
required, the names of any transferees or of any agent or broker-
dealer and applicable commissions or discounts and any other
required information with respect to any particular offer will be
set forth in an accompanying Prospectus Supplement. See "Plan of
Distribution." The Selling Shareholder reserves the sole right
to accept or reject, in whole or in part, any proposed purchase
of the Secondary Shares to be made directly or through agents.
The Company will not receive any cash proceeds from the
issuance of the Redemption Shares or the sale of any Secondary
Shares by the Selling Shareholder but has agreed to bear certain
expenses of registration of the issuance of the Redemption Shares
and the sale of the Secondary Shares under federal and state
securities laws. The Company will acquire Redemption Units in
exchange for any Redemption Shares that the Company may issue to
Redemption Unit holders pursuant to this Prospectus.
The Selling Shareholder and any agents or broker-dealers
that participate with the Selling Shareholder in the distribution
of Secondary Shares may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended (the
"Securities Act"), and any commissions received by them and any
profit on the resale of the Secondary Shares may be deemed to be
underwriting commissions or discounts under the Securities Act.
The date of this Prospectus is ___________, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange
Commission (the "Commission") pursuant to the Exchange Act. Such
reports, proxy statements and other information filed by the
Company may be examined and copied, upon payment of the
prescribed fees, at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained by mail from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates or from the Commission's site on
the World Wide Web at http:\\www.sec.gov. The Common Shares are
listed on the New York Stock Exchange, and such reports, proxy
and informational statements and other information concerning the
Company can be inspected and copied at the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission, 450 Fifth Street,
N.W., Washington D.C. 20549, a Registration Statement on Form S-3
under the Securities Act, and the rules and regulations
promulgated thereunder, with respect to the Common Shares offered
pursuant to this Prospectus. This Prospectus, which is part of
the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the
exhibits and financial schedules thereto. For further
information concerning the Company and the Common Shares offered
hereby, reference is made to the Registration Statement and the
exhibits and schedules filed therewith, which may be examined
without charge at, or copies obtained upon payment of prescribed
fees from, the Commission and its regional offices at the
locations listed above. Any statements contained in this
Prospectus concerning the provisions of any document referred to
herein are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by
such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the
Commission (File No. 34-0-24568) are incorporated herein by
reference:
(a) The Company's Current Reports on Form 8-K
filed with the Commission on July 18, 1997
and January 22, 1998;
(b) Annual Report on Form 10-K for the year
ended December 31, 1997;
(c) Quarterly Report on Form 10-Q for the three
months ended March 31, 1998;
(d) The description of the Common Shares of the
Company included in the Company's
Registration Statement on Form 8-A, dated
September 19, 1996; and
(e) The Company's Proxy Statement for the
Annual Meeting of Shareholders held on May
6, 1998.
All documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date of this Prospectus and prior to the termination of the
offering of the securities made hereby shall be deemed to be
incorporated by reference in this Prospectus and made a part
hereof from the date of the filing of such documents. Any
statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other document
subsequently filed with the Commission which also is deemed to be
incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute
a part of this Prospectus.
i
<PAGE>
The Company will provide without charge to each person to
whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any and all of the documents
incorporated by reference herein (not including the exhibits to
such documents, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such
copies should be directed to Innkeepers USA Trust, 306 Royal
Poinciana Plaza, Palm Beach, Florida 33480, Attention: Secretary,
telephone (561) 835-1800.
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the
more detailed information and financial statements and the notes
thereto appearing elsewhere in this Prospectus or incorporated by
reference herein or therein. Unless the context otherwise
indicates, all references herein to (i) the "Company" include
Innkeepers USA Trust and its subsidiaries, (ii) the "Partnership"
include Innkeepers USA Limited Partnership and its subsidiary
partnerships and (iii) the "JF Lessee" include JF Hotel, Inc. and
its sister corporations, which lease hotels from the Company.
This Prospectus contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Exchange Act, which involve risks and
uncertainties. The Company's actual results may differ
materially from the results discussed in such forward looking
statements. Factors that might cause such a difference include
those discussed in "Risk Factors" and in the Company's periodic
reports filed with the Securities and Exchange Commission.
THE COMPANY
The Company currently owns 62 Hotels containing an aggregate
of 7,439 rooms located in 24 states (the "Hotels"). The Hotels
include (i) 45 upscale and two mid-priced extended-stay hotels,
including 38 Residence Inn hotels, six Summerfield Suites hotels,
two Sierra Suites hotels and one Sunrise Suites hotel and (ii) 15
mid-priced limited or full service hotels including 12 Hampton
Inn hotels, one Comfort Inn hotel, one Holiday Inn Express hotel
and one Sheraton Inn hotel.
The Company has implemented a strategy of utilizing multiple
lessees and hotel management companies for its hotel properties.
The Company leases 53 of the Hotels to the JF Lessee and leases
the six Summerfield Suites hotels, two Sierra Suites hotels and
one Sunrise Suites hotel (collectively, the "Summerfield Hotels")
to affiliates of Summerfield (the "Summerfield Lessee" and,
together with the JF Lessee, the "Lessees") pursuant to
percentage leases (the "Percentage Leases") which provided for
the payment of rent based on a percentage of room revenues
("Percentage Rent"). The JF Lessee has entered into management
contracts with Residence Inn by Marriott, Inc., a subsidiary of
Marriott International, Inc. ("Marriott"), to manage 20 of the
Residence Inn Hotels. The Summerfield Lessee has entered into
management contracts with other affiliates of Summerfield Hotel
Corporation (the "Summerfield Manager") to manage the nine
Summerfield Hotels.
RISK FACTORS
Prospective investors and Unit holders should carefully
consider the matters discussed under "Risk Factors" before making
an investment decision regarding the Common Shares offered
hereby.
TAX STATUS OF THE COMPANY
The Company elected to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its short taxable year
ended December 31, 1994. As a REIT, the Company generally is not
subject to federal income tax on its taxable income that it
distributes to its shareholders. A REIT is subject to a number
of organizational and operational requirements, including a
requirement that it currently distribute at least 95% of its
annual taxable income. Failure to qualify as a REIT will render
the Company subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at
regular corporate rates, and distributions to the shareholders in
any such year will not be deductible by the Company. Even if the
Company qualifies for taxation as a REIT, the Company may be
subject to certain federal, state and local taxes on its income
and property. In connection with the Company's election to be
taxed as a REIT, the Company's Declaration of Trust imposes
certain restrictions on the ownership and transfer of Common
Shares. The Company has adopted the calendar year as its taxable
year. See "Description of Shares of Beneficial Interest" and
"Federal Income Tax Considerations."
SECURITIES TO BE OFFERED
This Prospectus relates to (i) the possible issuance by the
Company of up to 1,477,307 Redemption Shares if, and to the
extent that, current holders of the Redemption Units tender such
Units for redemption and the Company acquires the Redemption
Units in exchange for Redemption Shares and (ii) the offer and
sale from time to time of up to 95,554 Secondary Shares that may
be issued to the Selling Shareholder upon the tender of the
Redemption Units for redemption by such persons.
The Partnership issued the 1,572,861 Redemption Units in
connection with the acquisition of certain of the Hotels. The
Partnership has issued Units and preferred units of limited
partnership interest in the Partnership ("Preferred Units"; as
used herein, "Units" shall include common Units and "Preferred
Units" unless otherwise stated) to other sellers of hotel
properties, including the Summerfield Hotels, and intends to
consider the issuance of Units to sellers of hotel properties in
connection with future acquisitions of hotel properties. The
holders of Units are limited partners ("Limited Partners") of the
Partnership. See "Shares Available for Future Sale."
All of the Redemption Units may be tendered by the holders
to the Partnership for redemption at any time after June 20,
1998. Pursuant to the Partnership Agreement, the Company, in its
sole discretion, may elect to acquire directly any Redemption
Units tendered to the Partnership for redemption, rather than
causing the Partnership to redeem such Redemption Units. The
Company may acquire Redemption Units in exchange for Common
Shares, on a one-for-one basis, or, at its election, for an
equivalent value in cash. The Company anticipates that it
generally will elect to acquire directly Redemption Units
tendered for redemption and that the Company will issue
Secondary Shares or Redemption Shares pursuant to this Prospectus
in exchange therefor rather than paying cash. As a result, the
Company may from time to time issue up to 1,477,307 Redemption
Shares and 95,554 Secondary Shares upon the acquisition of
Redemption Units tendered for redemption. With each such
redemption, the Company's percentage interest in the Partnership
will increase. The Company is registering the issuance of the
Redemption Shares and the Secondary Shares to provide the
recipients thereof with freely tradable securities.
The Company will not receive any cash proceeds from the
issuance of any Redemption Shares or the sale of any Secondary
Shares, but will acquire Redemption Units upon issuance of
Redemption Shares or Secondary Shares. The registration of the
Redemption Shares and the Secondary Shares does not necessarily
mean that any of such shares will be issued by the Company or
sold by the Selling Shareholder.
EACH LIMITED PARTNER SHOULD CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF (A) THE
REDEMPTION OF HIS UNITS AND OWNERSHIP OF HIS UNITS, (B) THE
OWNERSHIP AND/OR SALE OF THE COMMON SHARES AND (C) THE COMPANY'S
ELECTION TO BE TAXED AS A REIT, INCLUDING THE STATE, LOCAL,
FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH REDEMPTION,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
RISK FACTORS
Prospective investors and Redemption Unit holders should
carefully consider the following information in conjunction with
the other information contained in this Prospectus.
Special Considerations Applicable to Redeeming Unit Holders
Tax Consequences of Redemption of Redemption Units. The
exercise by a holder of Redemption Units of the right to require
the redemption of Redemption Units will be treated for tax
purposes as a sale of such Redemption Units by the Limited
Partner. Such a sale will be fully taxable to the redeeming
Limited Partner, and such redeeming Limited Partner will be
treated as realizing for tax purposes an amount equal to the sum
of the cash or the value of the Common Shares received in the
redemption plus the amount of any Partnership liabilities
allocable to the redeemed Units at the time of the redemption.
It is possible that the amount of gain recognized or even the tax
liability resulting from such gain could exceed the amount of
cash and the value of the Redemption Shares received upon such
disposition. See "Redemption of Units-Tax Consequences of
Redemption." In addition, the ability of the Limited Partner to
sell a substantial number of Redemption Shares or Secondary
Shares in order to raise cash to pay tax liabilities associated
with the redemption of Redemption Units may be restricted due to
the Company's relatively low trading volume, and, as a result of
fluctuations in the price of the Common Shares, the price the
Limited Partner receives for such shares may not be equal to the
value of his Redemption Units at the time of redemption.
Change in Investment Upon Redemption of Redemption Units.
If a Limited Partner exercises the right to require the
redemption of his Redemption Units, such Limited Partner may
receive, either cash or Common Shares of the Company in exchange
for the Redemption Units. If the Limited Partner receives cash,
the Limited Partner will no longer have any interest in the
Company, will not benefit from any subsequent increases in share
price and will not receive any future distributions from the
Company (unless the Limited Partner currently owns or acquires in
the future additional Common Shares or Units). Upon redemption,
a Limited Partner's right to receive distributions with respect
to the Redemption Units will cease and the Limited Partner will
become a shareholder of the Company with respect to any
Redemption Shares or Secondary Shares issued upon redemption.
See "Redemption of Units-Comparison of Ownership of Units and
Common Shares."
Risk of Rapid Growth; Dependence on Lessees and Third-Party
Managers
The Company's ability to grow depends upon the ability of
the Lessees and any third-party manager retained by the Lessees,
such as Marriott or the Summerfield Manager, to manage
effectively the Hotels, as well as any additional hotels in which
the Company invests. The Lessees' or any third-party managers'
ability to operate additional hotels under Percentage Leases or
management agreements, as applicable, with current staffing
levels and office locations, may diminish as the Company acquires
additional hotels. Such growth may require the Lessees to hire
additional personnel, engage additional third-party managers and
operate in new geographic locations. In order to qualify as a
REIT, the Company cannot operate the Hotels or participate in
decisions affecting the daily operations of the Hotels. The
Lessees have limited assets and the Lessees must generate
sufficient cash flow from the operation of the Hotels, after
payment of all operating expenses, to fund the Lessees' rent
obligations under the Percentage Leases. There can be no
assurance that the Lessees or their third-party managers will
effectively operate the Hotels. In the event that the Lessees
and their third-party managers fail to effectively operate the
Hotels, the Company's internal growth strategy and acquisition
strategy would be more difficult to achieve and, therefore, cash
available for distribution to the shareholders of the Company
could be adversely affected. If the Company terminates a
Percentage Lease following a default under a Percentage Lease, a
default could concurrently be triggered under the Company's loan
agreements, which could result in a foreclosure of the Hotels
securing borrowings under the Company's loan agreements. In
addition, a material default under a Percentage Lease could
trigger cross-defaults under one or more Percentage Leases,
which could have a material adverse effect on cash available for
distribution to the shareholders of the Company.
Development and Construction Activities
The Company is currently undertaking the development of a
Sierra Suites hotel in Westborough, Massachusetts and may in the
future undertake additional hotel development. The Company has
also undertaken in the past, and may undertake in the future,
substantial renovation of hotels. Risks associated with
additional development and construction activities may include:
(i) the abandonment of development opportunities explored by the
Company; (ii) construction costs of a hotel exceeding original
estimates due to increased materials, labor or other expenses,
which could make completion of the hotel uneconomical; (iii)
operating results at a newly-completed hotel are dependent on a
number of factors, including market and general economic
conditions, competition and market acceptance; (iv) financing may
not be available on favorable terms for the development of a
hotel; and (v) construction and stabilization may not be
completed on schedule, resulting in increased debt service
expense and construction costs. Development activities are also
subject to risks relating to the inability to obtain, or delays
in obtaining, all necessary zoning, land-use, building,
occupancy, and other required governmental permits and
authorizations. The occurrence of any of the events described
above could adversely affect the Company's ability to achieve its
projected yields on hotels under development or renovation and
could adversely affect cash available for distribution to the
shareholders of the Company.
Acquisition of Hotels with Limited Operating History
The Company and the Lessees have negotiated the Percentage
Rent formulas for certain Hotels with limited operating history
based on certain assumptions of occupancy and average daily rate
("ADR") for these Hotels on an anticipated stabilized basis.
Consequently, the Company will be subject to risks that these
Hotels will not achieve anticipated occupancy or ADR levels or
may not achieve such levels within anticipated time frames.
Room revenues may be less than required to result in the payment
of Percentage Rent at levels at a particular Hotel that provide
the Company with an attractive return on its investment. Base
Rent for the Summerfield Hotels reduces under the terms of the
Percentage Leases beginning in 1999, when the Rent becomes more
heavily weighted towards Percentage Rent. If the room revenues
at that time were less than currently anticipated, the Rent
payable with respect to those Hotels would be lower than
anticipated, which could have a material adverse effect on cash
available for distribution to shareholders of the Company.
Additionally, the Company has entered into a contract with
Marriott to purchase the six Acquisition Hotels (defined in "The
Company" below), all of which are currently under development by
Marriott. See "The Company." Acquisition of hotels under
development entails risks that completion delays will delay
receipt of rent payments by the Company. The purchase of each
Acquisition Hotel is subject to certain conditions, and there
can be no assurance that such acquisitions will close as
contemplated.
Limitation on Resale of Certain Hotels
In November 1996, the Company acquired seven Residence Inn
by Marriott hotels (the "DeBoer Hotels") from affiliates of Jack
P. DeBoer (the "DeBoer Group"). The Preferred Units were issued
in connection with the DeBoer Hotels (the "DeBoer Preferred
Units"). Due to the potential adverse tax consequences to
members of the DeBoer Group that may result from a sale of the
DeBoer Hotels, the Company has agreed with the DeBoer Group that
for a period of up to ten years following the closing of the
acquisition of the DeBoer Hotels, (i) any taxable sale of a
DeBoer Hotel will require the consent of the applicable members
of the DeBoer Group and (ii) the Company will maintain at all
times outstanding indebtedness of at least approximately $40
million, subject to reduction upon the occurrence of certain
events, including certain redemptions or taxable transfers of
Preferred Units by the applicable members of the DeBoer Group
(the "Required Indebtedness") which may cause the Company to be
unable to sell some or all of the DeBoer Hotels in circumstances
in which it would be advantageous for the Company to do so. In
the event that the Company fails to maintain the Required
Indebtedness or sells a DeBoer Hotel in a taxable sale, the
Company will be liable for any resulting income tax liabilities
incurred by the applicable members of the DeBoer Group.
Due to the potential adverse tax consequences for certain
Summerfield affiliates that may result from the sale of any or
all of the Summerfield Hotels, the Company has agreed that for a
period of up to seven years following the closing of the
acquisition of the Summerfield Hotels, any taxable sale of a
Summerfield Hotel will require the consent of the applicable
Summerfield affiliates, which may cause the Company to be unable
to sell some or all of the Summerfield Hotels in circumstances in
which it would be advantageous for the Company to do so. If the
Company sells a Summerfield Hotel without such consent, the
Company could be liable for the tax liability on the built-in
gain of the Summerfield affiliates.
Environmental Matters
Under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs
of removal or remediation of certain hazardous or toxic
substances on such property. Such laws often impose such
liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances.
Furthermore, a person that arranges for the disposal or
transports for disposal or treatment of a hazardous substance at
a property owned by another may be liable for the costs of
removal or remediation of hazardous substances released into the
environment at the property. The costs of remediation or removal
of such substances may be substantial, and the presence of such
substances, or the failure to promptly remediate such substances,
may adversely affect the owner's ability to sell real estate or
to borrow using such real estate as collateral. In connection
with the ownership and operation of the Hotels, the Company or
the Lessee, as the case may be, may be potentially liable for any
such costs.
Phase I environmental site assessments ("ESAs") generally
are obtained on hotels acquired by the Company. The Company
generally intends to obtain an ESA on any other hotel acquired in
the future. The ESAs are and were intended to identify potential
environmental contamination for which the Hotels may be
responsible. The ESAs included historical reviews of the Hotels,
reviews of certain public records, preliminary investigations of
the sites and surrounding properties, screening for the presence
of hazardous substances, toxic substances and underground storage
tanks, and the preparation and issuance of a written report. The
ESAs did not include invasive procedures, such as soil sampling or
ground water analysis.
The ESAs have not revealed any environmental liability or
compliance concerns that the Company believes would have a
material adverse effect on the Company's business, assets,
results of operations or liquidity nor is the Company aware of
any such liability. Nevertheless, it is possible that these ESAs
do not reveal all environmental liabilities or that there are
material environmental liabilities or compliance concerns of
which the Company is unaware. Moreover, no assurances can be
given that (i) future laws, ordinances or regulations will not
impose any material environmental liability, or (ii) the current
environmental condition of the Hotels will not be affected by the
condition of the properties in the vicinity of the Hotels (such
as the presence of leaking underground storage tanks) or by third
parties unrelated to the Company or the Lessees.
Concentration of Investments in California
Ten of the 62 Hotels, which generated approximately 30% of
the Company's pro forma percentage lease revenue in 1997, are
located in California. As a result, localized adverse events or
conditions, such as economic recessions and natural disasters,
could have a significant negative effect on the operations of the
combined Hotels, and ultimately cash available for distribution
to shareholders of the Company.
Investment Concentration in Single Industry; Emphasis on Upscale
Extended-Stay Market Segment
The Company's current growth strategy is to acquire
primarily upscale extended-stay hotels. The Company will not
seek to invest in assets selected to reduce the risks associated
with an investment in that segment of the hotel industry, and,
therefore, is subject to risks inherent in concentrating
investments in a single industry and in a single market segment
within that industry. The upscale extended-stay segment is
particularly dependent on corporate training and consultant
activity, both of which would be adversely affected by an
economic downturn. Therefore, the adverse effect on rent under
the Percentage Leases and cash available for distribution to
shareholders of the Company resulting from a downturn in the
hotel industry or the failure of the upscale extended-stay market
segment to continue to grow in accordance with expectations would
be more pronounced than if the Company had diversified its
investments outside of the hotel industry or in additional hotel
market segments.
Emphasis on Acquiring Hotels with Certain Franchise Affiliations
The Company currently owns 62 Hotels. Thirty-eight of the
Hotels operate as Residence Inn hotels and 12 operate as Hampton
Inn hotels. The Summerfield Hotels include six Summerfield
Suites hotels and two Sierra Suites hotels. The Company will be
subject to risks inherent in concentrating investments in any
franchise brand, in particular the Residence Inn, Summerfield
Suites and the Hampton Inn brands, such as a reduction in
business following any adverse publicity related to a brand,
which could have an adverse effect on the Company's rent under
the Percentage Leases and distributions to shareholders.
Furthermore, the Summerfield Suites and Sierra Suites brands are
relatively new brands with a relatively small number of such
hotels currently open and do not currently have, and may not
develop in the future, substantial name recognition or effective
reservation systems. If name recognition and effective
registration systems are not established, the revenues from such
hotels, and therefore, the Lessee's obligation to make Percentage
Rent payments, particularly at the higher tier, may be adversely
affected in which case cash available for distribution would be
adversely affected. In addition, dependence upon a lessee,
manager or major franchisor such as Marriott, Promus or
Summerfield, respectively, may adversely affect the Company's
ability to negotiate favorable contractual provisions with such
franchisors, lessees or managers.
While the Company believes that its relationships with
Marriott and Summerfield will continue to provide the Company
with acquisition opportunities, there can be no assurance that
the Company will acquire any additional Marriott or Summerfield
Suites brand hotels.
Conflicts of Interest
Jeffrey H. Fisher is Chairman of the Board, Chief Executive
Officer and President of the Company, Frederic M. Shaw is
Executive Vice President and Chief Operating Officer of the
Company and Messrs. Fisher and Shaw are the shareholders of the
JF Lessee. Rolf E. Ruhfus, a Trustee of the Company, is the
Chairman of the Board of Summerfield, an affiliate of which is
the general partner of the Summerfield Lessee and Summerfield
Manager. The Company has acquired the DeBoer Hotels from Mr.
DeBoer, a Trustee of the Company. As a result, there are
inherent conflicts of interest in the ongoing lease, acquisition,
disposition and operation of the Hotels, and the interests of
shareholders may not have been, and in the future may not be,
reflected solely in all decisions made or actions taken by
officers and Trustees of the Company.
Percentage Leases
The JF Lessee. The Partnership and the JF Lessee, which is
owned by Mr. Fisher (80%) and Mr. Shaw (20%), are parties to
Percentage Leases with respect to 53 of the Hotels owned by the
Partnership, with each such Percentage Lease having an initial
term of at least 10 years. Pursuant to the terms of the
Percentage Leases, the JF Lessee is required to pay the greater
of Base Rent or Percentage Rent, and is entitled to all profits
from the operation of the Hotels after the payment of Rent,
operating expenses and other expenses (including management
fees). Payments of Rent under the Percentage Leases constitute a
substantial portion of the Partnership's and the Company's
revenues. For the year ended December 31, 1997, the JF Lessee
incurred or paid the Partnership an aggregate of approximately
$57.5 million in lease payments under the Percentage Leases for
the 47 Hotels owned and leased to JF Hotel at year end and had
combined net income of approximately $3.5 million from the
operation of the Hotels leased by the JF Lessee. In addition to
his ownership of the JF Lessee, Mr. Shaw serves as President of,
and derives a salary and bonus from, the JF Lessee.
Franchise Licenses. The JF Lessee holds all of the
Franchise Licenses (as defined herein) for the Hotels leased by
the JF Lessee (to the extent such hotels have franchise
agreements) and are expected to hold any franchise licenses
required for subsequently acquired hotels that are leased to the
JF Lessee. The JF Lessee pays the franchise fees for all of the
Company's Hotels which are leased to the JF Lessee and are
subject to franchise fees, except for Franchise License
application and transfer fees, which are paid by the Partnership.
During 1997, the Partnership incurred or paid Franchise License
application, transfer and related fees for the Hotels in the
aggregate amount of approximately $165,600. In addition, in 1996
and 1997, the Partnership loaned to the JF Lessee an aggregate of
approximately $530,250, which the JF Lessee was required to make
available to Marriott for initial working capital at certain of
the Residence Inn by Marriott hotels that are managed by Marriott
under management contracts with the JF Lessee. The Partnership's
loans to the JF Lessee for working capital at the Marriott-
managed hotels bear no interest and are payable on demand.
Jack P. DeBoer. In November 1996, the Company acquired the
seven DeBoer Hotels from the DeBoer Group. Mr. DeBoer and
certain of his affiliates have in the past, and continue to be,
involved in the development of hotels, including extended-stay
hotels. Mr. DeBoer is the President, Chairman of the Board and a
major shareholder of Candlewood Hotel Company, Inc.
("Candlewood"), a public hotel company that is the owner,
operator and franchisor of Candlewood hotels, an economy extended
stay hotel chain founded by Mr. DeBoer. Hotels developed by Mr.
DeBoer and his affiliates, including Candlewood hotels, may
compete with the Company's hotels for guests, and other hotel
companies with which Mr. DeBoer is affiliated, including
Candlewood, may compete with the Company for acquisition
opportunities. Accordingly, the interests of the Company and Mr.
DeBoer could be different in connection with matters relating to
the Company's Hotels or proposed acquisitions that are
competitive with hotels owned or being considered for acquisition
or development by Mr. DeBoer and his affiliates.
Rolf E. Ruhfus. In June 1997, the Company acquired the
Summerfield Hotels from affiliates of Mr. Ruhfus for a total
purchase price of approximately $118.6 million, consisting of (i)
approximately $89.5 million in cash and (ii) approximately 1.94
million Common Units, which were assumed to have a value of $15
per Common Unit. The Company leases the Summerfield Hotels to
the Summerfield Lessee, of which Mr. Ruhfus is the Chairman and a
principal owner. For the year ended December 31, 1997, the
Summerfield Lessee incurred or paid the Partnership an aggregate
of approximately $7.8 million in lease payments under the
Percentage Leases for the Summerfield Hotels.
The Summerfield Hotels include six Summerfield Suites hotels
and one Sunrise Suites hotel-which are upscale extended-stay
hotels-and two Sierra Suites hotels-which are mid-price extended
stay hotels. Mr. Ruhfus and certain of his affiliates have in
the past, and continue to be, involved in the development of
hotels, including extended-stay hotels. Mr. Ruhfus is the
President, Chairman of the Board and a major shareholder of
Summerfield, a private hotel company that is the owner (except
with respect to those hotels owned by the Company), operator and
franchisor of Summerfield Suites and Sierra Suites hotels.
Hotels developed by Mr. Ruhfus and his affiliates, including
Summerfield Suites and Sierra Suites hotels, may compete with the
Company's hotels for guests. Accordingly, the interests of the
Company and Mr. Ruhfus could be different in connection with
matters relating to the Company's Hotels or proposed acquisitions
that are competitive with hotels owned or being considered for
acquisition or development by Mr. Ruhfus and his affiliates.
Adverse Effect of Shares Available for Future Issuance and Sale
on Market Price of Common Shares
The Company's Declaration of Trust authorizes the Board of
Trustees to issue up to 120,000,000 shares of capital stock,
consisting of 100,000,000 Common Shares and 20,000,000 Preferred
Shares. The Board of Trustees will be able to issue an aggregate
of 49,884,950 unissued and unreserved Common Shares and to
classify and issue 15,370,000 unissued Preferred Shares. The
Company's acquisition strategy depends in part on access to
additional capital through sales and issuances of equity
securities. The market price of the Common Shares may be
adversely affected by the availability for future sale and
issuance of such unissued and unreserved Common Shares and
Preferred Shares.
In addition, the market price of Common Shares may also be
adversely affected by the availability for future sale and
issuance of 6,913,135 Common Shares that could be issued upon the
redemption of Units of the Partnership. The Company has
previously effected shelf registrations of 911,859 Common Shares
issuable to certain Limited Partners of the Partnership upon
redemption of their Units so as to permit such shares to be
freely tradeable. The Company has also agreed to effect, in
addition to this registration statement, on or before November 1,
1998, a shelf registration of 4,063,329 Common Shares issuable
upon redemption of Preferred Units issued in connection with the
acquisition of the DeBoer Hotels (the "DeBoer Preferred Units").
In connection with the purchase of the Summerfield Hotels,
certain affiliates of Summerfield received an aggregate of
1,937,947 Units (the "Summerfield Units" which include the
Redemption Units). In addition to its obligation to effect this
shelf registration of 1,572,861 Common Shares issuable upon the
redemption of certain of the Summerfield Units on or before June
20, 1998 (and to effect a shelf registration of the 365,086
remaining shares issuable upon the redemption of the Summerfield
Units on or before June 20, 1999), the Company has granted the
holders of the Summerfield Units the right to require the Company
to effect two underwritten offerings of the Common Shares
issuable upon redemption of the Summerfield Units upon demand by
the holders thereof. The Company also has entered into an
agreement to issue Units in connection with the acquisition of
the Acquisition Hotels (described below). The Company has
reserved Common Shares for issuance upon redemption of such Units
and expects to effect one or more registration statements to
permit such shares to be freely tradeable. The existence of such
shelf registration statements and demand registration rights and
the ability of holders of Units to receive Common Shares in
exchange for their Units and to thereafter sell such Common
Shares, may have an adverse effect on the market price of the
Common Shares.
On May 18, 1998, the Company issued 4,250,000 8.625% Series
A Cuumulative Convertible Preferred Shares, par value $.01 per
share (the "Series A Preferred Shares") and on May 28, 1998
issued 380,000 Series A Preferred Shares. The Series A Preferred
Shares are immediately convertible at a rate of 1.4811 Common
Shares for each Series A Preferred Share. The conversion of such
Series A Preferred Shares may have an adverse effect on the
market price of the Common Shares. See "Description of Shares of
Beneficial Interest - Preferred Shares" for a description of the
Series A Preferred Shares.
Common Share Price Fluctuations
A number of factors may adversely influence the price of the
Common Shares in public trading markets, many of which are beyond
the control of the Company. In particular, an increase in market
interest rates will result in higher yields on other financial
instruments and may lead purchasers of Common Shares to demand a
higher annual distribution rate on the price paid for the Common
Shares, which could adversely affect the market price of the
Common Shares. As a result, Common Shares acquired upon the
redemption of the Redemption Units could decline in value after
the date on which they are issued.
Leverage
To the extent the Company continues to incur debt, which it
expects to do, its debt service requirements will reduce cash
available for distribution to shareholders of the Company.
Variable rate debt, such as the line of credit, creates higher
debt service requirements if interest rates increase, which may
decrease cash available for distribution to shareholders of the
Company. There can be no assurances that the Company will be
able to meet its debt service obligations. To the extent that it
cannot meet its debt service obligations, the Company risks the
loss of some or all of its Hotels to foreclosure or forced sale.
Changes in economic conditions could result in higher interest
rates on variable rate debt, including borrowings under the Line
of Credit, reduce the availability of debt financing generally or
at rates deemed favorable to the Company, reduce cash available
for distribution to shareholders of the Company and increase the
risk of loss upon a sale or foreclosure. The Company also may
obtain one or more forms of interest rate protection on variable
rate debt (e.g., swap agreements or interest rate cap contracts)
and will consider additional long-term fixed-rate financing to
further hedge against the possible adverse effects of interest
rate fluctuations. In such circumstances, the Company could be
required to liquidate one or more Hotels or lose one or more
Hotels to foreclosure, either of which could result in a material
financial loss to the Company.
Tax Risks
Consequences of Failure to Maintain REIT Status. The
Company intends to operate in a manner so as to qualify as a REIT
for federal income tax purposes. Although the Company does not
intend to request a ruling from the Internal Revenue Service (the
"Service") as to its REIT status, it will receive an opinion from
its counsel, Hunton & Williams, based on certain assumptions and
representations, it so qualifies. Investors should be aware,
however, that opinions of counsel are not binding on the Service
or any court. The REIT qualification opinion only represents the
view of counsel to the Company based on counsel's review and
analysis of existing law, which includes no controlling
precedent. Furthermore, both the validity of the opinion and the
continued qualification of the Company as a REIT will depend on
the Company's satisfaction of certain asset, income,
organizational, and shareholder ownership requirements on a
continuing basis. If the Company were to fail to qualify as a
REIT in any taxable year, it would be subject to federal income
tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates, and distributions to
shareholders would not be deductible by the Company in computing
its taxable income. Any such corporate tax liability could be
substantial and would reduce the amount of cash available for
distribution to shareholders of the Company. In addition, the
Company might be required to liquidate certain investments or
borrow funds to pay the applicable tax. Unless entitled to
relief under certain Code provisions, the Company would be
precluded from reinstatement as a REIT for the four taxable years
following loss of REIT status.
Failure to Satisfy Distribution Requirements Will Result in
the Imposition of Corporate Income or Excise Tax. The Company
must distribute annually at least 95% of its net taxable income
(excluding any net capital gain) in order to maintain REIT status
and to avoid corporate income taxation of the earnings that it
distributes. In addition, the Company will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are
less than the sum of (i) 85% of its ordinary income for that
year, (ii) 95% of its capital gain net income for that year, and
(iii) 100% of its undistributed taxable income from prior REIT
taxable years. To the extent that the Company elects to retain
and pay income tax on the net long-term capital gains it receives
during a taxable year, such amounts will be treated as having
been distributed for purposes of the 4% excise tax.
The Company intends to make distributions to its
shareholders to comply with the 95% distribution requirement and
to avoid both corporate income tax and the nondeductible excise
tax. However, differences in timing between the recognition of
taxable income and the actual receipt of cash could require the
Company to borrow funds or sell assets on a short-term basis to
meet the 95% distribution requirement and to avoid corporate
income tax and the nondeductible excise tax. The requirement to
distribute a substantial portion of the Company's net taxable
income could cause the Company (i) to sell assets in adverse
market conditions to meet those distribution requirements, or
(ii) to distribute amounts that would otherwise be spent on
future acquisitions, capital expenditures, or repayment of debt.
Gain from the disposition of any asset held primarily for sale to
customers in the ordinary course of business generally will be
subject to a 100% penalty tax.
Failure of the Partnership to be Classified as a Partnership
for Federal Income Tax Purposes; Impact on REIT Status. The
Company believes that the Partnership will be classified as a
partnership for federal income tax purposes. If the Service were
to challenge successfully the tax status of the Partnership as a
partnership for federal income tax purposes, the Partnership
would be taxable as a corporation. In such event, the Company
would cease to qualify as a REIT for a variety of reasons.
Furthermore, the imposition of a corporate tax on the Partnership
would substantially reduce the amount of cash available for
distribution to the shareholders of the Company.
Summerfield Suites - West Hollywood, California
The Summerfield Suites - West Hollywood, California formerly
was an apartment/hotel. In obtaining land use approvals for the
hotel, the former owners agreed, among other things, that nine
apartment residents in the hotel would be permitted to continue
residing in the building under their existing, rent-controlled
apartment leases. The owners also agreed to conduct business in
a manner consistent with the surrounding property uses (primarily
residential); specifically, among other things, refuse pick-up
and deliveries are prohibited during certain night-time hours,
free on-site parking must be provided to hotel employees,
functions must be limited to 25 people and at night must be held
indoors, limits are placed on the manner and timing of
(a) unloading guests in front of the hotel, (b) service of food
and alcohol and (c) use of outdoor patio and roof-top deck, and
reasonable measures must be taken to assure that noise and odors
from the kitchen do not disturb neighbors. The municipality also
imposed a fee for occupancy taxes that were then-past due and for
the loss of apartment rental units at the building. The
approximately $60,000 annual fee is payable through 2009. Under
the percentage lease applicable to the hotel, the Summerfield
Lessee is responsible for making the payment to the municipality.
If the fee is not paid, the municipality may have the right to
revert the building from its currently authorized use mix, which
includes nine apartment units and the balance permitted for hotel
use, to a 50/71 apartment/hotel suite mix, with the reverted
apartment units possibly subject to any then-applicable rent
control provisions. Any such reversion would have a material
adverse affect on the revenues at the hotel, the lease payment
payable by the Summerfield Lessee and, therefore, the Company's
cash available for distribution to shareholders of the Company.
Ownership Limitation
In order for the Company to maintain its qualification as a
REIT, not more than 50% in value of its outstanding shares of
beneficial interest may be owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain
entities) during the last half of any taxable year. Furthermore,
if any shareholder or group of shareholders of a lessee owns,
actually or constructively, 10% or more of the shares of
beneficial interest of the Company, such lessee could become a
related-party tenant of the Company, which likely would result in
loss of REIT status for the Company. For the purpose of
preserving the Company's REIT qualification, the Company's
Declaration of Trust prohibits direct or indirect ownership
(taking into account applicable ownership provisions of the Code)
of more than 9.8% of the number of outstanding securities of each
class of the Company (the "Ownership Limitation"). Generally,
the shares of beneficial interest owned by related or affiliated
owners will be aggregated for purposes of the Ownership
Limitation. Any transfer of shares of beneficial interest that
would violate the Ownership Limitation will be void ab initio,
the intended transferee of such shares will be deemed never to
have had an interest in such shares, and such shares will be
designated "Shares-in-Trust." Further, the Company shall be
deemed to have been offered Shares-in-Trust for purchase at the
lesser of the market price (as defined in the Declaration of
Trust) on the date the Company accepts the offer and the price
per share in the transaction that created such Shares-in-Trust
(or, in the case of a gift, devise or non-transfer event (as
defined in the Declaration of Trust), the market price on the
date of such gift, devise or non-transfer event). Therefore, the
record holder 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.
THE COMPANY
The Company currently owns 62 Hotels containing an aggregate
of 7,439 rooms located in 24 states. The Hotels include (i) 45
upscale and two mid-priced extended-stay hotels, including 23
Residence Inn hotels, six Summerfield Suites hotels, two Sierra
Suites hotels and one Sunrise Suites hotel and (ii) 15-mid-priced
limited or full service hotels including 12 Hampton Inn hotels,
one Comfort Inn hotel, one Holiday Inn Express hotel and one
Sheraton Inn hotel.
The Company has implemented a strategy of utilizing multiple
lessees and hotel management companies for its hotel properties.
The Company leases 53 of the Hotels to the JF Lessee and leases
the six Summerfield Suites hotels, two Sierra Suites hotels and
one Sunrise Suites hotel (collectively, the "Summerfield Hotels")
to affiliates of Summerfield (the "Summerfield Lessee" and,
together with the JF Lessee, the "Lessees") pursuant to
percentage leases (the "Percentage Leases") which provided for
the payment of rent based on a percentage of room revenues
("Percentage Rent"). The JF Lessee has entered into management
contracts with Residence Inn by Marriott, Inc., a subsidiary of
Marriott International, Inc. ("Marriott"), to manage 20 of the
Residence Inn Hotels. The Summerfield Lessee has entered into
management contracts with other affiliates of Summerfield Hotel
Corporation (the "Summerfield Manager") to manage the nine
Summerfield Hotels.
In April 1998, the Company entered into an agreement to
acquire six newly-constructed Residence Inn by Marriott hotels
from Marriott (the "Acquisition Hotels"), after the completion
thereof. The Acquisition Hotels, which are being developed by
Marriott, will contain 810 rooms. The Acquisition Hotels will
be acquired for purchase prices aggregating approximately $89
million, an allocable portion of which will be paid at the
closing of each Acquisition Hotel. Fifteen percent (15%) of
the purchase price for each Acquisition Hotel is payable in
Common Units, with the number of Common Units to be issued
being based on the trading prices of the Common Shares at the
time of the closing for the Acquisition Hotel. The Acquisition
Hotels are located in the following locations: Chicago/O'Hare,
Illinois (192 rooms); South San Jose, California (150 rooms);
Gaithersburg, Maryland (132 rooms); Detroit/Livonia, Michigan
(112 rooms); Richmond/Northwest, Virginia (104 rooms); and
Atlanta/Peachtree, Georgia (120 rooms). Each Acquisition Hotel
is located in an existing market in which the Company owns
other Hotels. The Company will acquire each Acquisition Hotel
within 90 days after it opens. The Acquisition Hotels are
scheduled to open at various times throughout 1998. To the
extend that any such closing occurs after the opening date,
the purchase price of the applicable Acquisition Hotel will be
subject to adjustment. The Company will lease each Acquisition
Hotel to the JF Lessee, and the JF Lessee will retain Marriott
to manage the Acquisition Hotels. The closing of the
acquisition of the Acquisition Hotels is subject to customary
conditions and, if consummated, will increase to 44 the number
of Residence Inn by Marriott hotels owned by the Company, 26 of
which will be managed by Marriott. See "Risk Factors -
Acquisition of Hotels with Limited Operating History."
The Company's executive offices are located at 306 Royal
Poinciana Way, Palm Beach, Florida 33480, and its telephone
number is (561) 835-1800. The Company also maintains a website
at www.innkeepersusa.com.
THE PARTNERSHIP
A wholly-owned subsidiary of the Company controls the
Partnership as the sole general partner (the "General Partner")
and currently holds an approximately 82.7% interest in the
Partnership. Subject to certain holding periods, each Unit may
be tendered by the holder to the Partnership for redemption.
Pursuant to the Partnership Agreement, the Company may elect to
acquire directly Units tendered for redemption in exchange for
either Common Shares on a one-for-one basis or cash equal to the
fair market value thereof at the time of such redemption. The
Redemption Shares and the Secondary Shares will be issued if and
to the extent that the Company acquires the Redemption Units for
Common Shares. If the Partnership (rather than the Company)
redeems the Redemption Units, or if the Company acquires
Redemption Units for cash, Redemption Shares and the Secondary
Shares will not be issued. The Company presently anticipates
that it will elect to issue Common Shares in connection with each
redemption of Units rather than cash. With each acquisition of
outstanding Units, the Company's percentage ownership interest in
the Partnership, which is based on the number of Units owned by
the Company in relation to all outstanding Units, will increase.
In addition, whenever the Company issues Common Shares, the
Company, through the General Partner, will contribute any net
proceeds therefrom to the Partnership, and the Partnership will
issue additional Units to the General Partner.
The General Partner has the full, complete and exclusive
power under the Partnership Agreement to manage and control the
business of the Partnership. The Board of Trustees of the
Company manages the affairs of the Company by directing the
affairs of the Partnership through the Company's ownership of the
General Partner. The Partnership will continue until December
31, 2050, or until sooner dissolved upon (i) the bankruptcy,
dissolution or withdrawal of the General Partner (unless the
Limited Partners elect to continue the Partnership), (ii) the
sale or other disposition of all or substantially all of the
assets of the Partnership, (iii) the redemption of all limited
partnership interests in the Partnership (other than those held
by the General Partner, if any), or (iv) the election of the
General Partner. The General Partner's current interest in the
Partnership entitles the Company to share in cash distributions
from, and in the profits and losses of, the Partnership
(including payments under the Percentage Leases) and entitles the
Company to vote on all matters requiring a vote of the partners.
THE LESSEES
For the Company to qualify as a REIT, the Company cannot
operate hotels. The Company, therefore, leases 53 of the Hotels
to the JF Lessee and leases the nine Summerfield Hotels to the
Summerfield Lessee. The JF Lessee operates 31 of the Hotels.
Third parties (including Marriott) operate 22 of the Hotels and
the Summerfield Manager operates the nine Summerfield Hotels.
During the term of each Percentage Lease, the applicable
lessee is obligated to pay to the Company (i) the greater of the
fixed obligation of the lessee to pay a certain sum in annual
rent under the Percentage Lease regardless of the level of room
revenue achieved ("Base Rent") or Percentage Rent and (ii)
certain other amounts, including interest accrued on any late
payments or charges (the "Additional Charges"). Percentage Rent
is based on specified percentages of room revenues for each of
the Hotels in excess of certain levels ("Revenue Break Points").
Generally, both the Base Rent and the Revenue Break Points above
which a higher percentage of room revenues is paid as Percentage
Rent are adjusted annually at the beginning of each calendar
year based upon the change in the CPI during the prior calendar
year.
JF Lessee
Mr. Fisher is the majority shareholder and Mr. Shaw is the
other shareholder of the JF Lessee. The JF Lessee has agreed not
to operate any hotels other than those owned by the Company.
Summerfield Lessee
The Summerfield Lessee is an affiliate of Summerfield, which
leases the nine Summerfield Hotels. Mr. Ruhfus, a trustee of the
Company, is an officer and principal equity owner of the
Summerfield Lessee and Summerfield Manager. The Summerfield
Lessee has agreed not to engage in any business other than
leasing hotels owned by the Company.
DESCRIPTION OF THE PARTNERSHIP AND UNITS
General
The Partnership (directly or through subsidiary
partnerships) owns the Hotels and leases the Hotels to the
Lessees pursuant to the Percentage Leases. A wholly-owned
subsidiary of the Company is the general partner of the
Partnership (the "General Partner") and currently holds
approximately 82.7% of the issued Units therein. The remaining
approximately 17.3% of the issued Units are currently held by
Limited Partners who received the Units in connection with the
Partnership's acquisitions of certain of the Hotels. The
material terms of the Units, including a summary of certain
provisions of the Partnership Agreement, are set forth below.
The following description of the terms and provisions of the
Units and certain other matters does not purport to be complete
and is subject to and qualified in its entirety by reference to
applicable provisions of Virginia law and the Partnership
Agreement.
Through the ownership of Units, the Limited Partners hold
interests in the Partnership and all holders of Units (including
the General Partner) are entitled to share in cash distributions
from, and in the profits and losses of, the Partnership. Subject
to the rights of Preferred Units (described below), distributions
by the Partnership are made equally for each Unit outstanding.
Each Unit (other than the Preferred Units) generally receives
distributions in the same amount as the cash dividends paid by
the Company on each Common Share.
The Limited Partners have the rights to which limited
partners are entitled under the Virginia Revised Uniform Limited
Partnership Act. The issuance of the currently outstanding Units
were not registered pursuant to the federal securities laws or
any state securities law. The Units cannot be sold, assigned,
hypothecated, pledged, transferred or otherwise disposed of by a
holder unless they are so registered or unless an exemption from
such registration is available. In addition, the Partnership
Agreement imposes restrictions on the transfer of Units, as
described below.
Preferred Units
In connection with the acquisition of the DeBoer Hotels in
November 1996, the Partnership issued the DeBoer Preferred Units.
The DeBoer Preferred Units have a liquidation preference of
$11.00 per Preferred Unit and are convertible at any time into
Common Units on a one-for-one basis (the "Preferred Conversion
Right"). In November 2006, each then outstanding DeBoer
Preferred Unit automatically will convert into one Common Unit.
Distributions of $1.155 are payable on each Preferred Unit. On
or after November 1, 1998, the DeBoer Preferred Units are
redeemable, at the option of the holder, for cash, or, at the
option of the Company, Common Shares on a one-for-one basis. So
long as any DeBoer Preferred Units remain outstanding, the
Partnership is prohibited from issuing Units with income,
distribution or liquidation rights that are superior to or equal
to the income, distribution or liquidation rights of the DeBoer
Preferred Units unless immediately after such issuance (i) the
value of all of the outstanding superior Units would not exceed
18.7% of the value of all Units outstanding and (ii) the value of
all outstanding superior and equal Units would not exceed (A) 22%
of the value of all outstanding Units plus (B) the aggregate
value of the DeBoer Preferred Units at issuance and minus (C) the
value of the remaining outstanding DeBoer Preferred Units.
In May 1998, the Company contributed the proceeds of the
sale of an aggregate of 4,630,000 Series A Preferred Shares (as
defined above in "Risk Factors - Adverse Effect of Shares
Available for Future Issuance and Sale on Market Price of Common
Shares") to the Partnership in exchange for 4,630,000 8.625%
Series A Preferred Units (the "Series A Preferred Units") in the
Partnership, the economic terms of which are substantially
identical to those of the Series A Preferred Shares. The
Partnership is required to make all required distributions on the
Series A Preferred Units (which will mirror the payments of
distributions, including accrued and unpaid distributions upon
redemption, and of the liquidation preference amount on the
Series A Preferred Shares) prior to any distribution of cash or
assets to the holders of the Common Units or to the holders of
any other interests in the Partnership, except for (a) any other
series of preferred units ranking on a parity with the Series A
Preferred Units as to distributions or liquidation rights,
including the DeBoer Preferred Units, and (b) distributions
required to enable the Company to maintain its qualification as a
real estate investment trust.
Management
The Partnership has been organized as a Virginia limited
partnership pursuant to the terms of the Partnership Agreement.
Pursuant to the Partnership Agreement, the General Partner, a
wholly-owned subsidiary of the Company, has full, exclusive and
complete responsibility and discretion in the management and
control of the Partnership, and the Limited Partners have no
authority in their capacity as Limited Partners to transact
business for, or participate in the management activities or
decisions of, the Partnership except as required by applicable
law. However, any amendment to the Partnership Agreement that
would affect the Limited Partners' right to tender their Units
for redemption (the "Redemption Rights") would require the
consent of Limited Partners (other than the General Partner)
holding more than two-thirds of the Units held by the Limited
Partners. Any amendment to the Partnership Agreement that would
(i) affect the liquidation preference or preferred distributions
with respect to the Preferred Units or (ii) affect the right of
the holders of Preferred Units to exercise the Preferred
Conversion Right would require the consent of the Limited
Partners holding more than two-thirds of the Preferred Units held
by such partners. Any amendment that would (i) adversely affect
the Limited Partners' rights to receive cash distributions, (ii)
alter the Partnership's allocations of income or loss, or (iii)
impose on the Limited Partners any obligations to make additional
contributions to the capital of the Partnership, would require
the consent of Limited Partners (other than the General Partner)
holding more than two-thirds of the Units held by each such class
of Limited Partners adversely affected by such amendment.
Ability to Engage in Other Businesses; Conflicts of Interest
Subject to the terms of the Company's Declaration of Trust
and any agreements between the General Partner, the Company and
the Partnership, the General Partner and other persons (including
officers, directors, trustees, employees, agents and other
affiliates of the General Partner and the Company) are not
prohibited under the Partnership Agreement from engaging in other
business activities, including business activities substantially
similar or identical to those of the Partnership, and the General
Partner and the Company will not be required to present any
business opportunities to the Partnership or to any Limited
Partner.
Borrowing by the Partnership
The General Partner is authorized under the Partnership
Agreement to cause the Partnership to borrow money and to issue
and guarantee debt as it deems necessary for the conduct of the
activities of the Partnership. Such debt may be secured by deeds
to secure such debt, mortgages, deeds of trust, pledges or other
liens on the assets of the Partnership. The General Partner may
also cause the Partnership to borrow money to enable the
Partnership to make distributions in an amount sufficient to
permit the Company, so long as it qualifies as a REIT, to avoid
payment of the federal income tax.
Reimbursement of General Partner; Transactions with the General
Partner and its Affiliates
The General Partner will receive no compensation for its
services as the General Partner of the Partnership. However, as
a partner in the Partnership, the General Partner has the same
right to allocations, payments and distributions as other
partners of the Partnership. In addition, the Partnership will
reimburse the General Partner and the Company for certain
expenses. See "-Operations."
Except as expressly permitted by the Partnership Agreement,
neither the General Partner nor any of its affiliates will sell,
transfer or convey any property to, or purchase any property
from, the Partnership, directly or indirectly, except pursuant to
transactions that are determined by the General Partner in good
faith, in its sole and absolute discretion, to be fair and
reasonable.
Liability of General Partner and Limited Partners
The General Partner is liable for all general obligations of
the Partnership to the extent not paid by the Partnership. The
General Partner is not liable for the non-recourse obligations of
the Partnership.
The Limited Partners are not required to make further
capital contributions to the Partnership after their respective
initial contributions are fully paid. Assuming that a Limited
Partner acts in conformity with the provisions of the Partnership
Agreement and has not made any further commitment, such as
guaranteeing debt, the liability of the Limited Partner for
obligations of the Partnership under the Partnership Agreement
and the Virginia Revised Uniform Limited Partnership Act will be
limited, subject to certain possible exceptions, to the loss of
the Limited Partner's investment in the Partnership.
The Partnership is qualified to conduct business in each
state in which it owns property and may qualify to conduct
business in other jurisdictions. Maintenance of limited
liability may require compliance with certain legal requirements
of those jurisdictions and certain other jurisdictions.
Limitations on the liability of a limited partner for the
obligations of a limited partnership have not clearly been
established in many states. Accordingly, if it were determined
that the right, or exercise of the right by the Limited Partners,
to make certain amendments to the Partnership Agreement or to
take other action pursuant to the Partnership Agreement
constituted "control" of the Partnership's business for the
purposes of the statutes of any relevant state, the Limited
Partners might be held personally liable for the Partnership's
obligations. The Partnership will operate in a manner that the
General Partner deems reasonable, necessary and appropriate to
preserve the limited liability of the Limited Partners.
Exculpation and Indemnification of the General Partner
The Partnership Agreement generally provides that the
General Partner will incur no liability for monetary damages to
the Partnership or any Limited Partner for losses sustained or
liabilities incurred as a result of errors in judgment or of any
act or omission if the General Partner acted in good faith. In
addition, the General Partner is not responsible for any
misconduct or negligence on the part of its agents, provided the
General Partner appointed such agents in good faith. The General
Partner may consult with legal counsel, accountants, consultants,
real estate brokers and other consultants and advisors, and any
action it takes or omits to take in reliance upon the opinion of
such persons, as to matters which the General Partner reasonably
believes to be within their professional or expert competence,
shall be conclusively presumed to have been done or omitted in
good faith and in accordance with such opinion.
The Partnership Agreement also provides for indemnification
of the General Partner, the directors and officers of the General
Partner, and such other persons as the General Partner may from
time to time designate, against any and all losses, claims,
damages, liabilities (joint or several), expenses (including
reasonable legal fees and expenses), judgments, fines,
settlements, and other amounts arising from any and all claims,
demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, that relate to the operations of
the Partnership in which such person may be involved, or is
threatened to be involved, provided that the Partnership shall
not indemnify any such persons if it is established that (i) the
act or omission of such person was material to the matter giving
rise to the proceeding and either was committed in bad faith or
was the result of active and deliberate dishonesty, (ii) such
person actually received an improper personal benefit in money,
property or services, or (iii) in the case of any criminal
proceeding, such person had reasonable cause to believe that the
act or omission was unlawful.
Sale of Assets
Under the Partnership Agreement, the General Partner
generally has the exclusive authority to determine whether, when
and on what terms the assets of the Partnership (including the
Hotels) will be sold.
Removal of the General Partner; Transfer of General Partner's
Interest
Generally, the General Partner may not be removed by the
Limited Partners. Other than to a wholly-owned subsidiary of the
Company, the General Partner may not transfer any of its
interests as a partner except in connection with a merger or sale
of all or substantially all of its assets. The General Partner
may not sell all or substantially all of its assets, or enter
into a merger, unless the sale or merger includes the sale of all
or substantially all of the assets of, or the merger of, the
Partnership, with the holders of Units receiving substantially
the same consideration in such transaction as holders of Common
Shares.
Transferability of Interests
The General Partner may not withdraw from the Partnership
voluntarily or transfer or assign its interest in the Partnership
unless the transaction in which such withdrawal or transfer
occurs results in the Limited Partners' receipt of property in an
amount equal to the amount they would have received had they
redeemed their Units immediately prior to such transaction, or
unless the successor to the General Partner contributes
substantially all of its assets to the Partnership in return for
an interest in the Partnership. The Limited Partners (other than
the General Partner) may not transfer their interests in the
Partnership without the consent of the General Partner, which
consent may be withheld in the General Partner's sole discretion.
The General Partner may not consent to any transfer that would
cause the Partnership to be treated as a separate corporation for
federal income tax purposes.
Redemption Rights for Limited Partnership Units
Pursuant to the Partnership Agreement and the terms of
various agreements with limited partners who became Limited
Partners after the Company's initial public offering of common
shares of beneficial interest (the "Redemption Agreements"), the
Limited Partners have Redemption Rights that will enable them to
cause the Partnership to redeem their interests in the
Partnership in exchange for Common Shares or, at the election of
the Company and when required in certain other circumstances,
cash. Generally, the redemption price will be paid in cash in
the event that the issuance of Common Shares to the redeeming
Limited Partner would (i) result in any person owning, directly
or indirectly, Common Shares in excess of the Ownership
Limitation, (ii) result in shares of beneficial interest of the
Company being owned by fewer than 100 persons (determined without
reference to any rules of attribution), (iii) result in the
Company being "closely held" within the meaning of Section 856(h)
of the Code, (iv) cause the Company to own, actually or
constructively, 10% or more of the ownership interests in a
tenant of the Company's or the Partnership's real property,
within the meaning of Section 856(d)(2)(B) of the Code, or (v)
cause the acquisition of Common Shares by such redeeming Limited
Partner to be "integrated" with any other distribution of Common
Shares for purposes of complying with the Securities Act.
Redemption Rights of Limited Partners holding 911,859 Units are
currently exercisable and Redemption Rights will become
exercisable by the holders of 4,063,329 Preferred Units after
November 1, 1998, by the holders of 1,572,861 Summerfield Units
after June 20, 1998 and by the holders of 365,086 Summerfield
Units after June 20, 1999, provided that each Limited Partner may
not exercise Redemption Rights for less than 1,000 Units or, if
such Limited Partner holds less than 1,000 Units, all of the
Units held by such Limited Partner. In the future, it may become
necessary to place additional restrictions on the exercise of the
Redemption Rights in order to assure that the Partnership does
not become a "publicly traded partnership" that is treated as a
corporation for federal income tax purposes. See "Federal Income
Tax Considerations-Tax Aspects of the Partnership." The number
of Common Shares issuable upon exercise of the Redemption Rights
will be adjusted upon the occurrence of share splits, mergers,
consolidations or similar pro rata share transactions, which
otherwise would have the effect of diluting the ownership
interests of the Limited Partners or the shareholders of the
Company.
No Withdrawal by Limited Partners
No Limited Partner has the right to withdraw from or reduce
or receive the return of his capital contribution to the
Partnership, except as a result of the redemption or transfer of
his Units pursuant to the terms of the Partnership Agreement.
Issuance of Additional Limited Partnership Interests
The General Partner is authorized, without the consent of
the Limited Partners, to cause the Partnership to issue
additional Units to the partners or to other persons for such
consideration and on such terms and conditions as the General
Partner deems appropriate. In addition, the General Partner may
cause the Partnership to issue to the General Partner additional
Units, or other additional partnership interests in different
series or classes which may be senior to the Units, in
conjunction with an offering of securities of the Company having
substantially similar rights, for which the General Partner makes
a capital contribution to the Partnership of the proceeds of such
offering. Consideration for additional partnership interests may
be cash or any property or other assets permitted by Virginia
law.
Meetings
The Partnership Agreement does not provide for annual
meetings of the Limited Partners, and the General Partner does
not anticipate calling such meetings.
Amendment of Partnership Agreement
Amendments to the Partnership Agreement may, with four
exceptions, be made by the General Partner without the consent of
the Limited Partners. Any amendment to the Partnership Agreement
which would (i) affect the Redemption Rights, (ii) adversely
affect the rights of the Limited Partners to receive
distributions payable to them under the Partnership Agreement,
(iii) alter the Partnership's profit and loss allocations or (iv)
impose any obligation upon the Limited Partners to make
additional capital contributions to the Partnership shall require
the consent of Limited Partners holding more than 66 2/3% of the
Units held by the Limited Partners.
Books and Reports
The General Partner is required to keep the Partnership's
books and records at the specified principal office of the
Partnership. The Limited Partners have the right, subject to
certain limitations, to inspect or to receive copies of the
Partnership's federal, state and local tax returns, a list of the
partners and their last known business addresses, the Partnership
Agreement, the Partnership certificate and all amendments
thereto, information about the capital contributions of each of
the partners and any other documents and information required
under Virginia law. Any partner or his duly authorized
representative, upon paying duplicating, collection and mailing
costs, is entitled to inspect or copy such records during
ordinary business hours.
The General Partner will furnish to each Limited Partner,
within 90 days after the close of each fiscal year, an annual
report containing financial statements of the Partnership (or the
Company, if consolidated financial statements including the
Partnership are prepared) for each fiscal year. The financial
statements will be audited by a nationally recognized firm of
independent public accountants selected by the General Partner.
In addition, within 45 days after the close of each fiscal
quarter (other than the fourth quarter), the General Partner will
furnish to each Limited Partner a report containing quarterly
unaudited financial statements of the Partnership (or the
Company) and such other information as may be required by
applicable law or regulation or as the General Partner deems
appropriate.
The General Partner will use reasonable efforts to furnish
to each Limited Partner, within 75 days after the close of each
fiscal year of the Partnership, the tax information reasonably
required by the Limited Partners for federal and state income tax
reporting purposes.
Capital Contributions
The Company currently owns an approximately 82.7% interest
in the Partnership and the current Limited Partners aggregate
interest in the Limited Partnership is approximately 17.3%. The
Partnership Agreement provides that if the Partnership requires
additional funds at any time or from time to time in excess of
funds available to the Partnership from borrowing or capital
contributions, the General Partner or the Company may borrow such
funds from a third-party lender and lend such funds to the
Partnership on the same terms and conditions as are applicable to
the General Partner's or the Company's, as applicable, borrowing
of such funds. Moreover, the General Partner is authorized to
cause the Partnership to issue partnership interests for less
than fair market value if (i) the Company has concluded in good
faith that such issuance is in the best interests of the Company
and the Partnership and (ii) the General Partner makes a capital
contribution in an amount equal to the net proceeds of such
issuance. Under the Partnership Agreement, the General Partner
generally is obligated to contribute the proceeds of a share
offering by the Company as additional capital to the Partnership.
Upon such contribution the General Partner will receive
additional Units and the General Partner's percentage interest in
the Partnership will be increased on a proportionate basis based
upon the gross proceeds of the issuance (which the Partnership is
deemed to have received as a capital contribution). Conversely,
the percentage interests of the Limited Partners will be
decreased on a proportionate basis in the event of additional
capital contributions by the General Partner. In addition, if
the General Partner contributes additional capital to the
Partnership, the General Partner will revalue the property of the
Partnership to its fair market value (as determined by the
General Partner) and the capital accounts of the partners will be
adjusted to reflect the manner in which the unrealized gain or
loss inherent in such property (that has not been reflected in
the capital accounts previously) would be allocated among the
partners under the terms of the Partnership Agreement if there
were a taxable disposition of such property for such fair market
value on the date of the revaluation.
Registration Rights
For a description of certain registration rights held by the
Limited Partners, see "Risk Factors-Adverse Effect of Shares
Available for Future Issuance and Sale on Market Price of Common
Shares."
Operations
The Partnership Agreement requires that the Partnership be
operated in a manner that will enable the Company to satisfy the
requirements for being classified as a REIT, to avoid any federal
income or excise tax liability imposed by the Code, and to ensure
that the Partnership will not be classified as a "publicly traded
partnership" for purposes of Section 7704 of the Code.
In addition to the administrative and operating costs and
expenses incurred by the Partnership, the Partnership will pay
all administrative costs and expenses of the Company and the
General Partner (collectively, the "Company Expenses") and the
Company Expenses will be treated as expenses of the Partnership.
The Company Expenses generally will include (i) all expenses
relating to the formation and continuity of existence of the
Company and the General Partner, (ii) all expenses relating to
the public offering and registration of securities by the
Company, (iii) all expenses associated with the preparation and
filing of any period reports by the Company under federal, state
or local laws or regulations, (iv) all expenses associated with
compliance by the Company and the General Partner with laws,
rules and regulations promulgated by any regulatory body and (v)
all other operating or administrative costs of the General
Partner incurred in the ordinary course of its business on behalf
of the Partnership. The Company Expenses, however, will not
include any administrative and operating costs and expenses
incurred by the Company that are attributable to hotel properties
owned the Company directory or to partnership interests in any
subsidiary partnership directly owned by the Company.
Tax Matters; Profit and Loss Allocations
Pursuant to the Partnership Agreement, the General Partner
is the tax matters partner of the Partnership and, as such, has
the authority to handle tax audits and to make tax elections
under the Code on behalf of the Partnership.
Income, gain and loss of the Partnership for each fiscal
year generally is allocated among the partners in accordance with
their respective interests in the Partnership, subject to
compliance with the provisions of Code Sections 704(b) and 704(c)
and the Treasury Regulations promulgated thereunder. See
"Federal Income Tax Considerations - Tax Aspects of the
Partnership and Subsidiary Partnerships."
Distributions
Subject to the rights of holders of Preferred Units
(described under "- Preferred Units" above), the Partnership
Agreement provides that the Partnership will distribute cash from
operations (including net sale or refinancing proceeds, but
excluding net proceeds from the sale of the Partnership's
property in connection with the liquidation of the Partnership)
on a quarterly (or, at the election of the General Partner, more
frequent) basis, in amounts determined by the General Partner in
its sole discretion, to the partners, for any fiscal year of the
Partnership, in accordance with their respective percentage
interests in the Partnership. Upon liquidation of the
Partnership, after payment of, or adequate provision for, debts
and obligations of the Partnership, including the liquidation
preference of the Preferred Units and any loans made by partners,
any remaining assets of the Partnership will be distributed to
all partners (other than holders of Preferred Units) with
positive capital accounts in accordance with their respective
positive capital account balances. If the General Partner has a
negative balance in its capital account following a liquidation
of the Partnership, it will be obligated to contribute cash to
the Partnership equal to the negative balance in its capital
account. See "Preferred Units."
Term
The Partnership will continue until December 31, 2050, or
until sooner dissolved upon (i) the bankruptcy, dissolution or
withdrawal of the General Partner (unless the Limited Partners
elect to continue the Partnership), (ii) the sale or other
disposition of all the assets of the Partnership (except for such
assets as the General Partner believes are required to wind up
the affairs of the Partnership), (iii) the redemption of all
limited partnership interests in the Partnership (other than
those held by the General Partner, if any), or (iv) the election
by the General Partner.
SHARES AVAILABLE FOR FUTURE SALE
As of May 28, 1998, the Company had outstanding (or reserved
for issuance) 50,115,050 Common Shares. All of the up to
1,477,307 Redemption Shares issued and the 95,554 Secondary
Shares registered pursuant to the Registration Statement of which
this Prospectus is a part will be tradeable without restriction
under the Securities Act.
Pursuant to the Partnership Agreement and the Redemption
Agreements, the Limited Partners (other than the Company) have
Redemption Rights, which enable them to cause the Company to
redeem their Units and Preferred Units in exchange for cash (or,
at the election of the Company, Common Shares on a one-for-one
basis). Redemption Rights may be exercised with respect to
4,063,329 Preferred Units at any time after November 1, 1998.
After June 20, 1998, 1,572,861 Summerfield Units and after
June 20, 1999, 365,086 Summerfield Units are eligible for
redemption.
Secondary Shares issued to holders of Redemption Units upon
exercise of Redemption Rights will be "restricted" securities
under the meaning of Rule 144 promulgated under the Securities
Act ("Rule 144") and may not be sold in the absence of
registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule
144. As described below, the Company has granted certain holders
registration rights with respect to Common Shares issued in
redemption of Units.
In general, under Rule 144 as currently in effect, if one
year has elapsed since the later of the date of acquisition of
restricted shares from the Company or any "Affiliate" of the
Company, as that term is defined under the Securities Act, the
acquiror or subsequent holder thereof is entitled to sell within
any three-month period a number of shares that does not exceed
the greater of 1% of the then outstanding Common Shares or the
average weekly trading volume of the Common Shares during the
four calendar weeks preceding the date on which notice of the
sale is filed with the Securities and Exchange Commission. Sales
under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current
public information about the Company. If two years have elapsed
since the date of acquisition of restricted shares from the
Company or from any Affiliate of the Company, and the acquiror or
subsequent holder thereof is deemed not to have been an Affiliate
of the Company at any time during the three months preceding a
sale, such person would be entitled to sell such shares in the
public market under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information
requirements or notice requirements.
The Company has filed, in addition to this registration
statement covering 1,572,861 Common Shares, (i) a registration
statement with the Commission for the purpose of registering the
issuance of 658,717 Common Shares issuable upon redemption of
Units issued in connection with the initial public offering of
Common Shares, (ii) a registration statement with the Commission
for the purpose of registering the re-sale of 369,816 Common
Shares issuable upon redemption of Units issued in connection
with the purchase of certain Hotels and (iii) a registration
statement with the Commission for the purpose of registering the
issuance of 211,465 Common Shares issuable upon redemption of
Units issued in connection with the purchase of certain Hotels.
The Company has also agreed to effect one or more registration
statements with the Commission for the purpose of registering
(i) the issuance or re-sale of Common Shares issuable upon
redemption of other Units as set forth in "Risk Factors-Adverse
Effect of Shares Available for Future Issuance and Sale on
Market Price of Common Shares" and (ii) covering the Common
Shares issuable upon conversion of the Series A Preferred
Shares. Upon effectiveness of such registration statements,
those persons who receive Common Shares upon redemption of the
applicable Units and conversion of Series A Preferred Shares
may generally sell such shares in the secondary market without
being subject to the volume limitations or other requirements
of Rule 144. The Company will bear expenses incident to its
registration requirements, except that such expenses shall not
include any underwriting discounts or commissions, Securities
and Exchange Commission or state securities registration fees,
transfer taxes or certain other fees or taxes relating to such
shares. Registration rights are expected to be granted to
future sellers of hotels to the Company who elect to receive,
in lieu of cash, Common Shares, Units, or securities
convertible into Common Shares.
No prediction can be made as to the effect, if any, that
future sales of shares, or the availability of shares for future
sale, will have on the market price prevailing from time to time.
Sales of substantial amounts of Common Shares, or the perception
that such sales could occur, may affect adversely prevailing
market prices of the Common Shares. See "Risk Factors - Adverse
Effect of Shares Available for Future Issuance and Sale on Market
Price of Common Shares" and "Partnership Agreement
Transferability of Interests."
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The Declaration of Trust of the Company provides that the
Company may issue up to 100,000,000 Common Shares, and 20,000,000
Preferred Shares. At May 28, 1998, there were 33,114,422 Common
Shares outstanding and 4,630,000 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,
holders of Common Shares are entitled to receive dividends if, as
and when authorized and declared by the Board of Trustees of the
Company out of assets legally available therefor and to share
ratably in the assets of the Company legally available for
distribution to its shareholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision
for, all known debts and liabilities of the Company. The Company
has paid and intends to pay quarterly dividends to holders of its
Common Shares.
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 (except as provided below
under "-Voting Rights".
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 Title 8 of the Corporations and
Associations Article of the Annotated Code of Maryland ("Title
8"), appraisal rights.
Pursuant to Title 8, 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 voluntary termination by the
Company of its status 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
removal of trustees (which requires the affirmative vote of the
holders of not less than two-thirds of the shares then
outstanding and entitled to vote generally in the election of
Trustees); (c) 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 (d) 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 Title 8 without any action by the
shareholders. The Company's Declaration of Trust permits such
action by the Board of Trustees.
Preferred Shares
Preferred Shares may be issued from time to time, in one or
more series, as authorized by the Board of Trustees. Prior to
issuance of shares of each series, the Board is required by the
Maryland REIT Law and the Company's Declaration of Trust to set
for each such series, subject to the provisions of the Company's
Declaration of Trust regarding Shares-in-Trust, the preferences,
conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each
series. The Board could authorize the issuance of Preferred
Shares with terms and conditions that could have the effect of
delaying, deferring or preventing a takeover or other transaction
which holders of some, or a majority, of the Common Shares might
believe to be in their best interests or in which holders of
some, or a majority, of the Common Shares might receive a premium
for their Common Shares over the then market price of such Common
Shares.
In May 1998, the Company issued the 4,630,000 Series A
Preferred Shares, in two private placements. The Series A
Preferred Shares sold to "qualified institutional buyers"
("QIBs"), as defined in Rule 144A under the Securities Act of
1933 are expected to be eligible for trading among QIBs in the
Private Offering, Resale and Trading through Automated Linkages
Market of the National Association of Securities Dealers, Inc.
(the "PORTAL Market").
Ranking
The Series A Preferred Shares rank senior to the Junior
Shares (as defined below), including the Common Shares, with
respect to payment of dividends and amounts upon liquidation,
dissolution or winding up. While any Series A Preferred Shares
are outstanding, the Company may not authorize, create or
increase the authorized amount of any class or series of shares
that ranks prior to or senior to the Series A Preferred Shares
with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up without the consent of the
holders of two-thirds of the outstanding Series A Preferred
Shares. However, the Company may create additional classes of
shares, increase the authorized number of Preferred Shares or
issue series of Preferred Shares ranking junior to or on a parity
with the Series A Preferred Shares with respect, in each case, to
the payment of dividends and amounts upon liquidation,
dissolution and winding up without the consent of any holder of
Series A Preferred Shares. See "-Voting Rights" below.
Dividends
Holders of Series A Preferred Shares are entitled to
receive, when, as and if declared by the Board of Trustees of the
Company, out of funds of the Company legally available for
payment thereof, cumulative cash dividends. Such dividends will
be in an amount per share equal to the greater of (i) $0.53906
per quarter ($2.15264 per annum) (equal to a rate of 8.625% of
the liquidation preference of $25 per Series A Preferred Share
(the "Liquidation Preference") per annum) or (ii) the cash
dividend (exclusive of non-regular dividends such as a special
capital gain distribution) declared on the number of Common
Shares (or portions thereof) into which each Series A Preferred
Share is convertible (i.e., an amount equal to the number of
Common Shares (or portions thereof) into which one Series A
Preferred Share is convertible multiplied by the most current
quarterly distribution on or before the applicable payment date).
Dividends on the Series A Preferred Shares are payable quarterly
in arrears on or about the fourth Tuesday of January, April, July
and October of each year, commencing July 28, 1998 (and, in the
case of any accrued but unpaid dividends, at such additional
times and for such interim periods, if any, as determined by the
Board of Trustees).
No dividend will be declared or paid or other distribution
of cash or other property declared or made directly by the
Company or any person acting on behalf of the Company on any
shares of beneficial interest that rank in parity as to the
payment of dividends or amounts upon liquidation with the Series
A Preferred Shares (the "Parity Shares") unless full cumulative
dividends have been declared and paid or are contemporaneously
declared and funds sufficient for payment set aside on the Series
A Preferred Shares for all prior and contemporaneous dividend
periods; provided, however, that if accumulated and accrued
dividends on the Series A Preferred Shares for all prior and
contemporaneous dividend periods have not been paid in full then
any dividend declared on the Series A Preferred Shares for any
dividend period and on any Parity Shares will be declared ratably
in proportion to accumulated, accrued and unpaid dividends on the
Series A Preferred Shares and such Parity Shares.
No distributions on the Series A Preferred Shares shall be
authorized by the Board of Trustees or paid or set apart for
payment by the Company at such time as the terms and provisions
of any agreement of the Company, including any agreement relating
to its indebtedness, prohibits such authorization, payment or
setting apart for payment or provides that such authorization,
payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such authorization or
payment shall be restricted or prohibited by law. Distributions
on the Series A Preferred Shares will accrue whether or not the
Company has earnings, whether or not there are funds legally
available for the payment of such distributions and whether or
not such distributions are authorized. Accrued but unpaid
distributions on the Series A Preferred Shares will not bear
interest and holders of the Series A Preferred Shares will not be
entitled to any distributions in excess of full cumulative
distributions as described above.
The Company will not (i) declare, pay or set apart funds for
the payment of any dividend or other distribution with respect to
any Junior Shares (as defined below) (other than in Junior
Shares) or (ii) redeem, purchase or otherwise acquire for
consideration any Junior Shares through a sinking fund or
otherwise (other than a redemption or purchase or other
acquisition of Common Shares made for purposes of an employee
incentive or benefit plan of the Company or any subsidiary, a
conversion into or exchange for Junior Shares or redemptions for
the purpose of preserving the Company's qualification as a REIT),
unless (A) all cumulative dividends with respect to the Series A
Preferred Shares and any shares at the time such dividends are
payable have been paid or such dividends have been declared and
funds have been set apart for payment of such dividends and (B)
sufficient funds have been paid or set apart for the payment of
the dividend for the current dividend period with respect to the
Series A Preferred Shares and any Parity Shares.
If, for any taxable year, the Company elects to designate as
"capital gain distributions" (as defined in Section 857 of the
Code) any portion (the "Capital Gains Amount") of the
distributions paid or made available for the year to the holders
of all classes of shares (the "Total Distributions"), then the
portion of the Capital Gains Amount that will be allocable to the
holders of Series A Preferred Shares will be the Capital Gains
Amount multiplied by a fraction, the numerator of which will be
the total distributions (within the meaning of the Code) paid or
made available to the holders of the Series A Preferred Shares
for the year and the denominator of which shall be the Total
Distributions.
As used herein, (i) the term "dividend" does not include
dividends payable solely in Junior Shares on Junior Shares, or in
options, warrants or rights to holders of Junior Shares to
subscribe for or purchase any Junior Shares, and (ii) the term
"Junior Shares" means the Common Shares, and any other class of
shares of beneficial interest of the Company now or hereafter
issued and outstanding that ranks junior as to the payment of
dividends or amounts upon liquidation, dissolution and winding up
to the Series A Preferred Shares.
Redemption
Except as otherwise provided under the Declaration of Trust
to protect the Company's status as a REIT or to prevent the
Company's assets from being deemed plan assets under the plan
asset regulation promulgated by the Department of Labor under
ERISA at 29 C.F.R. 2510.3-101 (the "Plan Asset Regulation"),
Series A Preferred Shares will not be redeemable by the Company
prior to May 18, 2003. On and after May 19, 2003, the Company,
at its option upon not less than 30 nor more than 60 days'
written notice, may redeem the Series A Preferred Shares, in
whole or in part, at any time or from time to time at a price
equal to the Liquidation Preference plus accrued and unpaid
dividends, payable at the Company's option in (i) Common Shares,
equal in number to the Liquidation Preference plus accrued and
unpaid dividends divided by the average closing price of the
Common Shares on the NYSE for the 10 days prior to the business
day immediately preceding the date of redemption, or (ii) cash.
Liquidation Preference
The holders of Series A Preferred Shares will be entitled to
receive in the event of any liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary, the
Liquidation Preference plus an amount per Series A Preferred
Share equal to all dividends accrued and unpaid (whether or not
declared) thereon to the date of final distribution to such
holders, and no more.
Until the holders of the Series A Preferred Shares have been
paid the Liquidation Preference and all accrued and unpaid
dividends in full, no payment will be made to any holder of
Junior Shares upon the liquidation, dissolution or winding up of
the Company. If, upon any liquidation, dissolution or winding up
of the Company, the assets of the Company, or proceeds thereof,
distributable among the holders of the Series A Preferred Shares
are insufficient to pay in full the Liquidation Preference and
all accrued and unpaid dividends and the liquidation preference
and all accrued and unpaid dividends with respect to any other
shares of Parity Shares, then such assets, or the proceeds
thereof, will be distributed among the holders of Series A
Preferred Shares and any such Shares ratably in accordance with
the respective amounts which would be payable on such Series A
Preferred Shares and any such Parity Shares if all amounts
payable thereon were paid in full. None of (i) a consolidation
or merger of the Company with another corporation, (ii) a
statutory share exchange by the Company or (iii) a sale or
transfer of all or substantially all of the Company's assets will
be considered a liquidation, dissolution or winding up, voluntary
or involuntary, of the Company.
Voting Rights
Except as indicated below, the holders of Series A Preferred
Shares have no voting rights.
If and whenever six quarterly dividends (whether or not
consecutive) payable on the Series A Preferred Shares or any
other Parity Shares are in arrears, whether or not earned or
declared, the number of Trustees then constituting the Board of
Trustees of the Company will be increased by two and the holders
of Series A Preferred Shares, voting together as a class with the
holders of any other series of Parity Shares (any such other
series, the "Voting Preferred Shares"), will have the right to
elect two additional Trustees to serve on the Company's Board of
Trustees at an annual meeting of shareholders or a properly
called special meeting of the holders of the Series A Preferred
Shares and such Voting Preferred Shares and at each subsequent
annual meeting of shareholders (or special meeting held in place
thereof at which Trustees are to be elected) until all such
dividends and dividends for the current quarterly period on the
Series A Preferred Shares and such other Voting Preferred Shares
have been paid or declared and set aside for payment, at which
time such two additional Trustees shall resign from the Board of
Trustees.
The approval of two-thirds of the outstanding Series A
Preferred Shares (which do not include any Preferred Units issued
by the Partnership), either at a meeting of shareholders or by
written consent, is required in order to amend the Declaration of
Trust and Articles Supplementary to affect materially and
adversely the rights, preferences or voting powers of the holders
of the Series A Preferred Shares or to authorize, create or
increase the authorized amount of, any class of Shares having
rights senior to the Series A Preferred Shares with respect to
the payment of dividends or amounts upon liquidation, dissolution
or winding up (provided that if such amendment affects materially
and adversely the rights, preferences, privileges or voting
powers of one or more but not all of the series of Parity Shares,
the consent of the holders of at least two-thirds of the
outstanding shares of each such series affected is required in
lieu of the consent of the holders of two-thirds of the Parity
Shares as a class). However, the Company may create additional
classes of Parity Shares and Junior Shares, increase the
authorized number of shares of Parity Shares and Junior Shares
and issue additional series of Parity Shares and Junior Shares
without the consent of any holder of Series A Preferred Shares.
Conversion Rights
Series A Preferred Shares are convertible, in whole or in
part, at any time, at the option of the holders thereof, into
authorized but previously unissued Common Shares at a conversion
price of $16.8794 per Common Share (equivalent to a conversion
rate of 1.4811 Common Shares for each Series A Preferred Share),
subject to adjustment as described below ("Conversion Price").
The right to convert Series A Preferred Shares called for
redemption will terminate at the close of business on the
redemption date. For information as to notices of redemption,
see "-Redemption" above. See "- Common Shares" for a description
of the Company's Common Shares.
Conversion Price Adjustments
The Conversion Price is subject to adjustment upon certain
events, including (i) the payment of dividends (and other
distributions) payable in Common Shares on any class of shares of
beneficial interest of the Company, (ii) the issuance to all
holders of Common Shares of certain rights or warrants entitling
them to subscribe for or purchase Common Shares at a price per
share less than the fair market value (as defined in the articles
supplementary of the Company relating to the Series A Preferred
Shares (the "Articles Supplementary")) per Common Share, (iii)
subdivisions, combinations and reclassifications of Common Shares
and (iv) distributions to all holders of Common Shares of
evidences of indebtedness of the Company or assets (including
securities, but excluding those dividends, rights, warrants and
distributions referred to in clause (i), (ii) or (iii) above and
dividends and distributions paid in cash). In addition to the
foregoing adjustments, the Company will be permitted to make such
reductions in the Conversion Price as it considers to be
advisable in order that any event treated for Federal income tax
purposes as a dividend of Shares or share rights will not be
taxable to the holders of the Common Shares or, if that is not
possible, to diminish any income taxes that are otherwise payable
because of such event.
In case the Company shall be a party to any transaction
(including, without limitation, a merger, consolidation,
statutory share exchange, tender offer for all or substantially
all of the Common Shares or sale of all or substantially all of
the Company's assets), in each case as a result of which Common
Shares will be converted into the right to receive stock,
securities or other property (including cash or any combination
thereof), each Series A Preferred Share, if convertible after the
consummation of the transaction, will thereafter be convertible
into the kind and amount of shares of beneficial interest,
securities and other property receivable (including cash or any
combination thereof) upon the consummation of such transaction by
a holder of that number of Common Shares or fraction thereof into
which one Series A Preferred Share was convertible immediately
prior to such transaction (assuming such holder of Common Shares
failed to exercise any rights of election and received per Common
Share the kind and amount of shares of beneficial interest,
securities or other property received per Common Share by a
plurality of non-electing Common Shares). The Company may not
become a party to any such transaction unless the terms thereof
are consistent with the foregoing.
No adjustment of the Conversion Price is required to be made
in any case until cumulative adjustments amount to 1% or more of
the Conversion Price. Any adjustments not so required to be made
will be carried forward and taken into account in subsequent
adjustments.
Restrictions on Ownership
REIT-Related Restrictions. For the Company to qualify as a
REIT under the Code, not more than 50% in value of its
outstanding shares of beneficial interest may be owned, directly
or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of a
taxable year and the shares of beneficial interest must be
beneficially owned by 100 or more persons during at least 335
days of a taxable year of 12 months (or during a proportionate
part of a shorter taxable year). The Declaration of Trust
contains provisions that restrict the ownership and transfer of
shares of beneficial interest. With certain exceptions, the
Declaration of Trust provides that no person may own, or be
deemed to own by virtue of the attribution provisions of the
Code, more than 9.8% of the number of outstanding Preferred
Shares of any series or more than 9.8% of the number of
outstanding Common Shares. Shares owned in excess of such limits
shall be deemed "Shares-in-Trust" pursuant to the Company's
Declaration of Trust, in which case the holder will lose certain
ownership rights with respect to such shares and the Company will
have the right to purchase such Excess Shares from the holder.
Due to the attribution rules that exist with respect to these
ownership restrictions, persons holding, or treated as holding
under the relevant attribution rules, Series A Preferred Shares
will be treated, for purposes of the ownership restrictions, as
owning the Common Shares into which their Series A Preferred
Shares can be converted even prior to such conversion if such
ownership would cause ownership of Common Shares in excess of the
applicable ownership limit. Accordingly, potential purchasers
should take their direct and constructive ownership of Common
Shares into account in determining whether they can hold Series A
Preferred Shares without violating the ownership limit with
respect to Common Shares.
Transfer Agent, Registrar, Dividend Disbursing Agent, Conversion
Agent And Redemption Agent
The transfer agent, registrar, dividend disbursing agent,
conversion agent and redemption agent for the Common Shares, is
Harris Trust and Savings Bank, Chicago, Illinois.
OWNERSHIP LIMITATIONS
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"). The Declaration of Trust restricts the ownership
and transfer 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 the outstanding shares of any series
of Preferred Shares. Generally, the shares of beneficial
interest owned by related or affiliated owners will be aggregated
for purposes of the Ownership Limitation.
If any shareholder purports to transfer the outstanding
Common or Preferred Shares to a person and the transfer, if
effective, would result in (i) a person owning Common or
Preferred Shares, directly or constructively, in excess of the
Ownership Limitation, (ii) the Common and Preferred Shares being
beneficially owned by fewer than 100 persons (determined without
reference to any rules of attribution, (iii) the Company being
"closely held" within the meaning of Section 856(h) of the Code,
or (iv) the Company constructively owning 10% or more of the
ownership interests in a tenant of its real property, within the
meaning of Section 856(d)(2)(B) of the Code, 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 on
the date the Company accepts the offer and the price per share in
the transaction that created such Shares-in-Trust (or, in the
case of a gift, devise, or non-transfer event (as defined in the
Declaration of Trust), the market price on the date of such gift,
devise, or non-transfer event). Therefore, the recordholder of
shares of beneficial interest in excess of the Ownership
Limitation will experience a financial loss when such shares are
redeemed, if the market price falls between the date of purchase
and the date of redemption.
"Market Price" on any date shall mean the average of the
Closing Price (as defined below) for the five consecutive Trading
Days (as defined below) ending on such date. The "Closing Price"
on any date shall mean the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case as
reported to the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading
on the New York Stock Exchange or, if the Common or Preferred
Shares are not listed or admitted to trading on the New York
Stock Exchange, as reported in the principal consolidated
transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common or
Preferred Shares are listed or admitted to trading or, if the
Common or Preferred Shares are not listed or admitted to trading
on any national securities exchange, the last quoted price, or if
not so quoted, the average of the high bid and low asked prices
in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation
System or, if such system is no longer in use, the principal
other automated quotations system that may then be in use or, if
the Common or Preferred Shares are not quoted by any such
organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the
Common or Preferred Shares selected by the Board of Trustees.
"Trading Day" shall mean a day on which the principal national
securities exchange on which the Common or Preferred Shares are
listed or admitted to trading is open for the transaction of
business or, if the Common or Preferred Shares are not listed or
admitted to trading on any national securities exchange, shall
mean any day other than a Saturday, a Sunday or a day on which
banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
Any person who acquires or attempts to acquire Common Shares
or Preferred Shares in violation of the foregoing restrictions,
or any person who owned Common Shares or Preferred Shares that
were transferred to a share trust, will be required (i) to give
immediately written notice to the Company of such event and (ii)
to provide to the Company such other information the Company may
request in order to determine the effect, if any, of such transfer
on the Company's status as a REIT.
All persons who own, directly or indirectly, more than 5%
(or such lower percentages as required pursuant to the
regulations under the Code) of the outstanding Common Shares and
Preferred Shares must, within 30 days after January 1 of each
year, provide to the Company a written statement or affidavit
stating the name and address of such direct or indirect owner,
the number of Common Shares and Preferred Shares owned directly
or indirectly, and a description of how such shares are held. In
addition, each direct or indirect shareholder shall provide to
the Company such additional information as the Company may
request in order to determine the effect, if any, of such
ownership on the Company's status as a REIT and to ensure
compliance with the Ownership Limitation.
The Ownership Limitation generally will not apply to the
acquisition of Common Shares or Preferred Shares by an
underwriter that participates in a public offering of such
shares. In addition, the Board of Trustees, upon receipt of a
ruling from the Service or an opinion of counsel and upon such
other conditions as the Board of Trustees may direct, may exempt
a person from the Ownership Limitation under certain
circumstances. The Board of Trustees has granted exemptions from
the Ownership Limitation, subject to certain other ownership
restrictions, in the case of certain mutual fund investment
families. The foregoing restrictions will continue to apply
until (i) the Board of Trustees determines that it is no longer
in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a real estate investment trust and (ii)
there is an affirmative vote of two-thirds of the number of
Common Shares and Preferred Shares entitled to vote on such
matter at a regular or special meeting of the shareholders of the
Company.
All certificates representing Common Shares or Preferred
Shares will bear a legend referring to the restrictions described
above.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S
DECLARATION OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law
and the Declaration of Trust and Bylaws of the Company is subject
to and qualified in its entirety by reference to the Declaration
of Trust and Bylaws of the Company.
Classification of the Board of Trustees
The Bylaws provide that the number of trustees of the
Company may be established by the Board of Trustees but may not
be fewer than three nor more than nine. There are currently
seven Trustees on the Board of Trustees. The Trustees may
increase or decrease the number of Trustees by a vote of at least
80% of the members of the Board of Trustees, provided that the
number of Trustees shall never be less than the number required
by Maryland law and that the tenure of office of a Trustee shall
not be affected by any decrease in the number of Trustees. Any
vacancy will be filled, including a vacancy created by an
increase in the number of Trustees, by a majority of the
remaining Trustees, except that a vacancy resulting from an
increase in the number of Trustees must be filled by a majority
of the entire Board of Trustees.
Pursuant to the Declaration of Trust, the Board of Trustees
is divided into three classes of trustees. Upon the expiration
of their terms, Trustees of each class are chosen for three-year
terms and each year one class of trustees will be elected by the
shareholders. The Company believes that classification of the
Board of Trustees will help to assure the continuity and
stability of the Company's business strategies and policies as
determined by the Board of Trustees. Holders of Common Shares
will have no right to cumulative voting in the election of
Trustees. Consequently, at each annual meeting of shareholders,
the holders of a majority of the Common Shares are able to elect
all of the successors of the class of trustees whose terms expire
at that meeting.
The classified board provision could have the effect of
making the replacement of incumbent trustees more time consuming
and difficult. At least two annual meetings of shareholders,
instead of one, will generally be required to effect a change in
a majority of the Board of Trustees. Thus, the classified board
provision could increase the likelihood that incumbent Trustees
will retain their positions. The staggered terms of Trustees may
delay, defer or prevent a tender offer, an attempt to change
control of the Company or other transaction that might otherwise
involve a premium price for holders of Common Shares and even
though a tender offer, change of control or other transaction
might be in the best interest of the shareholders.
Removal of Trustees
The Declaration of Trust provides that a Trustee may be
removed with or without cause only by the affirmative vote of at
least two-thirds of the votes entitled to be cast in the election
of Trustees. This provision, when coupled with the provision in
the Bylaws authorizing the Board of Trustees to fill vacant
trusteeships, precludes shareholders from removing incumbent
Trustees except upon the existence of cause for removal and a
substantial affirmative vote, and filling the vacancies created
by such removal with their own nominees.
Business Combinations
Under the MGCL, as applicable to Maryland real estate
investment trusts, certain "business combinations" (including a
merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification
of equity securities) between a Maryland real estate investment
trust and any person who beneficially owns ten percent or more of
the voting power of the trust's shares or an affiliate of the
trust who, at any time within the two-year period prior to the
date in question, was the beneficial owner of ten percent or more
of the voting power of the then-outstanding voting shares of
beneficiary interest of the trust (an "Interested Shareholder")
or an affiliate thereof prohibited for five years after the most
recent date on which the Interested Shareholder becomes an
Interested Shareholder. Thereafter, any such business
combination must be recommended by the board of trustees of such
trust and approved by the affirmative vote of at least (a) 80% of
the votes entitled to be cast by holders of outstanding voting
shares of beneficial interest of the trust and (b) two-thirds of
the votes entitled to be cast by holders of voting shares of the
trust other than shares held by the Interested Shareholder with
whom (or with whose affiliate) the business combination is to be
effected, unless, among other conditions, the trust's common
shareholders receive a minimum price (as defined in the MGCL) for
their shares and the consideration is received in cash or in the
same form as previously paid by the Interested Shareholder for
its shares. These provisions of Maryland law to not apply,
however, to business combinations that are approved or exempted
by the board of trustees of the trust prior to the time that the
Interested Shareholder becomes an Interested Shareholder.
Control Share Acquisition
The MGCL, as applicable to Maryland real estate investment
trusts, provides that "control shares" of a Maryland real estate
investment trust acquired in a "control share acquisition" have
no voting rights except to the extent approved by a vote of two
thirds of the votes entitled to be cast on the matter, excluding
shares of beneficial interest owned by the acquiror, by officers
or by trustees who are employees of the trust. "Control Shares"
are voting shares of beneficial interest which, if aggregated
with all other such shares of beneficial interest previously
acquired by the acquiror, or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing trustees within one
of the following ranges of voting power: (i) one-fifth or more
but less than one-third, (ii) one-third or more but less than a
majority, or (iii) a majority or more of all voting power.
Control Shares do not include shares the acquiring person is
entitled to vote as result of having previously obtained
shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including
an undertaking to pay expenses), may compel the board of trustees
of the trust to call a special meeting of shareholders to be held
within 50 days of demand to consider the voting rights of the
shares. If no request for a meeting is made, the trust may itself
present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement
as required by the statute, then, subject to certain conditions
and limitations, the trust may redeem any or all of the control
shares (except those for which voting rights have previously been
approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date
of the last control share acquisition by the acquiror or of any
meeting of shareholders at which the voting rights of such shares
are considered and not approved. If voting rights for control
shares are approved at a shareholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to
vote, all other shareholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share
paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to
shares acquired in a merger, consolidation or share exchange if
the trust is a party to the transaction or (b) to acquisitions
approved or exempted by the declaration of trust or bylaws of the
trust.
The Bylaws of the Company contain a provision exempting from
the control share acquisition statute any and all acquisitions by
any person of the Company's Common or Preferred Shares. There
can be no assurance that such provision will not be amended or
eliminated at any time in the future.
Amendment
The Declaration of Trust may be amended by the affirmative
vote of the holders of at least a majority of all of the votes
entitled to be cast on the matter; provided, that certain
provisions of the Declaration of Trust regarding (i)
disqualification of the company as a real estate investment
trust, (ii) Independent Trustees or the removal of Trustees,
(iii) the restrictions on transfer of the Common Shares and the
Preferred Shares, (iv) amendments to the Declaration of Trust,
(v) the Debt Limitation (as defined in "- Operations" below) and
(vi) the termination of the Company may not be amended, altered,
changed or repealed without the approval of two-thirds of all of
the votes entitled to be cast on the matter. The Company's
Bylaws may be amended or altered exclusively by the Board of
Trustees or a committee thereof, except for provision of the
Bylaws relating to the sale of a certain Hotel and transactions
involving the Company in which an advisor, Trustee or officer has
an interest, which may be altered or repealed upon the vote of
shareholders holding at least two-thirds of the shares of the
Company entitled to vote generally in the election of Trustees.
Operations
The Company is generally prohibited from engaging in certain
activities, including incurring consolidated indebtedness, in the
aggregate, in excess of the limit set forth in the Company's
Declaration of Trust that limits consolidated indebtedness to 50%
of the Company's investment in Hotels, at cost, after giving
effect to the Company's use of proceeds from any indebtedness
(the "Debt Limitation") and acquiring or holding property or
engaging in any activity that would cause the Company to fail to
qualify as a REIT.
Dissolution of the Company
Pursuant to the Company's Declaration of Trust, the
dissolution of the Company must be approved by the affirmative
vote of two-thirds of all of the votes entitled to be cast on the
matter.
Advance Notice of Trustees' Nominations and New Business
The Bylaws of the Company provide that (a) with respect to
an annual meeting of shareholders, nominations of persons for
election to the Board of Trustees and the proposal of business to
be considered by shareholders may be made only (i) pursuant to
the Company's notice of the meeting, (ii) by the Board of
Trustees or (iii) by a shareholder who is entitled to vote at the
meeting and has complied with the advance notice procedures set
forth in the Bylaws and (b) with respect to special meetings of
Shareholders, only the business specified in the Company's notice
of meeting may be brought before the meeting of shareholders and
nominations of persons for election to the Board of Trustees may
be made only (i) pursuant to the Company's notice of the meeting,
(ii) by the Board of Trustees or (iii) provided that the Board of
Trustees has determined that Trustees shall be elected at such
meeting, by a shareholder who is entitled to vote at the meeting
and has complied with the advance notice provisions set forth in
the Bylaws.
Anti-Takeover Effect of Certain Provisions of Maryland Law and
the Declaration of Trust and Bylaws
The business combination provisions and, if the applicable
provision in the Bylaws is rescinded, the control share
acquisition provisions of the MGCL, the provisions of the
Declaration of Trust on classification of the Board of Trustees
and removal of Trustees and the advance notice provisions of the
Bylaws could delay, defer or prevent a transaction or a change in
control of the Company that might involve a premium price for
holders of Common Shares or otherwise be in their best interest.
Maryland Asset Requirements
To maintain its qualification as a Maryland real estate
investment trust, the Maryland REIT Law requires 75% of the value
of the Company's assets to be real estate assets, government
securities, cash and cash items, including receivables. The
Maryland REIT Law also prohibits the Company from using or
applying land for farming, agricultural, horticultural or similar
purposes.
Limitation of Liability and Indemnification
The Maryland REIT Law permits a Maryland real estate
investment trust to include in its declaration of trust a
provision limiting the liability of its trustees and officers to
the trust and its shareholders for money damages except for
liability resulting from (a) actual receipt of an improper
benefit or profit in money, property or services or (b) active
and deliberate dishonesty established by a final judgment as
being material to the cause of action. The Declaration of Trust
of the Company contains such a provision which eliminates such
liability to the maximum extent permitted by Maryland law.
The Declaration of Trust of the Company obligates the
Company, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance
of final disposition of a proceeding to (a) any present or former
shareholder, Trustee, or officer or (b) any individual who, while
a Trustee of the Company and at the request of the Company,
serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as
a trustee, director, officer, partner, employee or agent of such
a corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise from or against any claim or
liability to which such person may become subject or which such
person may incur by reason of such service. The Bylaws of the
Company obligate it, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to (a) any present
or former Trustee or officer who is made a party to the
proceeding by reason of his service in that capacity, (b) any
individual who, while a shareholder, Trustee or officer of the
Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a trustee, director,
officer or partner of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who
is made a party to the proceeding by reason of his service in
that capacity and (c) each shareholder or former shareholder for
any claim or liability to which he may become subject by reason
of such status. The Declaration of Trust and Bylaws also permit
the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a
predecessor of the Company. The Bylaws require the Company to
indemnify any present or former shareholder, trustee or officer
who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason
of his service in that capacity.
The Maryland REIT Law permits a Maryland real estate
investment trust to indemnify and advance expenses to its
trustees, officers, employees and agents to the same extent as
permitted by the MGCL for directors and officers of Maryland
corporations. The MGCL permits a corporation to indemnify its
present and former directors and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to
which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the
matter giving rise to the proceeding and (i) was committed in bad
faith or (ii) was the result of active and deliberate dishonesty,
(b) the director or officer actually received an improper
personal benefit in money, property or services or (c) in the
case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was
unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the
corporation. In accordance with the MGCL, the Bylaws of the
Company require it, as a condition to advancing expenses, to
obtain (a) a written affirmation by the director of officer of
his good faith belief that he has met the standard of conduct
necessary for indemnification by the Company as authorized by the
Bylaws and (b) a written statement by or on his behalf to repay
the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not
met.
Other Matters
The Common Shares trade on the New York Stock Exchange under
the symbol "KPA."
SELLING SHAREHOLDER
As described elsewhere herein, "Selling Shareholder" is that
person who has received and may receive Common Shares upon
redemption of Units and who is an affiliate of the Company.
Persons who receive Redemption Shares upon redemption of Units
and who are not now or at the time of redemption affiliates of
the Company are not considered a "Selling Shareholder" because
resale by them of any Redemption Shares received upon redemption
of Redemption Units will not be restricted under the Securities
Act. Because the Selling Shareholder may redeem all, some or
none of his Redemption Units, and may receive, at the Company's
option, cash rather than Common Shares upon such redemptions, no
estimate can be made of the aggregate number of Secondary Shares
which may be offered and sold by the Selling Shareholder pursuant
to this Prospectus. The Selling Shareholder may transfer his
Redemption Units to a transferee prior to tendering the
Redemption Units for redemption. In the table below, the Selling
Shareholder is assumed to have redeemed all of his Redemption
Units and received Secondary Shares therefor, and to be selling
all such Secondary Shares under this Prospectus. The table sets
forth as of May 19, 1998, and as adjusted to reflect the sale of
all the Secondary Shares, certain information regarding the
Selling Shareholder's ownership of the shares of Common Stock.
Prior to Offering After Offering
Selling Shares Secondary Shares
Shareholder Owned(1) Registered Hereunder Shares Owned(2)
Rolf E. Ruhfus 869,697 95,554 774,143
- ----------------
(1) Selling Shareholder's holdings represent less than 1% of all
outstanding Common Shares of the Company. Includes Units
held by the Selling Shareholder, 7,500 Series A Preferred
Shares, 5,172 restricted shares and 1,000 Common Shares
issuable upon the exercise of vested options granted under
the Company's Trustees Share Incentive Plan.
(2) Assuming all of the Secondary Shares registered hereunder
are sold.
REDEMPTION OF UNITS
General
Pursuant to the Redemption Rights, each Limited Partner
holding Redemption Units may, subject to certain limitations,
require that the Partnership redeem all or a portion of such
Redemption Units at any time after June 20, 1998, by delivering a
notice of exercise of redemption right to the Partnership. Upon
redemption, each Limited Partner will receive, at the option of
the General Partner, either (i) a number of Common Shares equal
to the number of Redemption Units redeemed (subject to certain
anti-dilution adjustments) or (ii) cash in an amount equal to the
market value of the number of Common Shares he would have
received pursuant to (i) above. The market value of the Common
Shares for this purpose will be equal to the average of the
closing trading prices of the Company's Common Shares (or
substitute information, if no such closing price is available)
generally for the ten consecutive trading days before the day on
which the redemption notice was received by the Partnership.
In lieu of the Partnership redeeming Redemption Units, the
Company, in its sole discretion, has the right to assume directly
and satisfy the redemption right of a Limited Partner described
in the preceding paragraph. The Company anticipates that it
generally will elect to assume directly and satisfy any
redemption right exercised by a Limited Partner with respect to
the Redemption Units through the issuance of Redemption Shares,
whereupon the Company will acquire the Redemption Units being
redeemed. Such an acquisition will be treated as a sale of the
Redemption Units to the Company for federal income tax purposes.
See "-Tax Consequences of Redemption." Upon redemption, a
Limited Partner's right to receive distributions with respect to
the Redemption Units redeemed will cease. A Limited Partner must
request the redemption of at least 1,000 Redemption Units (or all
of the Redemption Units held by such Limited Partner, if less
than 1,000 are so held).
EACH LIMITED PARTNER SHOULD CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF (A) THE
REDEMPTION OF HIS UNITS AND OWNERSHIP OF HIS UNITS, (B) THE
OWNERSHIP AND/OR SALE OF THE COMMON SHARES AND (C) THE COMPANY'S
ELECTION TO BE TAXED AS A REIT, INCLUDING THE STATE, LOCAL,
FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH REDEMPTION,
OWNERSHIP, SALE, AND ELECTION,AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
Tax Consequences of Redemption
The following discussion summarizes certain federal income
tax considerations that may be relevant to a Limited Partner who
exercises his right to require the redemption of his Units.
Tax Treatment of Redemption of Units. If the Company
assumes and performs the redemption obligation, the Partnership
Agreement provides that the redemption will be treated by the
Company, the Partnership, and the redeeming Limited Partner as a
sale of Units by such Limited Partner to the Company at the time
of such redemption. In that event, such sale will be fully
taxable to the redeeming Limited Partner and such redeeming
Limited Partner will be treated as realizing for tax purposes an
amount equal to the sum of the cash or the value of the Common
Shares received in connection with the redemption plus the amount
of any Partnership liabilities allocable to the redeemed Units at
the time of the redemption. The determination of the amount of
gain or loss is discussed more fully below.
If the Company does not elect to assume the obligation to
redeem a Limited Partner's Units and the Partnership redeems such
Units for cash that the Company contributes to the Partnership to
effect such redemption, the redemption likely would be treated
for tax purposes in the same manner as the scenario described in
the preceding paragraph (i.e., as a sale of such Units to the
Company in a fully taxable transaction), although the matter is
not free from doubt. In that event, the redeeming Partner would
be treated as realizing an amount equal to the sum of the cash
received in connection with the redemption plus the amount of any
Partnership liabilities allocable to the redeemed Units at the
time of the redemption. The determination of the amount of gain
or loss in the event of sale treatment is discussed more fully
below.
If the Partnership chooses to redeem a Limited Partner's
Units for cash that is not contributed by the Company to effect
the redemption, such transaction would be treated as a redemption
for federal income tax purposes. In that event, the tax
consequences would be the same as those described in the previous
paragraph, except that if the Partnership redeems less than all
of a Limited Partner's Units, the Limited Partner would not be
permitted to recognize any loss occurring on the transaction and
would recognize taxable gain only to the extent that the cash,
plus the amount of any Partnership liabilities allocable to the
redeemed Units, exceeded the Limited Partner's adjusted basis in
all of such Limited Partner's Units immediately before the
redemption.
Tax Treatment of Disposition of Units by Limited Partner
Generally. If a Unit is redeemed in a manner that is treated as
a sale of the Unit, or a Limited Partner otherwise disposes of a
Unit (other than in a transaction that is treated as a redemption
for tax purposes, such as a transaction described in the
preceding paragraph), the determination of gain or loss from such
sale or other disposition will be based on the difference between
the amount considered realized for tax purposes and the tax basis
in such Unit. See "-Basis of Units." Upon the sale of a Unit,
the "amount realized" will be measured by the sum of the cash and
fair market value of other property (e.g., Common Shares)
received plus the amount of any Partnership liabilities allocable
to the Unit sold. To the extent that the amount of cash or
property received plus the allocable share of any Partnership
liabilities exceeds the Limited Partner's basis in the Unit
disposed of, such Limited Partner will recognize gain. It is
possible that the amount of gain recognized or even the tax
liability resulting from such gain could exceed the amount of
cash and the value of any other property received upon such
disposition.
Except as described below, any gain recognized upon a sale
or other disposition of Units will be treated as gain
attributable to the sale or disposition of a capital asset. To
the extent, however, that the amount realized upon the sale of a
Unit attributable to a Limited Partner's share of "unrealized
receivables" of the Partnership (as defined in Section 751 of the
Code) exceeds the basis attributable to those assets, such excess
will be treated as ordinary income. Unrealized receivables
include, to the extent not previously included in Partnership
income, any rights to payment for services rendered or to be
rendered. Unrealized receivables also include amounts that would
be subject to recapture as ordinary income if the Partnership had
sold its assets at their fair market value at the time of the
transfer of a Unit (e.g., the excess of accelerated depreciation
over straight line depreciation).
Basis of Units. In general, a Limited Partner who
contributed property to the Partnership in exchange for his Units
had an initial tax basis in his Units ("Initial Basis") equal to
his basis in the contributed property. In general, a Limited
Partner who was deemed at the time of the transactions resulting
in the issuance of the Units to have received his Units upon the
contribution of property by the partnership in which such Limited
Partner was a partner, followed by the liquidation of such
partnership, had an Initial Basis equal to his basis in his
partnership interest at the time of such liquidation. Similarly,
in general, a Limited Partner who at the time of the transactions
resulting in the issuance of the Units contributed a partnership
interest in exchange for his Units had an Initial Basis in the
Units equal to his basis in the contributed partnership interest.
A Limited Partner's Initial Basis in his Units generally is
increased by (i) such Limited Partner's share of Partnership
taxable income and (ii) increases in his share of liabilities of
the Partnership (including any increase in his share of
liabilities occurring in connection with the transactions
resulting in the issuance of the Units). Generally, such Limited
Partner's basis in his Units is decreased (but not below zero) by
(A) his share of Partnership distributions, (B) decreases in his
share of liabilities of the Partnership (including any decrease
in his share of liabilities of the Partnership occurring in
connection with the transactions resulting in the issuance of the
Units), (C) his share of losses of the Partnership and (D) his
share of nondeductible expenditures of the Partnership that are
not chargeable to capital (e.g., syndication expenses).
Potential Application of Disguised Sale Regulations to a
Redemption of Units. There is a risk that a redemption of Units
may cause the original transfer of property to the Partnership in
exchange for Units to be treated as a "disguised sale" of
property. The Code and the Treasury Regulations thereunder (the
"Disguised Sale Regulations") generally provide that, unless one
of the prescribed exceptions is applicable, a partner's
contribution of property to a partnership and a simultaneous or
subsequent transfer of money or other consideration (including
the assumption of or taking subject to a liability but excluding
distributions of operating income) from the partnership to the
partner will be presumed to be a sale, in whole or in part, of
such property by the partner to the partnership. Further, the
Disguised Sale Regulations provide generally that, in the absence
of an applicable exception, if money or other consideration is
transferred by a partnership to a partner within two years of the
partner's contribution of property, the transactions are, when
viewed together, presumed to be a sale of the contributed
property unless the facts and circumstances clearly establish
that the transfers do not constitute a sale. However, if, at the
time of the transaction resulting in the issuance of Units to a
Limited Partner, such Limited Partner did not intend to redeem
such Units within two years of such issuance, the transfers of
property should not be viewed as a sale of the contributed
property to the Partnership even if the Units are redeemed within
two years of issuance. In addition, the Disguised Sale
Regulations provide that if two years have passed between the
transfer of money or other consideration and the contribution of
property, the transactions will be presumed not to be a sale
unless the facts and circumstances clearly establish that the
transfers constitute a sale.
Accordingly, if a Unit is redeemed, the Service could
contend that the Disguised Sale Regulations apply because the
Limited Partner will thus receive cash or Common Shares
subsequent to his previous contribution of property to the
Partnership. In that event, the Service could contend that the
transactions in connection with the issuance of the Units
themselves were taxable as a disguised sale under the Disguised
Sale Regulations. Any gain recognized thereby may be eligible
for installment reporting under Section 453 of the Code, subject
to certain limitations.
Comparison of Ownership of Units and Common Shares
Generally, the nature of an investment in Common Shares of
the Company is substantially equivalent economically to an
investment in Units in the Partnership. Since the Partnership
makes distributions to its partners on a per Unit basis and the
Company, through a wholly-owned subsidiary of the Company, owns
one Unit for each outstanding Common Share, a holder of a Common
Share generally receives the same distribution that a holder of a
Common Unit receives, and shareholders and Unit holders generally
share in the risks and rewards of ownership in the enterprise
being conducted by the Company (through the General Partner and
the Partnership). However, there are some differences between
ownership of Units and ownership of Common Shares, some of which
may be material to investors.
The information below highlights a number of the significant
differences between the Partnership and the Company relating to,
among other things, form of organization, permitted investments,
policies and restrictions, management structure, compensation and
fees, investor rights and federal income taxation, and compares
certain legal rights associated with the ownership of Units and
Common Shares, respectively. These comparisons are intended to
assist Limited Partners of the Partnership in understanding how
their investment will be changed if their Units are redeemed for
Common Shares.
EACH LIMITED PARTNER SHOULD CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF (A) THE
REDEMPTION OF HIS UNITS AND OWNERSHIP OF HIS UNITS, (B) THE
OWNERSHIP AND/OR SALE OF THE COMMON SHARES AND (C) THE COMPANY'S
ELECTION TO BE TAXED AS A REIT, INCLUDING THE STATE, LOCAL,
FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH REDEMPTION,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
Form of Organization and Assets Owned. The Partnership is
organized as a Virginia limited partnership. The Company is
organized as a Maryland REIT. The Company elected to be taxed as
a REIT under the Code commencing with its taxable year ended
December 31, 1994 and intends to maintain its qualification as a
REIT. The Company owns an interest in the Hotels through the
approximately 82.7% ownership interest in the Partnership held by
the General Partner.
Length of Investment. The Partnership has a stated
termination date of December 31, 2050, although it may be
terminated earlier under certain circumstances. See "The
Company-The Partnership" and "Description of the Partnership and
Units-Term." The Company has a perpetual term and intends to
continue its operations for an indefinite time period.
Purpose and Permitted Investments. The Partnership may,
subject to the foregoing limitations, invest in or enter into
partnerships, joint ventures or similar arrangements and may own
interests in any other entity. Under the Declaration of Trust,
the purpose of the Company is generally to invest in, acquire,
hold, merge and dispose of property, including engaging in
business as a REIT under the Maryland REIT Law. Under its
Declaration of Trust, the Company may engage in any activities
not inconsistent with law.
Additional Equity. The Partnership is authorized to issue
Units and other partnership interests to the partners or to other
persons for such consideration and on such terms and conditions
as the General Partner, in its sole discretion, may deem
appropriate. In addition, the General Partner may cause the
Partnership to issue additional Units to the General Partner, or
other partnership interests in one or more different series or
classes which may be senior to the Units, in conjunction with the
offering of securities of the Company having substantially
similar rights, for which the General Partner shall make a
capital contribution to the Partnership in an amount equal to
the proceeds of such offering. Consideration for additional
partnership interests may be cash or other property or other
assets permitted by Virginia law.
Under the Declaration of Trust, the total number of shares
of all classes of stock that the Company has the authority to
issue is 120,000,000, consisting of 100,000,000 Common Shares and
20,000,000 Preferred Shares. 4,250,000 Preferred Shares are
outstanding or will be outstanding as of the date of this
Prospectus. The Board of Trustees of the Company may issue, in
its discretion, additional equity securities consisting of Common
Shares or Preferred Shares, provided, however, that the total
number of shares issued does not exceed the authorized number of
shares of beneficial interest set forth in the Company's
Declaration of Trust.
Borrowing Policies. The Company's Declaration of Trust
limits consolidated indebtedness to 50% of the Company's
investment in hotel properties, at cost, after giving effect to
the Company's use of proceeds from any indebtedness. For
purposes of calculating the Company's consolidated indebtedness,
any indebtedness incurred by the Partnership is included.
Other Investment Restrictions. Other than restrictions
precluding investments by the Partnership that would adversely
affect the qualification of the Company as a REIT, there are no
restrictions upon the Partnership's authority to enter into
certain transactions, including among others, making investments,
lending Partnership funds, or reinvesting the Partnership's cash
flow and net sale or refinancing proceeds.
Neither the Company's Declaration of Trust nor its Bylaws
impose any restrictions upon the types of investments made by the
Company, except that under the Declaration of Trust the Board of
Trustees is prohibited from taking any action that would
terminate the Company's REIT status without the approval of the
holders of two-thirds of the outstanding Common Shares.
Management and Control. All management and control over the
business of the Partnership is vested in the General Partner of
the Partnership, and no Limited Partner of the Partnership has
any right to participate in or exercise management or control
over the business of the Partnership. Upon the occurrence of an
event of bankruptcy or the dissolution of the General Partner,
such General Partner shall be deemed to be removed automatically;
otherwise, generally the General Partner may not be removed by
the Limited Partners with or without cause.
The Board of Trustees has exclusive control over the
Company's business and affairs subject to the restrictions in the
Declaration of Trust and Bylaws. The policies adopted by the
Board of Trustees may be altered or eliminated without a vote of
the shareholders. Accordingly, except for their vote in the
elections or removals of trustees, shareholders have no control
over the ordinary business policies of the Company. The Board of
Trustees cannot take action to disqualify the Company as a REIT
or revoke the Company's election to qualify as a REIT, however,
without the consent of the holders of two-thirds of the
outstanding Common Shares. See "Description of Shares of
Beneficial Interest-Certain Provisions of Maryland Law and of the
Company's Declaration of Trust and Bylaws"
Fiduciary Duties. Under Virginia law, the General Partner
of the Partnership is accountable to the Partnership as a
fiduciary and, consequently, is required to exercise good faith
in all of its dealings with respect to partnership affairs.
However, under the Partnership Agreement, the General Partner is
under no obligation to take into account the tax consequences to
any Limited Partner of any action taken by it, and the General
Partner will have no liability to a Limited Partner as a result
of any liabilities or damages incurred or suffered by or benefits
not derived by a Limited Partner as a result of an action or
inaction of the General Partner so long as the General Partner
acted in good faith.
Under Maryland law, the Company's trustees must perform
their duties in good faith, in a manner that they believe to be
in the best interests of the Company and with the care an
ordinarily prudent person would exercise under similar
circumstances. Trustees of the Company who act in such a manner
generally will not be liable to the Company for monetary damages
arising from their activities.
Management Limitation of Liability and Indemnification. The
Partnership Agreement generally provides that the General Partner
will incur no liability for monetary damages to the Partnership
or any Limited Partner for losses sustained or liabilities
incurred as a result of errors in judgment or of any act or
omission if the General Partner acted in good faith. In
addition, the General Partner is not responsible for any
misconduct or negligence on the part of its agents provided the
General Partner appointed such agents in good faith. The General
Partner may consult with legal counsel, accountants, consultants,
real estate brokers and such other persons and any action it
takes or omits to take in reliance upon the opinion of such
persons, as to matters which the General Partner reasonably
believes to be within their professional or expert competence,
shall be conclusively presumed to have been done or omitted in
good faith and in accordance with such opinion. The Partnership
Agreement also provides for indemnification of the General
Partner, the directors and officers of the General Partner, and
such other persons as the General Partner may from time to time
designate, against any and all losses, claims, damages,
liabilities (joint or several), expenses (including reasonable
legal fees and expenses), judgments, fines, settlements, and
other amounts arising from any and all claims, demands, actions,
suits or proceedings, whether civil, criminal, administrative or
investigative, that relate to the operations of the Partnership
in which such person may be involved, or is threatened to be
involved, provided that the Partnership shall not indemnify any
such person (i) for an act or omission of such person that was
material to the matter giving rise to the proceeding and either
was committed in bad faith or was the result of active and
deliberate dishonesty, (ii) such person actually received an
improper benefit in money, property or services or (iii) in the
case of any criminal proceeding, such person had reasonable cause
to believe that the act or omission was unlawful.
The Maryland REIT Law permits a Maryland real estate
investment trust to include in its declaration of trust a
provision limiting the liability of its trustees and officers to
the trust and its shareholders for money damages except for
liability resulting from (a) actual receipt of an improper
benefit or profit in money, property or services or (b) active
and deliberate dishonesty established by a final judgment as
being material to the cause of action. The Declaration of Trust
of the Company contains such a provision which eliminates such
liability to the maximum extent permitted by Maryland law.
The Declaration of Trust of the Company obligates the
Company, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance
of final disposition of a proceeding to (a) any present or former
shareholder, Trustee, or officer or (b) any individual who, while
a Trustee of the Company and at the request of the Company,
serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as
a trustee, director, officer, partner, employee or agent of such
a corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise from or against any claim or
liability to which such person may become subject or which such
person may incur by reason of such service. The Bylaws of the
Company obligate it, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to (a) any present
or former Trustee or officer who is made a party to the
proceeding by reason of his service in that capacity, (b) any
individual who, while a shareholder, Trustee or officer of the
Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a trustee, director,
officer or partner of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who
is made a party to the proceeding by reason of his service in
that capacity and (c) each shareholder or former shareholder for
any claim or liability to which he may become subject by reason
of such status. The Declaration of Trust and Bylaws also permit
the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a
predecessor of the Company. The Bylaws require the Company to
indemnify any present or former shareholder, trustee or officer
who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason
of his service in that capacity.
The Maryland REIT Law permits a Maryland real estate
investment trust to indemnify and advance expenses to its
trustees, officers, employees and agents to the same extent as
permitted by the MGCL for directors and officers of Maryland
corporations. The MGCL permits a corporation to indemnify its
present and former directors and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to
which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the
matter giving rise to the proceeding and (i) was committed in bad
faith or (ii) was the result of active and deliberate dishonesty,
(b) the director or officer actually received an improper
personal benefit in money, property or services or (c) in the
case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was
unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the
corporation. In accordance with the MGCL, the Bylaws of the
Company require it, as a condition to advancing expenses, to
obtain (a) a written affirmation by the director of officer of
his good faith belief that he has met the standard of conduct
necessary for indemnification by the Company as authorized by the
Bylaws and (b) a written statement by or on his behalf to repay
the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not
met.
Anti-Takeover Provisions. Except in limited circumstances,
the General Partner of the Partnership has exclusive management
power over the business and affairs of the Partnership. The
General Partner generally may not be removed by the Limited
Partners with or without cause. Under the Partnership Agreement,
the General Partner may, in its sole discretion, prevent a
Limited Partner from transferring his interest or any rights as a
Limited Partner except in certain limited circumstances. The
General Partner may exercise this right of approval to deter,
delay or hamper attempts by persons to acquire a controlling
interest in the Partnership. See "Description of Units."
The business combination provisions and, if the applicable
provision in the Bylaws is rescinded, the control share
acquisition provisions of the MGCL, the provisions of the
Declaration of Trust on classification of the Board of Trustees
and removal of Trustees and the advance notice provisions of the
Bylaws could delay, defer or prevent a transaction or a change in
the control of the Company that might involve a premium price for
holders of Common Shares or otherwise be in their best interests.
See "Description of Shares of Beneficial Interest-Certain
Provisions of Maryland Law and of the Declaration of Trust and
Bylaws."
Voting Rights. Under the Partnership Agreement, the Limited
Partners have voting rights only as to the dissolution of the
Partnership and certain amendments of the Partnership Agreement,
as described more fully in " - Vote Required to Dissolve the
Partnership or the Company" below. Otherwise, all decisions
relating to the operation and management of the Partnership are
made by the General Partner. See "Description of Partnership and
Units." The Company, through a wholly-owned subsidiary,
currently owns approximately 82% of the outstanding Units. As
Units held by Limited Partners are redeemed, the Company's
percentage ownership of the Units will increase. If additional
Units are issued to third parties, the Company's percentage
ownership of the Units will decrease.
Shareholders of the Company have the right to vote on, among
other things, a merger or sale of substantially all of the assets
of the Company, certain amendments to the Declaration of Trust,
termination of the status of the Company as a REIT, and
dissolution of the Company. All Common Shares have one vote per
share, and the Declaration of Trust permits the Board of Trustees
to classify and issue Preferred Shares in one or more series
having voting power which may differ from that of the Common
Shares. See "Description of Shares of Beneficial Interest."
Amendment of the Partnership Agreement or the Declaration of
Trust. The Partnership Agreement may be amended by the General
Partner without the consent of the Limited Partners in any
respect, except that certain amendments affecting the fundamental
rights of a Limited Partner must be approved by consent of
Limited Partners holding more than 66 2/3% of the Units held by
the Limited Partners. Such consent is required for any amendment
that would (i) affect the Redemption Rights, (ii) adversely
affect the rights of Limited Partners to receive distributions
payable to them under the Partnership Agreement, (iii) alter the
Partnership's profit and loss allocations, or (iv) impose any
obligation upon the Limited Partners to make additional capital
contributions to the Partnership.
For a description of the vote of shareholders required to
amend the Company's Declaration of Trust, see "Description of
Shares of Beneficial Interest - Certain Provisions of Maryland
Law and of the Company's Declaration of Trust and Bylaws
Amendment."
Vote Required to Dissolve the Partnership or the Company.
At any time prior to December 31, 2050 (upon which date the
Partnership shall terminate), the General Partner may elect to
dissolve the Partnership in its sole discretion. Such
dissolution shall also occur upon (i) the bankruptcy, dissolution
or withdrawal of the General Partner (unless the Limited Partners
elect to continue the Partnership and select a substitute general
partner by unanimous consent), (ii) the passage of 90 days after
the sale or other disposition of all or substantially all the
assets of the Partnership or (iii) the redemption of all limited
partnership interests in the Partnership (other than those held
by the General Partner, if any).
Pursuant to the Company's Declaration of Trust, the Board of
Trustees must obtain approval of two-thirds of all of the votes
entitled to be cast upon such proposal in order to dissolve the
Company.
Vote Required to Sell Assets or Merge. Under the
Partnership Agreement, the sale, exchange, transfer or other
disposition of all or substantially all of the Partnership's
assets or merger or consolidation of the Partnership requires
only the consent of the General Partner. Pursuant to the
Maryland REIT Law, a real estate investment trust generally
cannot merge, unless approved by its board of trustees and the
affirmative vote or written consent of shareholders holding at
least two-thirds of the shares entitled to vote on the matter
unless a lesser percentage (but not less than a majority of all
of the votes entitled to be case on the matter) is set forth in
the real estate investment trust's declaration of trust. The
Company's Declaration of Trust does not provide for a lesser
percentage in such situations. Under the Declaration of Trust,
Board of Trustees approval and such two-thirds affirmative vote
of the Company's shareholders is required for any proposed merger
or consolidation of the Company or for the sale, lease, exchange
or transfer of substantially all of the Company's assets. No
approval of the shareholders is required for the sale of the
Company's assets in the usual and regular course of business.
Compensation, Fees and Distributions. The General Partner
does not receive any compensation for its services as General
Partner of the Partnership. As a partner in the Partnership,
however, the General Partner has the same right to allocations
and distributions as other partners of the Partnership. In
addition, the Partnership will reimburse the General Partner and
the Company for all expenses incurred relating to the ongoing
operation of the Partnership and any offering of partnership
interests in the Partnership or capital shares of the Company.
Liability of Investors. Under the Partnership Agreement and
applicable state law, the liability of the Limited Partners for
the Partnership's debts and obligations is generally limited to
the amount of their investment in the Partnership and Limited
Partners are generally not liable for any debts, liabilities,
contracts or obligations of the Partnership.
Under Maryland law, the Company's shareholders are not
personally liable for the debts or obligations of the Company.
Nature of Investments. The Common Units constitute equity
interests entitling each Limited Partner to his pro rata share of
cash distributions made to the Limited Partners of the
Partnership. The Partnership generally intends to retain and
reinvest proceeds of the sale of property or excess refinancing
proceeds in its business.
The Common Shares constitute equity interests in the
Company. The Company is entitled to receive its pro rata shares
of distributions made by the Partnership with respect to the
Common Units, and each shareholder will be entitled to his pro
rata share of any dividends or distributions paid with respect to
the Common Shares. The dividends payable to the shareholders are
not fixed in amount and are only paid if, when and as declared by
the Board of Trustees. In order to qualify as a REIT, the Company
must distribute at least 95% of its taxable income (excluding
capital gains), and any taxable income (including capital gains)
not distributed will be subject to corporate income tax.
Potential Dilution of Rights. The General Partner of the
Partnership is authorized, in its sole discretion and without the
consent of the Limited Partners, to cause the Partnership to
issue additional limited partnership interests and other equity
securities for any partnership purpose at any time to the Limited
Partners or to other persons on terms and conditions established
by the General Partner.
The Board of Trustees of the Company may issue, in its
discretion, additional Common Shares and may have the authority
to issue from the authorized capital stock a variety of other
equity securities of the Company with such powers, preferences
and rights as the Board of Trustees may designate at the time.
The issuance of additional Common Shares or other equity
securities may result in the dilution of the interests of the
shareholders.
Liquidity. Subject to certain exceptions, a Limited Partner
may not transfer all or any portion of his Units without (i)
obtaining the prior written consent of the General Partner, which
consent may be withheld in the sole and absolute discretion of
the General Partner, and (ii) meeting certain other requirements
set forth in the Partnership Agreement. Notwithstanding the
foregoing, subject to certain restrictions and more expansive
rights in certain cases, a Limited Partner may transfer his Units
to (i) an immediate family member (defined in the Partnership
Agreement as an individual Limited Partner's spouse, children and
grandchildren) of an individual Limited Partner or any trust in
which the individual Limited Partner or his immediate family
members own, collectively, 100% of the beneficial interests or
(ii) for a corporation or other business entity to any of such
Limited Partner's affiliates, subsidiaries or any successor-in
interest of such Limited Partner, provided that, in either case,
such transferee is an "accredited investor" within the meaning of
Regulation D promulgated under the Securities Act. Limited
Partners should expect to hold their Units until they redeem them
for cash or Common Shares, or until the Partnership terminates.
The right of a transferee in a donative transfer to become a
substituted Limited Partner also is subject to the consent of the
General Partner, which consent may be withheld in its sole and
absolute discretion. If the General Partner does not consent to
the admission of a transferee in a donative transfer, the
transferee will succeed to all economic rights and benefits
attributable to such Units (including the right of redemption)
but will not become a Limited Partner or possess any other rights
of Limited Partners (including the right to vote on or consent to
actions of the Partnership). The General Partner may require, as
a condition of any transfer, that the transferring Limited
Partner assume all costs incurred by the Partnership in
connection with such transfer.
The Common Shares are listed on the New York Stock Exchange
under the symbol "KPA." The breadth and strength of the
secondary market for the Common Shares at any time depends on,
among other things, upon the number of shares outstanding, the
Company's financial results and prospects, the general interest
in the Company's and other real estate investments, and the
Company's dividend yield compared to that of other debt and
equity securities.
Federal Income Taxation. The Partnership is not subject to
federal income taxes. Instead, each holder of Units includes its
allocable share of the Partnership's taxable income or loss in
determining its federal income tax liability. The maximum
federal income tax rate for noncorporate taxpayers is 39.6%.
Income and loss from the Partnership generally is subject to the
"passive activity" limitations. Under the "passive activity"
rules, income and loss from the Partnership that is considered
"passive" income or loss generally can be offset only against
income and loss (including passive loss carry-forwards from prior
years) from other investments that constitute "passive
activities" (unless the Partnership is considered a "publicly
traded partnership," in which case income and loss from the
Partnership can only be offset against other income and loss from
the Partnership). Income of the Partnership, however, that is
attributable to dividends or interest does not qualify as passive
income and cannot be offset with losses and deductions from a
"passive activity." Cash distributions from the Partnership are
not taxable to a holder of Units except to the extent they exceed
such holder's basis in its interest in the Partnership (which
will include such holder's allocable share of the Partnership's
debt). See "-Basis of Units." Moreover, a holder of Units must
include its allocable share of the Partnership's income and loss
in income for its taxable year ending with or within the
Partnership's taxable year, whether or not such holder receives
distributions from the Partnership. Each year, holders of Units
will receive a Schedule K-1 tax form containing detailed tax
information for inclusion in preparing their federal income tax
returns. Holders of Units are required in some cases, to file
state income tax returns and/or pay state income taxes in the
states in which the Partnership owns property, even if they are
not residents of those states, and in some such states (including
Virginia) the Partnership is required to remit a withholding tax
with respect to such nonresidents.
The Company elected to be taxed as a REIT effective for its
taxable year ending December 31, 1994. So long as it qualifies
as a REIT, the Company will be permitted to deduct distributions
paid to its shareholders, which effectively will reduce (or
eliminate) the "double taxation" that typically results when a
corporation earns income and distributes that income to its
shareholders in the form of dividends. A REIT, however, is
subject to federal income tax on taxable income that is not
distributed and also may be subject to federal income and excise
taxes in certain circumstances. The maximum federal income tax
rate for corporations currently is 35% and for noncorporate
taxpayers is 39.6%. Dividends paid by the Company will be
treated as "portfolio" income and cannot be offset with losses
from "passive activities." Distributions made by the Company to
its taxable domestic shareholders out of current or accumulated
earnings and profits will be taken into account by them as
ordinary income. Distributions that are designated as capital
gain dividends generally will be taxed as long-term capital gain,
subject to certain limitations. Distributions in excess of
current or accumulated earnings and profits will be treated as a
non-taxable return of basis to the extent of a shareholder's
adjusted basis in its Common Shares, with the excess taxed as
capital gain. Each year, shareholders of the Company (other than
certain types of institutional investors) will receive IRS Form
1099, which is used by corporations to report dividends paid to
their shareholders. Shareholders who are individuals generally
should not be required to file state income tax returns and/or
pay state income taxes outside of their state of residence with
respect to the Company's operations and distributions. The
Company may be required to pay state income taxes in certain
states.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax
considerations that may be relevant to a prospective holder of
the Common Shares is based on current law, is for general
information only, and is not tax advice. The discussion
contained herein does not address all aspects of taxation that
may be relevant to particular shareholders in light of their
personal investment or tax circumstances, or to certain types of
shareholders (including insurance companies, tax-exempt
organizations (except as described below), financial institutions
or broker-dealers, foreign corporations, and persons who are not
citizens or residents of the United States (except as described
below)) subject to special treatment under the federal income tax
laws.
The statements in this discussion are based on current
provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations promulgated under the Code, the
legislative history of the Code, existing administrative rulings
and practices of the Service, and judicial decisions. No
assurance can be given that future legislative, judicial, or
administrative actions or decisions, which may be retroactive in
effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or
contemplated prior to the effective date of such changes.
EACH LIMITED PARTNER SHOULD CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF (A) THE
REDEMPTION OF HIS UNITS AND OWNERSHIP OF HIS UNITS, (B) THE
OWNERSHIP AND/OR SALE OF THE COMMON SHARES AND (C) THE COMPANY'S
ELECTION TO BE TAXED AS A REIT, INCLUDING THE STATE, LOCAL,
FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH REDEMPTION,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
Taxation of the Company
The Company elected to be taxed as a REIT under sections 856
through 860 of the Code, effective for its short taxable year
ended December 31, 1994. The Company believes that, commencing
with such taxable year, it has been organized and has operated in
such a manner as to qualify for taxation as a REIT under the
Code, and the Company intends to continue to operate in such a
manner, but no assurance can be given that the Company will
operate in a manner so as to qualify or remain qualified as a
REIT.
The sections of the Code relating to qualification and
operation as a REIT are highly technical and complex. The
following discussion sets forth the material aspects of the Code
sections that govern the federal income tax treatment of a REIT
and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations
promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change
prospectively or retrospectively.
If the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income tax on
its net income that is distributed currently to its shareholders.
That treatment substantially eliminates the "double taxation"
(i.e., taxation at both the corporate and shareholder levels)
that generally results from an investment in a corporation.
However, the Company will be subject to federal income tax in the
following circumstances. First, the Company will be taxed at
regular corporate rates on any undistributed REIT taxable income,
including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative
minimum tax" on its undistributed items of tax preference.
Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" that is held primarily for
sale to customers in the ordinary course of business or (ii)
other nonqualifying income from foreclosure property, it will be
subject to tax at the highest corporate rate on such income.
Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held
primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if
the Company should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a
100% tax on (i) the gross income attributable to the greater of
the amount by which the Company fails the 75% or 95% gross income
test multiplied by (ii) a fraction intended to reflect the
Company's profitability. Sixth, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company
would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
Seventh, the Company may elect to retain and pay income tax on
its long-term capital gains. Finally, if the Company acquires
any asset from a C corporation (i.e., a corporation generally
subject to full corporate-level tax) in a transaction in which
the basis of the asset in the Company's hands is determined by
reference to the basis of the asset (or any other asset) in the
hands of the C corporation and the Company recognizes gain on the
disposition of such asset during the 10-year period beginning on
the date on which such asset was acquired by the Company, then to
the extent of such asset's "built-in gain" (i.e., the excess of
the fair market value of such asset at the time of acquisition by
the Company over the adjusted basis in such asset at such time),
such gain will be subject to tax at the highest regular corporate
rate applicable (as provided in Treasury Regulations that have
not yet been promulgated). The results described above with
respect to the recognition of "built-in gain" assume that the
Company would make an election pursuant to IRS Notice 88-19 if it
were to make any such acquisition.
Requirements for Qualification
The Code defines a REIT as a corporation, trust or
association (i) that is managed by one or more trustees or
directors; (ii) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic
corporation, but for sections 856 through 860 of the Code; (iv)
that is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) not more
than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (as defined
in the Code to include certain entities) during the last half of
each taxable year (the "5/50 Rule"); (vii) that makes an election
to be a REIT (or has made such election for a previous taxable
year) and satisfies all relevant filing and other administrative
requirements established by the Service that must be met in order
to elect and to maintain REIT status; (viii) that uses a calendar
year for federal income tax purposes and complies with the
recordkeeping requirements of the Code and Treasury Regulations
promulgated thereunder; and (ix) that meets certain other tests,
described below, regarding the nature of its income and assets.
The Code provides that conditions (i) to (iv), inclusive, must be
met during the entire taxable year and that condition (v) must be
met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12
months. Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made by the Company
to be taxed as a REIT. Beginning with its 1998 taxable year, if
the Company complies with the requirements for ascertaining the
ownership of its outstanding shares of beneficial interest and
does not know or have reason to know that it has violated the
5/50 Rule, it will be deemed to satisfy the 5/50 Rule for the
taxable year. The Company believes that it has issued sufficient
Common Shares with sufficient diversity of ownership to allow it
to satisfy requirements (v) and (vi). In addition, the Company's
Declaration of Trust provides for restrictions regarding transfer
of the Common Shares that are intended to assist the Company in
continuing to satisfy the share ownership requirements described
in (v) and (vi) above. Such transfer restrictions are described
in "Description of Shares of Beneficial Interest - Certain
Provisions of Maryland Law and of the Company's Declaration of
Trust and Bylaws - Restrictions on Transfer."
For purposes of determining share ownership under the 5/50
Rule, a supplemental unemployment compensation benefits plan, a
private foundation, or a portion of a trust permanently set aside
or used exclusively for charitable purposes generally is
considered an individual. A trust that is a qualified trust
under Code section 401(a), however, generally is not considered
an individual and the beneficiaries of such trust are treated as
holding shares of a REIT in proportion to their actuarial
interests in such trust for purposes of the 5/50 Rule.
The Company currently has thirteen 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 is owned by the
REIT. Thus, in applying the requirements described herein, any
"qualified REIT subsidiaries" acquired or formed by the Company
will be ignored, and all assets, liabilities, and items of
income, deduction, and credit of such subsidiaries will be
treated as assets, liabilities and items of income, deduction,
and credit of the Company. The Company's current subsidiaries
are "qualified REIT subsidiaries."
In the case of a REIT that is a partner in a partnership,
Treasury Regulations provide that the REIT will be deemed to own
its proportionate share of the assets of the partnership and will
be deemed to be entitled to the gross income of the partnership
attributable to such share. In addition, the assets and gross
income of the partnership will retain the same character in the
hands of the REIT for purposes of section 856 of the Code,
including satisfying the gross income and asset tests described
below. Thus, the Company's proportionate share of the assets,
liabilities, and items of income of the Partnership and its
subsidiary partnerships (the "Subsidiary Partnerships") will be
treated as assets and gross income of the Company for purposes of
applying the requirements described herein.
Income Tests
In order for the Company to maintain its qualification as a
REIT, there are two requirements relating to the Company's gross
income that must be satisfied annually. First, at least 75% of
the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain
circumstances, interest) or temporary investment income. Second,
at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must
be derived from such real property or temporary investments, and
from dividends, other types of interest, and gain from the sale
or disposition of stock or securities, or from any combination of
the foregoing. The specific application of these tests to the
Company is discussed below.
Rents received by the Company will qualify as "rents from
real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First,
the amount of rent must not be based in whole or in part on the
income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Code
provides that rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests
if the Company, or an owner of 10% or more of the Company,
actually or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will
not qualify as "rents from real property." Finally, for rents
received to qualify as "rents from real property," the Company
generally must not operate or manage the property or furnish or
render services to the tenants of such property, other than
through an "independent contractor" who is adequately compensated
and from whom the Company derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent
the services provided by the Company are "usually or customarily
rendered" in connection with the rental of space for occupancy
only and are not otherwise considered "rendered to the occupant."
In addition, the Company may furnish or render "noncustomary
services" to the tenants of a Hotel other than through an
independent contractor as long as the amount the Company receives
with respect to such services does not exceed 1% of its total
receipts from the Hotel. For that purpose, the amount
attributable to the Company's services will be at least equal to
150% of the Company's cost of providing the services.
Pursuant to the Percentage Leases, the Lessees lease from
the Partnership and the Subsidiary Partnerships the land,
buildings, improvements, furnishings, and equipment comprising
the Hotels for periods ranging from ten to thirteen years. The
Percentage Leases provide that the Lessees are obligated to pay
to the Partnership or the applicable Subsidiary Partnership (i)
the greater of a fixed rent (the "Base Rent") or a percentage
rent (the "Percentage Rent") (collectively, the "Rents") and (ii)
certain other amounts, including interest accrued on any late
payments or charges (the "Additional Charges"). The Percentage
Rent is calculated by multiplying fixed percentages by the gross
room revenues for each of the Hotels. The Base Rent accrues and
is required to be paid monthly and the Percentage Rent (if any)
accrues and is required to be paid either monthly or quarterly,
depending on the hotel.
In order for the Base Rent, the Percentage Rent, and the
Additional Charges to constitute "rents from real property," the
Percentage Leases must be respected as true leases for federal
income tax purposes and not treated as service contracts, joint
ventures or some other type of arrangement. The determination of
whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In
making such a determination, courts have considered a variety of
factors, including the following: (i) the intent of the parties,
(ii) the form of the agreement, (iii) the degree of control over
the property that is retained by the property owner (e.g.,
whether the lessee has substantial control over the operation of
the property or whether the lessee was required simply to use its
best efforts to perform its obligations under the agreement), and
(iv) the extent to which the property owner retains the risk of
loss with respect to the property (e.g., whether the lessee bears
the risk of increases in operating expenses or the risk of damage
to the property).
In addition, Code section 7701(e) provides that a contract
that purports to be a service contract (or a partnership
agreement) is treated instead as a lease of property if the
contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service
recipient is in physical possession of the property, (ii) the
service recipient controls the property, (iii) the service
recipient has a significant economic or possessory interest in
the property (e.g., the property's use is likely to be dedicated
to the service recipient for a substantial portion of the useful
life of the property, the recipient shares the risk that the
property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares
in savings in the property's operating costs, or the recipient
bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially
diminished receipts or substantially increased expenditures if
there is nonperformance under the contract, (v) the service
provider does not use the property concurrently to provide
significant services to entities unrelated to the service
recipient, and (vi) the total contract price does not
substantially exceed the rental value of the property for the
contract period. Since the determination of whether a service
contract should be treated as a lease is inherently factual, the
presence or absence of any single factor may not be dispositive
in every case.
If the Percentage Leases are recharacterized as service
contracts or partnership agreements, rather than true leases,
part or all of the payments that the Partnership or the
Subsidiary Partnerships receives from the Lessees may not be
considered rent or may not otherwise satisfy the various
requirements for qualification as "rents from real property." In
that case, the Company likely would not be able to satisfy either
the 75% or 95% gross income tests and, as a result, would lose
its REIT status.
Based on the following facts, the Company believes that the
Percentage Leases will be treated as true leases for federal
income tax purposes: (i) the Partnership or Subsidiary
Partnership, as applicable, and the Lessees intend for their
relationship to be that of a lessor and lessee and such
relationship is documented by lease agreements, (ii) the Lessees
have the right to the exclusive possession, use, and quiet
enjoyment of the Hotels during the term of the Percentage Leases,
(iii) the Lessees bear the cost of, and are responsible for, day
to-day maintenance and repair of the Hotels, other than the cost
of certain capital improvements, and dictate how the Hotels are
operated, maintained, and improved, (iv) the Lessees bear all of
the costs and expenses of operating the Hotels (including the
cost of any inventory used in their operation) during the term of
the Percentage Leases (other than real estate 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 Lessees benefit from any savings in the costs of operating
the Hotels during the term of the Percentage Leases, (vi) in the
event of damage to or destruction of a Hotel, the Lessees are at
economic risk because they are obligated either (A) to restore
the property to its prior condition, in which event they will
bear all costs of such restoration in excess of any insurance
proceeds, or (B) to purchase the Hotel for an amount generally
equal to the fair market value of the property, less any
insurance proceeds, (vii) the Lessees have indemnified the
Partnership and Subsidiary Partnerships against all liabilities
imposed on the Partnership or Subsidiary Partnerships during the
term of the Percentage Leases by reason of (A) injury to persons
or damage to property occurring at the Hotels, (B) the Lessees'
use, management, maintenance or repair of the Hotels, (C) any
environmental liability caused by acts or grossly negligent
failures to act of the Lessees, (D) taxes and assessments in
respect of the Hotels that are the obligations of the Lessees, or
(E) any breach of the Percentage Leases or of any sublease of a
Hotel by the Lessees, (viii) the Lessees are obligated to pay
substantial fixed rent for the period of use of the Hotels, (ix)
the Lessees stand to incur substantial losses (or reap
substantial gains) depending on how successfully they operate the
Hotels, (x) the Partnership and Subsidiary Partnerships cannot
use the Hotels concurrently to provide significant services to
entities unrelated to the Lessees, and (xi) the total contract
price under the Percentage Leases does not substantially exceed
the rental value of the Hotels for the term of the Percentage
Leases.
Investors should be aware that there are no controlling
Treasury Regulations, published rulings, or judicial decisions
involving leases with terms substantially the same as the
Percentage Leases that discuss whether such leases constitute
true leases for federal income tax purposes. If the Percentage
Leases are characterized as service contracts or partnership
agreements, rather than as true leases, part or all of the
payments that the Partnership and Subsidiary Partnerships receive
from the Lessees may not be considered rent or may not otherwise
satisfy the various requirements for qualification as "rents from
real property." In that case, the Company likely would not be
able to satisfy either the 75% or 95% gross income test and, as a
result, would lose its REIT status.
In order for the Rents to constitute "rents from real
property," several other requirements also must be satisfied.
One requirement is that the Rents attributable to personal
property, leased in connection with the lease of the real
property comprising a Hotel, must not be greater than 15% of the
Rents received under the Percentage Lease. The Rents
attributable to the personal property in a Hotel is the amount
that bears the same ratio to total rent for the taxable year as
the average of the adjusted bases of the personal property in the
Hotel at the beginning and at the end of the taxable year bears
to the average of the aggregate adjusted bases of both the real
and personal property comprising the Hotel at the beginning and
at the end of such taxable year (the "Adjusted Basis Ratio").
With respect to certain of the Company's Hotels, the average
adjusted basis of the personal property contained in such Hotels
is greater than 15% of the average adjusted bases of both the
real and personal property comprising such Hotels. As a
consequence, the portion of the Rents received with respect to
those Hotels that is attributable to personal property does not
qualify as rents from real property. The amount of disqualified
income under the Percentage Lease for those Hotels, 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.
Management of the Company has obtained appraisals of the personal
property at each Hotel that the Partnership acquired in exchange
for cash indicating that the appraised value of the personal
property at such hotel is less than 15% of the purchase price of
such Hotel. If the Adjusted Basis Ratio with respect to any
Hotel exceeds 15% and the income attributable to excess personal
property would prevent the Company from qualifying as a REIT or
would subject it to any federal income taxation, a portion of the
personal property at that Hotel will be acquired or leased (other
than from the Company, the Partnership, or a Subsidiary
Partnership) by the Lessee and the lease payments under the
Percentage Lease will be adjusted appropriately. Further, the
Company anticipates that any additional personal property that
the Partnership or a Subsidiary Partnership acquires will not
cause the Company to lose its REIT status or subject it to any
federal income taxation. There can be no assurance, however,
that the Service would not assert that the personal property
acquired by the Partnership, the Company, or a Subsidiary
Partnership had a value in excess of the appraised value, or that
a court would not uphold such assertion. If such a challenge
were successfully asserted, the Company could fail the Adjusted
Basis Ratio as to one or more of the Hotels, which in turn
potentially could cause the Company to fail to satisfy the 75% or
95% gross income test and thus lose its REIT status.
Another requirement for qualification of the Rents as "rents
from real property" is that the Percentage Rent must not be based
in whole or in part on the income or profits of any person. The
Percentage Rent, however, will qualify as "rents from real
property" if it is based on percentages of receipts or sales and
the percentages (i) are fixed at the time the Percentage Leases
are entered into, (ii) are not renegotiated during the term of
the Percentage Leases in a manner that has the effect of basing
Percentage Rent on income or profits, and (iii) conform with
normal business practice. More generally, the Percentage Rent
will not qualify as "rents from real property" if, considering
the Percentage Leases and all the surrounding circumstances, the
arrangement does not conform with normal business practice, but
is in reality used as a means of basing the Percentage Rent on
income or profits. Since the Percentage Rent is based on fixed
percentages of the gross revenues from the Hotels that are
established in the Percentage Leases, and the Company has
represented that the percentages (i) will not be renegotiated
during the terms of the Percentage Leases in a manner that has
the effect of basing the Percentage Rent on income or profits and
(ii) conform with normal business practice, the Percentage Rent
should not be considered based in whole or in part on the income
or profits of any person. Furthermore, the Company has
represented that, with respect to other hotel properties that it
acquires in the future, it will not charge rent for any property
that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage of
gross revenues, as described above).
A third requirement for qualification of the Rents as "rents
from real property" is that the Company must not own, directly or
constructively, 10% or more of any Lessee. The constructive
ownership rules generally provide that if 10% or more in value of
the shares of the Company is 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 equity interests in stock of any
Lessee. In addition, the Declaration of Trust prohibits
transfers of Common and 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 the Subsidiary Partnership's real property,
within the meaning of Section 856(d)(2)(B) of the Code. Thus,
the Company should never own, actually or constructively, 10% or
more of any Lessee. Furthermore, the Company has represented
that, with respect to other hotels that it acquires in the
future, it will not rent any property to a Related Party Tenant.
However, because the Code's constructive ownership rules for
purposes of the Related Party Tenant rules are broad and it is
not possible to monitor continually direct and indirect
transferors of Common Shares, no absolute assurance can be given
that such transfers or other events of which the Company has no
knowledge will not cause the Company to own constructively 10% or
more of a Lessee at some future date.
A fourth requirement for qualification of the Rents as
"rents from real property" is, other than pursuant to the 10% de
minimis exception described above, that the Company cannot
furnish or render noncustomary services to the tenants of the
Hotels, or manage or operate the Hotels, other than through an
independent contractor who is adequately compensated and from
whom the Company itself does not derive or receive any income.
Provided that the Percentage Leases are respected as true leases,
the Company should satisfy that requirement because the Company,
the Partnership, and the Subsidiary Partnerships are not
performing any services other than customary ones for the
Lessees. Furthermore, the Company has represented that, with
respect to other hotel properties that it acquires in the future,
it will not perform noncustomary services with respect to the
tenant of the property. As described above, however, if the
Percentage Leases are recharacterized as service contracts or
partnership agreements, the Rents likely would be disqualified as
"rents from real property" because the Company would be
considered to furnish or render services to the occupants of the
Hotels and to manage or operate the Hotels other than through an
independent contractor who is adequately compensated and from
whom the Company derives or receives no income.
If a portion of the Rents from a particular Hotel does not
qualify as "rents from real property" because the amount
attributable to personal property exceeds 15% of the total Rents
for a taxable year, the portion of the Rents that is attributable
to personal property will not be qualifying income for purposes
of either the 75% or 95% gross income tests. Thus, if such Rents
attributable to personal property, plus any other nonqualifying
income, during a taxable year exceed 5% of the Company's gross
income during the year, the Company would lose its REIT status.
If, however, the Rents do not qualify as "rents from real
property" because either (i) the Percentage Rent is considered
based on income or profits of the Lessees, (ii) the Company owns,
actually or constructively, 10% or more of any Lessee, or (iii)
the Company furnishes noncustomary services to the tenants of the
Hotels, other than pursuant to the 10% de minimis exception
described above, or manages or operates the Hotels, other than
through a qualifying independent contractor, none of the Rents
would qualify as "rents from real property." In that case, the
Company likely would lose its REIT status because it would be
unable to satisfy either the 75% or 95% gross income tests.
In addition to the Rents, the Lessees are required to pay to
the Company or the Partnership, as applicable, the Additional
Charges. To the extent that the Additional Charges represent
either (i) reimbursements of amounts that the Lessees are
obligated to pay to third parties or (ii) penalties for
nonpayment or late payment of such amounts, the Additional
Charges should qualify as "rents from real property." To the
extent however, that the Additional Charges represent interest
that is accrued on the late payment of the Rents or the
Additional Charges, the Additional Charges should not qualify as
"rents from real property," but instead should be treated as
interest that qualifies for the 95% gross income test.
The term "interest" generally does not include any amount
received or accrued (directly or indirectly) if the determination
of such amount depends in whole or in part on the income or
profits of any person. However, an amount received or accrued
generally will not be excluded from the term "interest" solely by
reason of being based on a fixed percentage or percentages of
receipts or sales. Furthermore, to the extent that interest from
a loan that is based on the residual cash proceeds from sale of
the property securing the loan constitutes a "shared appreciation
provision" (as defined in the Code), income attributable to such
participation feature will be treated as gain from the sale of
the secured property.
The net income derived from a prohibited transaction is
subject to a 100% tax. Beginning with its 1998 taxable year, the
Company no longer will be subject to the 30% gross income test.
The term "prohibited transaction" generally includes a sale or
other disposition of property (other than foreclosure property)
that is held primarily for sale to customers in the ordinary
course of a trade or business. All inventory required in the
operation of the Hotels will be purchased by the Lessees or their
designee as required by the terms of the Percentage Leases.
Accordingly, the Company believes that no asset owned by the
Company, the Partnership, or a Subsidiary Partnership is held for
sale to customers and that a sale of any such asset will not be
in the ordinary course of business of the Company, the
Partnership, or a Subsidiary Partnership. Whether property is
held "primarily for sale to customers in the ordinary course of a
trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those
related to a particular property. Nevertheless, the Company will
attempt to comply with the terms of safe-harbor provisions in the
Code prescribing when asset sales will not be characterized as
prohibited transactions. Complete assurance cannot be given,
however, that the Company can comply with the safe-harbor
provisions of the Code or avoid owning property that may be
characterized as property held "primarily for sale to customers
in the ordinary course of a trade or business."
The Company will be subject to tax at the maximum corporate
rate on any income from foreclosure property (other than income
that would be qualified income under the 75% gross income test),
less expenses directly connected with the production of such
income. However, gross income from such foreclosure property
will qualify under the 75% and 95% gross income tests.
"Foreclosure property" is defined as any real property (including
interests in real property) and any personal property incident to
such real property (i) that is acquired by a REIT as the result
of such REIT having bid in such property at foreclosure, or
having otherwise reduced such property to ownership or possession
by agreement or process of law, after there was a default (or
default was imminent) on a lease of such property or on an
indebtedness that such property secured and (ii) for which such
REIT makes a proper election to treat such property as
foreclosure property. However, a REIT will not be considered to
have foreclosed on a property where such REIT takes control of
the property as a mortgagee-in-possession and cannot receive any
profit or sustain any loss except as a creditor of the mortgagor.
Under the Code, property generally ceases to be foreclosure
property with respect to a REIT at the close of the third taxable
year following the year in which the REIT acquired such property
(or longer if an extension is granted by the Secretary of the
Treasury). The foregoing grace period is terminated and
foreclosure property ceases to be foreclosure property on the
first day (i) on which a lease is entered into with respect to
such property that, by its terms, will give rise to income that
does not qualify under the 75% gross income test or any amount is
received or accrued, directly or indirectly, pursuant to a lease
entered into on or after such day that will give rise to income
that does not qualify under the 75% gross income test, (ii) on
which any construction takes place on such property (other than
completion of a building, or any other improvement, where more
than 10% of the construction of such building or other
improvement was completed before default became imminent), or
(iii) which is more than 90 days after the day on which such
property was acquired by the REIT and the property is used in a
trade or business that is conducted by the REIT (other than
through an independent contractor from whom the REIT itself does
not derive or receive any income). As a result of the rules with
respect to foreclosure property, if a Lessee defaults on its
obligations under a Percentage Lease for a Hotel, the Company
terminates the Lessee's leasehold interest, and the Company is
unable to find a replacement Lessee for such Hotel within 90 days
of such foreclosure, gross income from hotel operations conducted
by the Company from such Hotel would cease to qualify for the 75%
and 95% gross income tests. In such event, the Company likely
would be unable to satisfy the 75% and 95% gross income tests
and, thus, would fail to qualify as a REIT.
It is possible that, from time to time, the Company, the
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, option, future contract agreement, or similar financial
instrument to reduce interest rate with respect to indebtedness
incurred or to be incurred to acquire or carry real estate
assets, any periodic income or gain from the disposition of such
contract should be qualifying income for purposes of the 95%
gross income test, but not the 75% gross income test. To the
extent that the Company, the Partnership, or a Subsidiary
Partnership hedges with other types of financial instruments or
in other situations, it may not be entirely clear how the income
from those transactions will be treated for purposes of the
various income tests that apply to REITs under the Code. The
Company intends to structure any hedging transactions in a manner
that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or
95% gross income tests for any taxable year, it may nevertheless
qualify as a REIT for such year if it is entitled to relief under
certain provisions of the Code. Those relief provisions
generally will be available if the (i) Company's failure to meet
such tests is due to reasonable cause and not due to willful
neglect, (ii) the Company attaches a schedule of the sources of
its income to its return, and (iii) any incorrect information on
the schedule was not due to fraud with intent to evade tax. It
is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of those relief
provisions. As discussed above in "Federal Income Tax
Considerations - Taxation of the Company," even if those relief
provisions apply, a tax would be imposed with respect to (i) the
gross income attributable to the greater of the amount by which
the Company failed the 75% or 95% gross income test, multiplied
by (ii) a fraction intended to reflect the Company's
profitability.
Asset Tests
The Company, at the close of each quarter of its taxable
year, also must satisfy two tests relating to the nature of its
assets. First, at least 75% of the value of the Company's total
assets must be represented by cash or cash items (including
certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital
through stock or long-term (at least five-year) debt offerings,
temporary investments in stock or debt instruments during the
one-year period following the Company's receipt of such capital.
The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent
the mortgage balance does not exceed the value of the associated
real property, and shares of other REITs. For purposes of the
75% asset requirement, the term "interest in real property"
includes an interest in land and improvements thereon, such as
buildings or other inherently permanent structures (including
items that are structural components of such buildings or
structures), a leasehold in real property, and an option to
acquire real property (or a leasehold in real property). Second,
of the investments not included in the 75% asset class, the value
of any one issuer's securities owned by the Company may not
exceed 5% of the value of the Company's total assets and the
Company may not own more than 10% of any one issuer's outstanding
voting securities (except for its ownership interest in the
Partnership, the Subsidiary Partnerships, and any qualified REIT
subsidiary).
If the Company should fail to satisfy the asset tests at the
end of a calendar quarter, such a failure would not cause it to
lose its REIT status if (i) it satisfied all of the asset tests
at the close of the preceding calendar quarter and (ii) the
discrepancy between the value of the Company's assets and the
asset test requirements arose from changes in the market values
of its assets and was not wholly or partly caused by an
acquisition of one or more nonqualifying assets. If the
condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by
eliminating any discrepancy within 30 days after the close of the
quarter in which it arose.
Distribution Requirements
The Company, in order to qualify as a REIT, is required to
distribute dividends (other than capital gain dividends) to its
shareholders in an amount at least equal to (i) the sum of (A)
95% of its "REIT taxable income" (computed without regard to the
dividends paid deduction and its net capital gain) and (B) 95% of
the net income (after tax), if any, from foreclosure property,
minus (ii) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid
on or before the first regular dividend payment date after such
declaration. To the extent that the Company does not distribute
all of its net capital gain or distributes at least 95%, but less
than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gains
corporate tax rates. Furthermore, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject
to a 4% nondeductible excise tax on the excess of such required
distribution over the amounts actually distributed. The Company
may elect to retain and pay income tax on its net long-term
capital gains. Any such retained amounts would be treated as
having been distributed by the Company for purposes of the 4%
excise tax described above. The Company has made, and intends to
continue to make, timely distributions sufficient to satisfy all
annual distribution requirements.
It is possible that, from time to time, the Company may
experience timing differences between (i) the actual receipt of
income and actual payment of deductible expenses and (ii) the
inclusion of that income and deduction of such expenses in
arriving at its REIT taxable income. For example, under one of
the Percentage Leases, the Percentage Rent is not due until 30
days after the end of the calendar quarter. In that case, the
Partnership still would be required to recognize as income the
Percentage Rent in the calendar quarter to which it relates.
Further, it is possible that, from time to time, the Company may
be allocated a share of net capital gain attributable to the sale
of depreciated property that exceeds its allocable share of cash
attributable to that sale. Therefore, the Company may have less
cash available for distribution than is necessary to meet its
annual 95% distribution requirement or to avoid corporate income
tax or the excise tax imposed on certain undistributed income.
In such a situation, the Company may find it necessary to arrange
for short-term (or possibly long-term) borrowings or to raise
funds through the issuance of additional common or preferred
shares of beneficial interest.
Under certain circumstances, the Company may be able to
rectify a failure to meet the distribution requirements for a
year by paying "deficiency dividends" to its shareholders in a
later year, which may be included in the Company's deduction for
dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest
based upon the amount of any deduction taken for deficiency
dividends.
Recordkeeping Requirements
Pursuant to applicable Treasury Regulations, 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 comply with such requirements.
Partnership Anti-Abuse Rule
The U.S. Department of the Treasury has issued a final
regulation (the "Anti-Abuse Rule") under the partnership
provisions of the Code (the "Partnership Provisions") that
authorizes the Service, in certain abusive transactions involving
partnerships, to disregard the form of the transaction and recast
it for federal tax purposes as the Service deems appropriate.
The Anti-Abuse Rule applies where a partnership is formed or
utilized in connection with a transaction (or series of related
transactions) a principal purpose of which is to reduce
substantially the present value of the partners' aggregate
federal tax liability in a manner inconsistent with the intent of
the Partnership Provisions. The Anti-Abuse Rule states that the
Partnership Provisions are intended to permit taxpayers to
conduct joint business (including investment) activities through
a flexible economic arrangement that accurately reflects the
partners' economic agreement and clearly reflects the partners'
income without incurring an entity-level tax. The purposes for
structuring a transaction involving a partnership are determined
based on all of the facts and circumstances, including a
comparison of the purported business purpose for a transaction
and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal
tax liability through the use of a partnership does not, by
itself, establish inconsistency with the intent of the
Partnership Provisions.
The Anti-Abuse Rule contains an example in which a
corporation that elects to be treated as a REIT contributes
substantially all of the proceeds from a public offering to a
partnership in exchange for a general partnership interest. The
limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed
their respective aggregate bases in such property. In addition,
some of the limited partners have the right, beginning two years
after the formation of the partnership, to require the redemption
of their limited partnership interests in exchange for cash or
REIT stock (at the REIT's option) equal to the fair market value
of their respective interests in the partnership at the time of
the redemption. The example concludes that the use of the
partnership is not inconsistent with the intent of the
Partnership Provisions and, thus, cannot be recast by the
Service. However, the Redemption Rights do not conform in all
respects to the redemption rights contained in the foregoing
example. Moreover, the Anti-Abuse Rule is extraordinarily broad
in scope and is applied based on an analysis of all of the facts
and circumstances. As a result, there can be no assurance that
the Service will not attempt to apply the Anti-Abuse Rule to the
Company. If the conditions of the Anti-Abuse Rule are met, the
Service is authorized to take appropriate enforcement action,
including disregarding the Partnership for federal tax purposes
or treating one or more of its partners as nonpartners. Any such
action potentially could jeopardize the Company's status as a
REIT.
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in
any taxable year, and the relief provisions do not apply, the
Company will be subject to tax (including any applicable
alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to the shareholders in any year
in which the Company fails to qualify will not be deductible by
the Company nor will they be required to be made. In such event,
to the extent of current and accumulated earnings and profits,
all distributions to shareholders will be taxable as ordinary
income and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation
as a REIT for the four taxable years following the year during
which the Company ceased to qualify as a REIT. It is not
possible to state whether in all circumstances the Company would
be entitled to such statutory relief.
Taxation of Taxable U.S. Shareholders
As long as the Company qualifies as a REIT, distributions
made to the Company's taxable U.S. shareholders out of current or
accumulated earnings and profits (and not designated as capital
gain dividends or retained capital gains) will be taken into
account by such U.S. shareholders as ordinary income and will not
be eligible for the dividends received deduction generally
available to corporations. As used herein, the term "U.S.
shareholder" means a holder of Common Shares that for U.S.
federal income tax purposes is (i) a citizen or resident of the
United States, (ii) a corporation, partnership, or other entity
created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) an estate whose
income from sources without the United States is includible in
gross income for U.S. federal income tax purposes regardless of
its connection with the conduct of a trade or business within the
United States, or (iv) any trust with respect to which (A) a U.S.
court is able to exercise primary supervision over the
administration of such trust and (B) one or more U.S. persons
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. The Company may elect
to retain and pay income tax on its net long-term capital gains.
In that case, the Company's shareholders would include in income
their proportionate share of the Company's undistributed long-
term capital gains. In addition, the shareholders would be
deemed to have paid their proportionate share of the tax paid by
the Company, which would be credited or refunded to the
shareholders. Each shareholder's basis in his shares would be
increased by the amount of the undistributed long-term capital
gain included in the shareholder's income, less the shareholder's
share of the tax paid by the Company.
Distributions in excess of current and accumulated earnings
and profits will not be taxable to a 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 the shareholder is a limited partner) against such income.
In addition, taxable distributions from the Company and gain from
the disposition of Common Shares generally will be treated as
investment income for purposes of the investment interest
limitations. The Company will notify shareholders after the
close of the Company's taxable year as to the portions of the
distributions attributable to that year that constitute ordinary
income, return of capital, and capital gain.
Taxation of Shareholders on the Disposition of the Common Shares
In general, any gain or loss realized upon a taxable
disposition of the Common Shares by a shareholder who is not a
dealer in securities will be treated as long-term capital gain or
loss if the Common Shares have been held for more than one year
and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Shares by a shareholder
who has held such stock for six months or less (after applying
certain holding period rules), will be treated as a long-term
capital loss to the extent of distributions from the Company
required to be treated by such shareholder as long-term capital
gain. All or a portion of any loss realized upon a taxable
disposition of the Common Shares may be disallowed if other
Common Shares are purchased within 30 days before or after the
disposition.
Capital Gains and Losses
A capital asset generally must be held for more than one
year in order for gain or loss derived from its sale or exchange
to be treated as long-term capital gain or loss. The highest
marginal income tax rate for noncorporate taxpayers is 39.6%. The
maximum tax rate on net capital gains applicable to noncorporate
taxpayers is 28% for sales and exchanges of assets held for more
than one year but not more than 18 months, and 20% for sales and
exchanges of assets held for more than 18 months. The maximum
tax rate on long-term capital gain from the sale or exchange of
"section 1250 property" (i.e., depreciable real property) held
for more than 18 months is 25% to the extent that such gain would
have been treated as ordinary income if the property were
"section 1245 property." With respect to distributions
designated by the Company as capital gain dividends and any
retained capital gains that the Company is deemed to distribute,
the Company may designate (subject to certain limits) whether
such a distribution is taxable to its noncorporate shareholders
at a 20%, 25%, or 28% rate. Thus, the tax rate differential
between capital gain and ordinary income for noncorporate
taxpayers may be significant. In addition, the characterization
of income as capital or ordinary may affect the deductibility of
capital losses. Capital losses not offset by capital gains may
be deducted against a noncorporate taxpayer's ordinary income
only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate rates.
A corporate taxpayer can deduct capital losses only to the extent
of capital gains, with unused losses being carried back three
years and forward five years.
Information Reporting Requirements and Backup Withholding
The Company will report to its U.S. shareholders and to the
Service the amount of distributions paid during each calendar
year, and the amount of tax withheld, if any. Under the backup
withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to distributions paid
unless such holder (i) is a corporation or comes within certain
other exempt categories and, when required, demonstrates this
fact, or (ii) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and
otherwise complies with the applicable requirements of the backup
withholding rules. A shareholder who does not provide the
Company with his correct taxpayer identification number also may
be subject to penalties imposed by the Service. Any amount paid
as backup withholding will be creditable against the
shareholder's income tax liability. In addition, the Company may
be required to withhold a portion of capital gain distributions
to any shareholders who fail to certify their non-foreign status
to the Company. The Service has issued final regulations
regarding the backup withholding rules as applied to Non-U.S.
Shareholders. The regulations alter the technical requirements
relating to backup withholding compliance and are effective for
distributions made after December 31, 1999. See "Federal Income
Tax Considerations - Taxation of Non-U.S. Shareholders."
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension
and profit sharing trusts and individual retirement accounts
("Exempt Organizations"), generally are exempt from federal
income taxation. However, they are subject to taxation on their
unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued
a published ruling that dividend distributions by a REIT to an
exempt employee pension trust do not constitute UBTI, provided
that the shares of the REIT are not otherwise used in an
unrelated trade or business of the exempt employee pension trust.
Based on that ruling, amounts distributed by the Company to
Exempt Organizations generally should not constitute UBTI.
However, if an Exempt Organization finances its acquisition of
the Common Shares with debt, a portion of its income from the
Company will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts,
and qualified group legal services plans that are exempt from
taxation under paragraphs (7), (9), (17), and (20), respectively,
of Code section 501(c) are subject to different UBTI rules, which
generally will require them to characterize distributions from
the Company as UBTI. In addition, in certain circumstances, a
pension trust that owns more than 10% of the Company's shares is
required to treat a percentage of the dividends from the Company
as UBTI (the "UBTI Percentage"). The UBTI Percentage is the
gross income derived by the Company from an unrelated trade or
business (determined as if the Company were a pension trust)
divided by the gross income of the Company for the year in which
the dividends are paid. The UBTI rule applies to a pension trust
holding more than 10% of the Company's shares only if (i) the
UBTI Percentage is at least 5%, (ii) the Company qualifies as a
REIT by reason of the modification of the 5/50 Rule that allows
the beneficiaries of the pension trust to be treated as holding
shares of the Company in proportion to their actuarial interests
in the pension trust, and (iii) the Company is a "pension-held"
REIT (i.e., 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). Because the Ownership Limitation
prohibits any shareholder from owning more than 9.8% of any class
of the Company's shares, the Company should not be a "pension
held" REIT.
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 or retained capital gains will
be treated as dividends of ordinary income to the extent that
they are made out of current or accumulated earnings and profits
of the Company. Such distributions ordinarily will be subject to
a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in
the Common Shares is treated as effectively connected with the
Non-U.S. Shareholder's conduct of a U.S. trade or business, the
Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. shareholders
are taxed with respect to such distributions (and also may be
subject to the 30% branch profits tax in the case of a Non-U.S.
Shareholder that is a foreign corporation). The Company expects
to withhold U.S. income tax at the rate of 30% on the gross
amount of any such distributions made to a Non-U.S. Shareholder
unless (i) a lower treaty rate applies and any required form
evidencing eligibility for that reduced rate is filed with the
Company or (ii) the Non-U.S. Shareholder files an IRS Form 4224
with the Company claiming that the distribution is effectively
connected income. The Service has issued final regulations that
modify the manner in which the Company complies with the
withholding requirements. Those regulations are effective for
distributions made after December 31, 1999.
Distributions in excess of current and accumulated earnings
and profits of the Company will not be taxable to a shareholder
to the extent that such distributions do not exceed the adjusted
basis of the shareholder's Common Shares, but rather will reduce
the adjusted basis of such stock. To the extent that such
distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a Non-U.S. Shareholder's
Common Shares, such distributions will give rise to tax liability
if the Non-U.S. Shareholder would otherwise be subject to tax on
any gain from the sale or disposition of his Common Shares, as
described below. Because it generally cannot be determined at
the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be
subject to withholding at the same rate as a dividend. However,
a Non-U.S. Shareholder can file a claim for refund with the
Service for the overwithheld amount to the extent it is
determined subsequently that a distribution was, in fact, in
excess of the current and accumulated earnings and profits of the
Company.
The Company is required to withhold 10% of any distribution
in excess of the Company's current and accumulated earnings and
profits. Consequently, although the Company intends to withhold
at a rate of 30% on the entire amount of any distribution, to the
extent that the Company does not do so, any portion of a
distribution not subject to withholding at a rate of 30% will be
subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT,
distributions that are attributable to gain from sales or
exchanges by the Company of U.S. real property interests will be
taxed to a Non-U.S. Shareholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA").
Under FIRPTA, distributions attributable to gain from sales of
U.S. real property interests are taxed to a Non-U.S. Shareholder
as if such gain were effectively connected with a U.S. business.
Non-U.S. Shareholders thus would be taxed at the normal capital
gain rates applicable to U.S. shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions
subject to FIRPTA also may be subject to a 30% branch profits tax
in the hands of a foreign corporate shareholder not entitled to
treaty relief or exemption. The Company is required to withhold
35% of any distribution that is designated by the Company as a
capital gains dividend. The amount withheld is creditable
against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his
Common Shares generally will not be taxed under FIRPTA if the
Company is a "domestically controlled REIT," defined generally as
a REIT in which at all times during a specified testing period
less than 50% in value of the stock was held directly or
indirectly by foreign persons. However, because the Common
Shares are publicly traded, no assurance can be given that the
Company is or will continue to be a "domestically controlled
REIT." In addition, a Non-U.S. Shareholder that owns, actually
and constructively, 5% or less of the Common Shares throughout a
specified "look-back" period will not recognize gain on the sale
of his shares taxable under FIRPTA if the Common Shares are
traded on an established securities market. Furthermore, gain
not subject to FIRPTA will be taxable to a Non-U.S. Shareholder
if (i) investment in the Common Shares is effectively connected
with the Non-U.S Shareholder's U.S. trade or business, in which
case the Non-U.S. Shareholder will be subject to the same
treatment as U.S. shareholders with respect to such gain, or (ii)
the Non-U.S. Shareholder is a nonresident alien individual who
was present in the United States for 183 days or more during the
taxable year and certain other conditions apply, in which case
the nonresident alien individual will be subject to a 30% tax on
the individual's capital gains. If the gain on the sale of the
Common Shares were to be subject to taxation under FIRPTA, the
Non-U.S. Shareholder 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 Partnership, the Subsidiary Partnerships,
and the Company's shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those
in which it or they own property, transact business, or reside.
The state and local tax treatment of the Company and its
shareholders may not conform to the federal income tax
consequences discussed above. CONSEQUENTLY, PROSPECTIVE
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN THE
COMPANY.
Tax Aspects of the Partnership and Subsidiary Partnerships
The following discussion summarizes certain federal income
tax considerations applicable to the Company's direct or indirect
investment in the Partnership and the Subsidiary Partnerships
(each of the Partnership and the Subsidiary Partnerships is
referred to herein as a "Hotel Partnership"). The discussion
does not cover state or local tax laws or any federal tax laws
other than income tax laws.
Classification as a Partnership
The Company will be entitled to include in its income its
distributive share of each Hotel Partnership's income and to
deduct its distributive share of each Hotel Partnership's losses
only if each Hotel Partnership is classified for federal income
tax purposes as a partnership rather than as a corporation or an
association taxable as a corporation. An entity will be
classified as a partnership rather than as a corporation for
federal income tax purposes if the entity (i) is treated as a
partnership under Treasury regulations, effective January 1,
1997, relating to entity classification (the "Check-the-Box
Regulations") and (ii) is not a "publicly traded" partnership.
Pursuant to the Check-the-Box Regulations, an unincorporated
entity with at least two members may elect to be classified
either as an association or as a partnership. If such an entity
fails to make an election, it generally will be treated as a
partnership for federal income tax purposes. The federal income
tax classification of an entity that was in existence prior to
January 1, 1997, such as the Hotel Partnerships, will be
respected for all periods prior to January 1, 1997 if (i) the
entity had a reasonable basis for its claimed classification,
(ii) the entity and all members of the entity recognized the
federal tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and
(iii) neither the entity nor any member of the entity was
notified in writing by a taxing authority on or before May 8,
1996 that the classification of the entity was under examination.
Each Hotel Partnership had a reasonable basis for its claimed
classification under the Treasury Regulations in effect prior to
January 1, 1997 and intends to continue to be classified as a
partnership for federal income tax purposes. In addition, the
Company has represented that no Hotel Partnership will elect to
be classified as an association taxable as a corporation under
the Check-the-Box Regulations.
A "publicly traded" partnership is a partnership whose
interests are traded on an established securities market or are
readily tradable on a secondary market (or the substantial
equivalent thereof). A publicly traded partnership will be
treated as a corporation for federal income tax purposes unless
at least 90% of such partnership's gross income for a taxable
year consists of "qualifying income" under section 7704(d) of the
Code, which generally includes any income that is qualifying
income for purposes of the 95% gross income test applicable to
REITs (the "90% Passive-Type Income Exception"). See "Federal
Income Tax Considerations-Requirements for Qualification - Income
Tests." The U.S. Treasury Department has issued regulations (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.
Income Taxation of Each Hotel Partnership and its Partners
Partners, Not the Hotel Partnerships, Subject to Tax. A
partnership is not a taxable entity for federal income tax
purposes. Rather, the Company will be required to take into
account its allocable share of each Hotel Partnership's income,
gains, losses, deductions, and credits for any taxable year of
such Hotel Partnership ending within or with the taxable year of
the Company, without regard to whether the Company has received
or will receive any distribution from such Hotel Partnership.
Hotel Partnership Allocations. Although a partnership
agreement generally will determine the allocation of income and
losses among partners, such allocations will be disregarded for
tax purposes under section 704(b) of the Code if they do not
comply with the provisions of section 704(b) of the Code and the
Treasury Regulations promulgated thereunder. If an allocation is
not recognized for federal income tax purposes, the item subject
to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined
by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect
to such item. Each Hotel Partnership's allocations of taxable
income and loss are intended to comply with the requirements of
section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations With Respect to Contributed Properties.
Pursuant to section 704(c) of the Code, income, gain, loss, and
deduction attributable to appreciated or depreciated property
that is contributed to a partnership in exchange for an interest
in the partnership must be allocated for federal income tax
purposes in a manner such that the contributor is charged with,
or benefits from, the unrealized gain or unrealized loss
associated with the property at the time of the contribution.
The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value
of the contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution.
The Treasury Department has issued regulations requiring
partnerships to use a "reasonable method" for allocating items
affected by section 704(c) of the Code and outlining several
reasonable allocation methods. The Partnership generally has
elected to use the traditional method for allocating Code section
704(c) items with respect to Hotels that it acquires in exchange
for Units.
Under the partnership agreement for each Hotel Partnership,
depreciation or amortization deductions of the Hotel Partnership
generally will be allocated among the partners in accordance with
their respective interests in the Hotel Partnership, except to
the extent that the Hotel Partnership is required under Code
section 704(c) to use a method for allocating tax depreciation
deductions attributable to the Hotels or other contributed
properties that results in the Company receiving a
disproportionately large share of such deductions. In addition,
gain on sale of a Hotel will be specially allocated to the
Limited Partners to the extent of any "built-in" gain with
respect to such Hotel for federal income tax purposes. Because
the Partnership generally has elected to use the traditional
method for allocating Code section 704(c) items with respect to
the Hotels that it acquires in exchange for Units, the Company
(i) may be allocated lower amounts of depreciation deductions for
tax purposes with respect to such Hotels than would be allocated
to the Company if such Hotels were to have a tax basis equal to
their fair market value at the time of contribution and (ii) may
be allocated taxable gain in the event of a sale of such Hotels
in excess of the economic profit allocated to the Company as a
result of such sale. These allocations possibly could cause the
Company to recognize taxable income in excess of cash proceeds,
which might adversely affect the Company's ability to comply with
the REIT distribution requirements, although the Company does not
anticipate that this event will occur. The application of
section 704(c) to the Hotel Partnerships is not entirely clear,
however, and may be affected by Treasury Regulations promulgated
in the future.
Basis in Hotel Partnership Interest. The Company's adjusted
tax basis in its partnership interest in a Hotel Partnership
generally is equal to (i) the amount of cash and the basis of any
other property contributed to the Hotel Partnership by the
Company, (ii) increased by (A) its allocable share of the Hotel
Partnership's income and (B) its allocable share of indebtedness
of the Hotel Partnership, and (iii) reduced, but not below zero,
by (A) the Company's allocable share of the Hotel Partnership's
loss and (B) the amount of cash distributed to the Company,
including constructive cash distributions resulting from a
reduction in the Company's share of indebtedness of the Hotel
Partnership.
If the allocation of the Company's distributive share of the
Hotel Partnership's loss would reduce the adjusted tax basis of
the Company's partnership interest in the Hotel Partnership below
zero, the recognition of such loss will be deferred until such
time as the recognition of such loss would not reduce the
Company's adjusted tax basis below zero. To the extent that the
Hotel Partnership's distributions, or any decrease in the
Company's share of the indebtedness of the Hotel Partnership
(such decrease being considered a constructive cash distribution
to the partners), would reduce the Company's adjusted tax basis
below zero, such distributions (including such constructive
distributions) will constitute taxable income to the Company.
Such distributions and constructive distributions normally will
be characterized as capital gain, and if the Company's
partnership interest in the Hotel Partnership has been held for
longer than the long-term capital gain holding period (currently
one year), the distributions and constructive distributions will
constitute long-term capital gain.
Depreciation Deductions Available to the Partnership. To
the extent that a Hotel Partnership has acquired Hotels for cash,
the Hotel Partnership's initial basis in such Hotels for federal
income tax purposes generally was equal to the purchase price
paid by the Hotel Partnership. The Hotel Partnerships depreciate
such depreciable Hotel property for federal income tax purposes
under either the modified accelerated cost recovery system of
depreciation ("MACRS") or the alternative depreciation system of
depreciation ("ADS"). The Hotel Partnerships use MACRS for
furnishings and equipment. Under MACRS, the Hotel Partnerships
generally depreciate such furnishings and equipment over a seven
year recovery period using a 200% declining balance method and a
half-year convention. If, however, a Hotel Partnership places
more than 40% of its furnishings and equipment in service during
the last three months of a taxable year, a mid-quarter
depreciation convention must be used for the furnishings and
equipment placed in service during that year. The Hotel
Partnerships use ADS for buildings and improvements. Under ADS,
the Hotel Partnerships generally depreciate such buildings and
improvements over a 40-year recovery period using a straight line
method and a mid-month convention. However, to the extent that a
Hotel Partnership has acquired Hotels in exchange for Units, the
Hotel Partnership's initial basis in each Hotel for federal
income tax purposes should be the same as the transferor's basis
in that Hotel on the date of acquisition. Although the law is
not entirely clear, the Hotel Partnerships generally depreciate
such depreciable property for federal income tax purposes over
the same remaining useful lives and under the same methods used
by the transferors. A Hotel Partnership's tax depreciation
deductions are allocated among the partners in accordance with
their respective interests in the Hotel Partnership (except to
the extent that the Hotel Partnership is required under Code
section 704(c) to use a method for allocating depreciation
deductions attributable to the Hotels or other contributed
properties that results in the Company receiving a
disproportionately large share of such deductions).
Sale of the Partnership's or a Subsidiary Partnership's Property
Generally, any gain realized by a Hotel Partnership on the
sale of property held for more than one year will be long-term
capital gain, except for any portion of such gain that is treated
as depreciation or cost recovery recapture. Any gain recognized
by a Hotel Partnership on the disposition of the Hotels will be
allocated first to the Limited Partners under section 704(c) of
the Code to the extent of their "built-in gain" on those Hotels
for federal income tax purposes. The Limited Partners' "built-in
gain" on the Hotels sold will equal the excess of the Limited
Partners' proportionate share of the book value of those Hotels
over the Limited Partners' tax basis allocable to those Hotels at
the time of the sale. Any remaining gain recognized by a Hotel
Partnership on the disposition of the Hotels will be allocated
among the partners in accordance with the applicable partnership
agreement.
The Company's share of any gain realized by a Hotel
Partnership on the sale of any property held by the Hotel
Partnership as inventory or other property held primarily for
sale to customers in the ordinary course of the Hotel
Partnership's trade or business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax.
Such prohibited transaction income also may have an adverse
effect upon the Company's ability to satisfy the income tests for
REIT status. See "Federal Income Tax Considerations Requirements
For Qualification - Income Tests" above. The Company, however,
does not presently intend to acquire or hold or to allow the
Hotel Partnerships to acquire or hold any property that
represents inventory or other property held primarily for sale to
customers in the ordinary course of the Company's, the
Partnership's or a Subsidiary Partnership's trade or business.
PLAN OF DISTRIBUTION
This Prospectus relates to (i) the possible issuance by the
Company of the Redemption Shares if, and to the extent that,
holders of Redemption Units tender such Units for redemption and
the Company elects to redeem the Redemption Units for Common
Shares, and (ii) the offer and sale from time to time of any
Secondary Shares by the Selling Shareholder his transferees, if,
and to the extent that he tenders Redemption Units for redemption
and the Company elects to redeem the Redemption Units for Common
Shares. The Company is registering the Redemption Shares and the
Secondary Shares for sale to provide the holders thereof with
freely tradeable securities, but registration of such shares does
not necessarily mean that any of such shares will be issued by
the Company or offered or sold by the holders thereof.
The Company will not receive any proceeds from the offering
by the Selling Shareholder or from the issuance of the Redemption
Shares, although the Company will acquire Redemption Units from
such Limited Partners in exchange for Redemption Shares or
Secondary Shares.
The Secondary Shares may be sold from time to time to
purchasers directly by the Selling Shareholder or his pledgees,
donees or transferees. Alternatively, the Selling Shareholder or
his transferees may from time to time offer the Secondary Shares
through dealers or agents, who may receive compensation in the
form of commissions from the Selling Shareholder or his
transferees and/or the purchasers of Secondary Shares for whom
they may act as agent. The Selling Shareholder or his
transferees and any dealers or agents that participate in the
distribution of Secondary Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any
profit on the sale of Secondary Shares by them and any
commissions received by any such dealers or agents may be deemed
to be underwriting commissions under the Securities Act.
At a time a particular offer of Secondary Shares is made, a
Prospectus Supplement, if required, may be distributed which will
set forth the name of any transferees of the Redemption Units or
Secondary Shares or broker-dealers or agents and any commissions
and other terms constituting compensation from the Selling
Shareholder and any other required information. The Secondary
Shares may be sold from time to time at varying prices determined
at the time of sale or at negotiated prices. Unless the Company
has otherwise specifically agreed, the holder of the Secondary
Shares will be responsible for the costs associated with the
Prospectus Supplement.
In order to comply with the securities laws of certain
states, if applicable, the Secondary Shares may be sold only
through registered or licensed brokers or dealers. In addition,
in certain states, the Secondary Shares may not be sold unless
they have been registered or qualified for sale in such state or
an exemption from such registration or qualification requirement
is available and is complied with.
All expenses incident to the offering and sale of the
Redemption Shares and Secondary Shares, if any, other than
commissions, discounts and fees of underwriters, broker-dealers
or agents, and legal and accounting expenses incurred by the
holders of the Redemption Shares and Secondary Shares shall be
paid by the Company.
EXPERTS
The consolidated financial statements and related financial
statement schedule of Innkeepers USA Trust, as of December 31,
1996 and 1997, and the years ended December 31, 1995, 1996 and
1997; the combined financial statements of the JF Lessee as of
December 31, 1996 and 1997 and for the years ended December 31,
1995, 1996 and 1997; and the combined financial statements of the
Summerfield Hotels as of January 3, 1997 and for the year ended
January 3, 1997, all of which have been incorporated by reference
in this Prospectus have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their reports thereon
incorporated by reference herein. Such financial statements and
financial statement schedule are incorporated herein by reference
in reliance upon such reports given on their authority as experts
in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the Common Shares offered
pursuant to this Prospectus will be passed upon for the Company
by Hunton & Williams.
<PAGE>
No dealer, salesperson or
other individual has been
authorized to give any
information or to make any
representations other than those
contained in this Prospectus in
connection with the offering
covered by this Prospectus. If
given or made, such information
or representations must not be
relied upon as having been
authorized by the Company or the
Selling Shareholder. This
Prospectus does not constitute
an offer to sell, or a
solicitation of an offer to buy,
the Common Stock, in any INNKEEPERS USA TRUST
jurisdiction where, or to any
person to whom, it is unlawful
to make any such offer or
solicitation. Neither the
delivery of this Prospectus nor
any offer or sale made hereunder
shall, under any circumstances,
create an implication that there
has not been any change in the facts
set forth in this Prospectus or in
the affairs of the Company since the
date hereof.
1,572,861 SHARES
_____________________
TABLE OF CONTENTS
_____________________
Page
CROSS-REFERENCE SHEET. . . . . . . ii COMMON SHARES
AVAILABLE INFORMATION. . . . . . . i
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE . . . . . . . . . . i
PROSPECTUS SUMMARY . . . . . . . . 1
THE COMPANY. . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . 1
TAX STATUS OF THE COMPANY. . . . . 1
SECURITIES TO BE OFFERED . . . . . 2
RISK FACTORS . . . . . . . . . . . 3
THE COMPANY. . . . . . . . . . . . 9
THE PARTNERSHIP. . . . . . . . . . 10
THE LESSEES. . . . . . . . . . . . 10
DESCRIPTION OF THE PARTNERSHIP
AND UNITS. . . . . . . . . . . . 12
SHARES AVAILABLE FOR FUTURE SALE . 19 ________________
DESCRIPTION OF SHARES OF
BENEFICIAL INTEREST. . . . . . . 21
OWNERSHIP LIMITATIONS. . . . . . . 29 PROSPECTUS
CERTAIN PROVISIONS OF MARYLAND
LAW AND OF THE COMPANY'S C ________________
DECLARATION OF TRUST AND
BYLAWS . . . . . . . . . . . . . 31
SELLING SHAREHOLDER. . . . . . . . 34
REDEMPTION OF UNITS. . . . . . . . 36
FEDERAL INCOME TAX CONSIDERATIONS. 45
PLAN OF DISTRIBUTION . . . . . . . 61
EXPERTS. . . . . . . . . . . . . . 61
LEGAL MATTERS. . . . . . . . . . . 62
_____________________
____________, 1998
<PAGE>
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:
Securities and Exchange Commission registration fee $ 6,510
Accounting fees and expenses 10,000
Blue Sky fees and expenses 1,000
Legal fees and expenses 10,000
Printing 5,000
Miscellaneous 5,000
TOTAL $37,510
Item 15. Indemnification of Officers and Directors.
The Maryland REIT Law permits a Maryland real estate
investment trust to include in its Declaration of Trust a
provision limiting the liability of its trustees and officers to
the trust and its shareholders for money damages except for
liability resulting from (a) actual receipt of an improper
benefit or profit in money, property or services or (b) active
and deliberate dishonesty established by a final judgment as
being material to the cause of action. The Declaration of Trust
of the Company contains such a provision which eliminates such
liability to the maximum extent permitted by the Maryland REIT
Law.
The Declaration of Trust of the Company authorizes it, to
the maximum extent permitted by Maryland law, to obligate itself
to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to (a) any present
or former Trustee or officer or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves
or has served another real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer or partner of
such real estate investment trust, corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise.
The Bylaws of the Company obligate it, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a
proceeding to (a) any present or former Trustee or officer who is
made a party to the proceeding by reason of his service in that
capacity or (b) any individual who, while a Trustee of the
Company and at the request of the Company, serves or has served
another real estate investment trust, corporation, partnership,
joint venture, trust, employee benefit plan or any other
enterprise as a trustee, director, officer or partner of such
real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who
is made a party to the proceeding by reason of his service in
that capacity. The Declaration of Trust and Bylaws also permit
the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a
predecessor of the Company. The Bylaws require the Company to
indemnify a Trustee or officer who has been successful, on the
merits or otherwise, in the defense of any proceeding to which he
is made a party by reason of his service in that capacity.
Maryland REIT Law permits a Maryland real estate investment
trust to indemnify and advance expenses to its trustees,
officers, employees and agents to the same extent as is permitted
by the MGCL for directors and officers of Maryland corporations.
The MGCL permits a corporation to indemnify its present and
former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they
may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or
II-1
<PAGE>
omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty, (b)
the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any
criminal proceeding, the director or officer had reasonable cause
to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in
a suit by or in the right of the corporation. In accordance with
the MGCL, the Bylaws of the Company require it, as a condition to
advancing expenses, to obtain (a) a written affirmation by the
Trustee or officer of his good faith belief that he has met the
standard of conduct necessary for indemnification by the Company
as authorized by the Bylaws and (b) a written statement by or on
his behalf to repay the amount paid or reimbursed by the Company
if it shall ultimately be determined that the standard of conduct
was not met.
Item 16. Exhibits.
3.1 - Amended and Restated Declaration of Trust of
the Registrant (previously filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-11
(Registration No. 33-81362) and incorporated by
reference herein)
3.1(a) - Amendment of Declaration of Trust of the
Registrant (previously filed as Exhibit 3.1 to
Registration Statement on Form S-11 (Registration No.
33-81362) and incorporated by reference herein)
3.1(b)* - Articles Supplementary to the Declaration of Trust of
the Registrant
3.2 - Bylaws of the Registrant (previously filed as
Exhibit 3.2 to the Company's Registration Statement on
Form S-11 (Registration No. 33-81362) and incorporated
by reference herein)
4.1 - Form of Common Share Certificate (previously
filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-11 (Registration No. 33-81362) and
incorporated by reference herein)
5.1* - Opinion of Hunton & Williams
8.1* - Opinion of Hunton & Williams with respect to
certain tax matters.
10.1 - Second Amended and Restated Agreement of
Limited Partnership of Innkeepers USA Limited
Partnership (previously filed as Exhibit 4.2 to
Registration Statement on Form S-3 (Registration No.
333-12809) and incorporated by reference herein)
23.1* - Consent of Coopers & Lybrand L.L.P.
23.2* - Consent of Hunton & Williams (included in
Exhibit 5.1)
24.1* - Power of Attorney (located on the signature
page of this Registration Statement)
_____________
*Filed herewith
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
II-2
<PAGE>
(1) To file, during any period in which offers or sales are
being made of the securities registered hereby, a post-effective
amendment to this registration statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of
1933; (ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement; provided, however, that the undertakings
set forth in subparagraphs (i) and (ii) above do not apply if the
information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in this registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
provisions described under Item 15 above or otherwise, the
registrant has been advised that the in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted against the
registrant by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to deliver or
cause to be delivered with the prospectus, to each person to whom
the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the
prospectus and furnished pursuant to and meeting the requirements
of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be
presented by Article 3 of Regulation S-X is not set forth in the
prospectus, to deliver, or cause to be delivered to each person
to whom the prospectus is sent or given, the latest quarterly
report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in the form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
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 22nd day of May,
1998.
INNKEEPERS USA TRUST,
a Maryland real estate investment trust
(Registrant)
By /s/ Jeffrey H. Fisher
Jeffrey H. Fisher Chairman of the
Board, President and Chief
Executive Officer
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes
and appoints Jeffrey H. Fisher, Mark A. Murphy and David Bulger,
and each or any of them, his true and lawful attorney-in-fact
with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to
this Registration Statement and any registration statement that
is to be effective upon filing pursuant to Rule 424(b) under the
Securities Act of 1933, as amended, and to cause the same to be
filed with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
granting to said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and
thing whatsoever requisite or desirable to be done in and about
the premises, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and
confirming all acts and things that said attorneys-in-fact and
agents, or either of them, or their substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed below on the 22nd day
of May, 1998 by the following persons in the capacities
indicated.
Signature Title
/s/ Jeffrey H. Fisher Chairman of the Board, President
Jeffrey H. Fisher and Chief Executive Officer
(Principal Executive Officer)
/s/ Bruce Zenkel Trustee
Bruce Zenkel
/s/ Miles Berger Trustee
Miles Berger
/s/ C. Gerald Goldsmith Trustee
C. Gerald Goldsmith
/s/ Rolf E. Ruhfus Trustee
Rolf E. Ruhfus
/s/ Jack P. DeBoer Trustee
Jack P. DeBoer
/s/ Thomas J. Crocker Trustee
Thomas J. Crocker
/s/ David Bulger Chief Financial Officer and Treasurer
David Bulger (Principal Financial Officer)
/s/ Gregory Fay Vice President of Accounting
Gregory Fay (Principal Accounting Officer)
Exhibit 3.1(b)
INNKEEPERS USA TRUST
ARTICLES SUPPLEMENTARY
8.625% SERIES A CUMULATIVE CONVERTIBLE PREFERRED SHARES
(liquidation preference $25.00 per share)
Innkeepers USA Trust, a Maryland real estate investment
trust (the "Company"), hereby certifies to the State Department
of Assessments and Taxation of Maryland that:
Under a power contained in Article VI of the Amended and
Restated Declaration of Trust of the Company (the "Declaration of
Trust"), the Board of Trustees of the Company (the "Board of
Trustees"), by resolution duly adopted at a meeting duly called
and held on May 6, 1998, classified and designated 4,880,000
Preferred Shares (as defined in the Declaration of Trust) as
8.625% Series A Cumulative Convertible Preferred Shares of
Beneficial Interest, $.01 par value per share, with the following
preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of
redemption, which, upon any restatement of the Declaration of
Trust, shall be deemed to be part of Article VI of the
Declaration of Trust:
8.625% SERIES A CUMULATIVE CONVERTIBLE PREFERRED SHARES
A. CERTAIN DEFINITIONS.
Unless the context otherwise requires, the terms defined in
this Paragraph A shall have, for all purposes of these Articles
Supplementary, the meanings herein specified (with terms defined
in the singular having comparable meanings when used in the
plural).
"Benefit Plan Investor" means (i) an employee benefit plan
(as defined by Section 3(3) of ERISA), whether or not it is
subject to Title I of ERISA; (ii) a plan as described in Section
4975 of the Code; (iii) an entity whose underlying assets include
the assets of any plan described in clause (i) or (ii) by reason
of the plan's investment in such entity (including but not
limited to an insurance company general account); or (iv) an
entity that otherwise constitutes a "benefit plan investor"
within the meaning of the Plan Asset Regulation.
"Board of Trustees" shall mean the Board of Trustees of the
Company or any committee authorized by such Board of Trustees to
perform any of its responsibilities with respect to the Series A
Preferred Shares.
"Business Day" shall mean any day, other than a Saturday or
Sunday, that is neither a legal holiday nor a day on which
banking institutions in New York City, New York are authorized or
required by law, regulation or executive order to close.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Common Shares" shall mean the common shares of beneficial
interest, $.01 par value per share, of the Company.
"Constituent Person" shall have the meaning set forth in
subsection (e) of subparagraph (7) of paragraph B.
"Conversion Price" shall mean the conversion price per
Common Share at which the Series A Preferred Shares are
convertible into Common Shares, as such Conversion Price may be
adjusted pursuant to subparagraph (7) of paragraph B. The initial
Conversion Price shall be $16.8794 (equivalent to a conversion
rate of 1.4811 Common Shares for each Series A Preferred Share).
"Current Market Price" of publicly traded Common Shares or
any other class of shares of beneficial interest or other
security of the Company or any other issuer for any day shall
mean the last reported sales price, regular way, on such day or,
if no sale takes place on such day, the average of the reported
closing bid and asked prices on such day, regular way, in either
case as reported on the New York Stock Exchange ("NYSE") or, if
such security is not listed or admitted for trading on the NYSE,
on the principal national securities exchange on which such
security is listed or admitted for trading or, if not listed or
admitted for trading on any national securities exchange, on the
Nasdaq National Market or, if such security is not quoted on the
Nasdaq National Market, the average of the closing bid and asked
prices on such day in the over-the-counter market as reported by
Nasdaq or, if bid and asked prices for such security on such day
shall not have been reported through Nasdaq, the average of the
bid and asked prices on such day as furnished by any NYSE member
firm regularly making a market in such security and selected for
such purpose by the Chief Executive Officer of the Company or the
Board of Trustees or, if such security is not so listed or
quoted, as determined in good faith at the sole discretion of the
Chief Executive Officer of the Company or the Board of Trustees,
which determination shall be final, conclusive and binding.
"Distribution Payment Date" shall have the meaning set forth
in subparagraph (3) of paragraph B.
"Distribution Period" shall have the meaning set forth in
subparagraph (3) of paragraph B.
"Dividend Ratchet Amount" shall mean for any calendar
quarter, the cash distribution (exclusive of non-regular
dividends such as a special capital gain distribution) payable on
the number of Common Shares (or portions thereof) into which each
Series A Preferred Share is then convertible (i.e., an amount
equal to the number of Common Shares (or portions thereof) into
which one Series A Preferred Share is convertible multiplied by
the cash distribution (exclusive of non-regular dividends)
declared per Common Share for such quarter).
"Fair Market Value" shall mean the fair market value as
determined in good faith at the sole discretion of the Chief
Executive Officer or the Board of Trustees, which determination
shall be final, conclusive and binding.
"Issue Date" shall mean the first date on which Series A
Preferred Shares are issued and sold.
"Junior Shares" shall have the meaning set forth in
subparagraph (2) of paragraph B.
"Non-Electing Share" shall have the meaning set forth in
subsection (e) of subparagraph (7) of paragraph B.
"Ownership Limitation" means the limitation on ownership of
the Company's shares of beneficial interest (or deemed ownership
by virtue of the attribution provisions of the Code) set forth in
Article VII of the Declaration of Trust.
"Parity Shares" shall have the meaning set forth in
subparagraph (2) of paragraph B.
"Person" shall mean an individual, corporation, partnership,
estate, trust (including a trust qualified under Section 401(a)
or 501(c)(17) of the Code), a portion of a trust permanently set
aside for or to be used exclusively for the purposes described in
Section 642(c) of the Code, association, private foundation
within the meaning of Section 509(a) of the Code, joint stock
company or other entity, and also includes a group as that term
is used for purposes of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended; but does not include EVEREN
Securities, Inc. in its capacity as initial purchaser of the
Series A Preferred Shares provided that the ownership of Series A
Preferred Shares by EVEREN Securities, Inc. would not result in
the Company being "closely held" within the meaning of Section
856(h) of the Code or otherwise result in the Company failing to
qualify as a REIT or result in the Company's assets being deemed
"plan assets" as defined under the Plan Asset Regulation.
"Plan Asset Regulation" means the plan asset regulation
promulgated by the Department of Labor under ERISA at 29 C.F.R.
2510.3-101.
"Plan Assets" means "plan assets" as defined in the Plan
Asset Regulation.
"Preferred Shares" shall mean preferred shares of beneficial
interest, $.01 par value per share, of the Company.
"Record Date" shall have the meaning set forth in
subparagraph (3) of paragraph B.
"Redemption Price" shall equal $25.00 per share, plus
dividends accrued and unpaid to the redemption date (whether or
not declared) without interest, or such other amount referred to
in subparagraph (5)(d) of paragraph B.
"REIT" shall mean a real estate investment trust under
Section 856 of the Code.
"Securities" shall have the meaning set forth in subsection
(d)(iii) of subparagraph (7) of paragraph B.
"Series A Preferred Shares" shall mean the Company's 8.625%
Series A Cumulative Convertible Preferred Shares of beneficial
interest, $.01 par value per share, liquidation preference $25.00
per share.
"Series A Preferred Shares Redemption Date" shall have the
meaning set forth in subsection (e) of subparagraph (5) of
paragraph B hereof.
"Set apart for payment" shall be deemed to include, without
any action other than the following, the recording by the Company
in its accounting ledgers of any accounting or bookkeeping entry
which indicates, pursuant to a declaration of distributions by
the Board of Trustees, the allocation of funds to be paid on any
class or series of shares of beneficial interest; provided,
however, that if any funds for any class or series of Junior
Shares or any Parity Shares are placed in a separate account of
the Company or delivered to a disbursing, paying or other similar
agent, then "set apart for payment" with respect to the Series A
Preferred Shares shall mean placing such funds in a separate
account or delivering such funds to a disbursing, paying or other
similar agent.
"Shares-in-Trust" means the designation placed upon shares
of beneficial interest of the Company as set forth in Article VII
of the Declaration of Trust.
"Trading Day" shall mean any day on which the securities in
question are traded on the NYSE, or if such securities are not
listed or admitted for trading on the NYSE, on the principal
national securities exchange on which such securities are listed
or admitted, or if not listed or admitted for trading on any
national securities exchange, on the Nasdaq National Market, or
if such securities are not quoted on such Nasdaq National Market,
in the applicable securities market in which the securities are
traded.
"Transaction" shall have the meaning set forth in subsection
(e) of subparagraph (7) of paragraph B hereof.
"Transfer Agent" means Harris Trust and Savings Bank,
Chicago, Illinois or such other agent or agents of the Company as
may be designated by the Board of Trustees or their designee as
the transfer agent for the Series A Preferred Shares.
"25% Threshold" means ownership by Benefit Plan Investors,
in the aggregate, of 25% or more of the value of any class of
equity interest in the Company (calculated by excluding the value
of any interest held by any person, other than a Benefit Plan
Investor, who has discretionary authority or control with respect
to the assets of the Company or any person who provides
investment advice to the Company for a fee (direct or indirect)
with respect to such assets, or any affiliate of such person).
B. SERIES A PREFERRED SHARES
(1) Number.
The maximum number of shares of the Series A Preferred
Shares shall be 4,880,000.
(2) Relative Seniority.
In respect of rights to receive distributions and to
participate in distributions or payments in the event of any
liquidation, dissolution or winding up of the Company, the Series
A Preferred Shares shall rank pari passu with any other preferred
shares of beneficial interest of the Company (the "Parity
Shares"), and will rank senior to the Common Shares and any other
class or series of shares of beneficial interest of the Company
ranking, as to distributions and upon liquidation, junior to the
Parity Shares (collectively, the "Junior Shares").
(3) Distributions.
The holders of the then outstanding Series A Preferred
Shares shall be entitled to receive, when, and as authorized and
declared by the Board of Trustees out of any funds legally
available therefor, cumulative cash distributions in an amount
per share equal to the greater of (i) $0.53906 per quarter (equal
to a rate of 8.625% of the $25.00 liquidation preference (the
"Liquidation Preference") per annum) or (ii) the Dividend Ratchet
Amount. Quarterly dividends on the Series A Preferred Shares are
payable as authorized by the Board of Trustees, or if not
authorized, on the fourth Tuesday of January, April, July and
October of each year, commencing on or about July 28, 1998 (each
such day being hereinafter called a "Distribution Payment Date"
and each period ending on a Distribution Payment Date being
hereinafter called a "Distribution Period"), with respect to each
Distribution Period, to shareholders of record as they appear on
the share transfer records of the Company at the close of
business on the dividend record dates authorized by the Board of
Trustees, or if none are authorized, on the last Friday of
December, March, June and September (each, a "Record Date"). The
amount of any distribution payable for the initial Distribution
Period and for any other Distribution Period greater or less than
a full calendar quarter shall be prorated and computed on the
basis of a 360-day year of twelve 30-day months. Distributions on
each Series A Preferred Share shall accrue and be cumulative from
and including the date of original issue thereof, whether or not
(i) distributions on such shares are earned or declared or (ii)
on any Distribution Payment Date there shall be funds legally
available for the payment of distributions. Distributions paid on
the Series A Preferred Shares in an amount less than the total
amount of such distributions at the time accrued and payable on
such shares shall be allocated pro rata on a per share basis
among all such shares at the time outstanding. Distributions on
account of any arrearage for any past Distribution Periods may be
declared and paid at any time, without reference to any regular
distribution, as may be fixed by the Board of Trustees.
The amount of any distributions accrued on any Series A
Preferred Shares at any Distribution Payment Date shall be the
amount of any unpaid distributions accumulated thereon through
and during such Distribution Period, to and including such
Distribution Payment Date, whether or not earned or declared, and
the amount of distributions accrued on any Series A Preferred
Shares at any date other than a Distribution Payment Date shall
be equal to the sum of the amount of any unpaid distributions
accumulated thereon, to and including the last preceding
Distribution Payment Date, whether or not earned or declared.
Accrued but unpaid distributions will not bear interest and the
holders of the Series A Preferred Shares will not be entitled to
any distributions in excess of full cumulative distributions as
described herein.
If any Series A Preferred Shares are outstanding, no full
distributions shall be declared or paid or set apart for payment
on any other class or series of Parity Shares or Junior Shares
for any period unless full cumulative distributions have been
declared and paid or declared and a sum sufficient for the
payment thereof has been set apart for payment on the Series A
Preferred Shares for all past distribution periods and the then
current distribution period. If distributions are not paid in
full, or not declared in full and a sum sufficient for such full
payment is not set apart for payment thereof, upon the Series A
Preferred Shares and any class or series of Parity Shares, no
distributions may be paid on Junior Shares and all distributions
declared upon Series A Preferred Shares and upon any other class
or series of Parity Shares shall be paid or declared pro rata so
that in all cases the amount of distributions paid or declared
per share on the Series A Preferred Shares and Parity Shares
shall bear to each other the same ratio that accumulated
distributions per share, including distributions accrued or in
arrears, if any, on the Series A Preferred Shares and Parity
Shares bear to each other. Except as provided in the preceding
sentence, unless full cumulative distributions on the Series A
Preferred Shares have been paid or declared and a sum sufficient
for such full payment set apart for payment for all past
distribution periods and the then current distribution period, no
distributions (other than distributions in shares of Common
Shares or in any other Junior Shares) shall be declared or paid
or set apart for payment or other distribution upon the Company's
Common Shares, or, except as provided above, on any other Junior
Shares or Parity Shares, nor shall any Common Shares or any other
Junior Shares or Parity Shares be redeemed, purchased or
otherwise acquired for any consideration (or any payment made to
or available for a sinking fund for the redemption of any such
shares) by the Company or any subsidiary of the Company (except
by conversion into or exchange for Junior Shares and except in
connection with any redemption of units of partnership interest
of subsidiary partnerships which units are redeemable for Common
Shares, cash, or other securities of the Company). Holders of the
Series A Preferred Shares shall not be entitled to any
distributions, whether payable in cash, property or shares of
beneficial interest, in excess of full accrued and cumulative
distributions as herein provided. No interest or sum of money in
lieu of interest shall be payable in respect of any distribution
payment or payments on the Series A Preferred Shares that may be
in arrears.
Except as provided in these Articles Supplementary, the
Series A Preferred Shares shall not be entitled to participate in
the earnings or assets of the Company.
(4) Liquidation Preference.
(a) Upon the voluntary or involuntary dissolution,
liquidation or winding up of the Company, the holders of
the Series A Preferred Shares then outstanding shall be
entitled to receive and to be paid out of the assets of
the Company legally available for distribution to its
shareholders, before any payment or distribution shall
be made on any Junior Shares, the amount of $25.00 per
Series A Preferred Share, plus accrued and unpaid
distributions thereon.
(b) After the payment to the holders of the Series A
Preferred Shares of the full preferential amounts
provided for in this paragraph B, the holders of the
Series A Preferred Shares as such shall have no right or
claim to any of the remaining assets of the Company.
(c) If, upon any voluntary or involuntary dissolution,
liquidation, or winding up of the Company, the
preference amounts payable with respect to the Series A
Preferred Shares and any Parity Shares are not paid in
full, no payment will be made to any holder of Junior
Shares and the holders of the Series A Preferred Shares
and of such Parity Shares will share ratably in any such
distribution of assets of the Company in proportion to
the full respective preferential amounts provided for in
this paragraph B to which they are entitled.
(d) Neither (i) the sale or transfer of all or substantially
all the property or business of the Company; (ii) a
statutory share exchange by the Company; (iii) nor the
merger or consolidation of the Company into or with any
other entity or the merger or consolidation of any other
entity into or with the Company, shall be deemed to be a
dissolution, liquidation or winding up, voluntary or
involuntary, for the purposes of this paragraph B.
(e) In determining whether a distribution (other than upon
voluntary or involuntary liquidation), by dividend,
redemption or other acquisition of shares of beneficial
interest of the Company or otherwise, is permitted under
Maryland law, amounts that would be needed, if the
Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon
dissolution of holders of Series A Preferred Shares will
not be added to the Company's total liabilities.
(5) Redemption at the Option of the Company.
(a) Subject to paragraph (c), and except as the Board of
Trustees deems necessary to protect the Company's status
as a REIT or to prevent the Company's assets from being
deemed "plan assets" under the Plan Asset Regulation,
pursuant to paragraph B(9), the Series A Preferred
Shares shall not be redeemable by the Company prior to
May 18, 2003. On and after May 18, 2003, the Company, at
its option, may redeem the Series A Preferred Shares, in
whole or in part, as set forth herein, subject to the
provisions described below.
(b) On and after May 18, 2003 and upon giving of notice as
provided below, the Series A Preferred Shares may be
redeemed at the option of the Company, in whole or from
time to time in part, at the Redemption Price, payable
at the Company's option in (i) Common Shares, equal in
number to the Redemption Price divided by the average of
the closing prices of the Common Shares on the NYSE for
the ten (10) Trading Days prior to the business day that
immediately precedes the date fixed for redemption, or
(ii) cash. Fractional shares will not be issued upon
redemption of the Series A Preferred Shares, but, in
lieu thereof, the Company will pay a cash adjustment
based on the average of the closing prices of the Common
Shares on the ten (10) Trading Days prior to the
business day immediately preceding the date fixed for
redemption.
(c) If fewer than all of the outstanding Series A Preferred
Shares are to be redeemed, the shares to be redeemed
will be determined pro rata or by lot or in such other
manner as prescribed by the Company's Board of Trustees
in its sole discretion. In the event that such
redemption is to be by lot, if as a result of such
redemption any holder of Series A Preferred Shares would
own shares of beneficial interest in excess of the
Ownership Limitation, because such holder's Series A
Preferred Shares were not redeemed, or were only
redeemed in part, then, except in certain instances, the
Company will redeem the requisite number of Series A
Preferred Shares of such holder such that he will not
own shares of beneficial interest in excess of the
Ownership Limitation subsequent to such redemption. A
new certificate shall be issued representing any
unredeemed Series A Preferred Shares without cost to the
holder thereof.
(d) At any time prior to such time, if ever, as the Series A
Preferred Shares qualify as a "publicly offered
security" under the Plan Asset Regulation, or qualify
for another exception from the "look-through" rule
(i.e., the provisions of paragraph (a)(2) of the Plan
Asset Regulation), if the Company determines that, as a
result of transfers, conversions or otherwise, Benefit
Plan Investors own 20% of the aggregate number of
outstanding Series A Preferred Shares (excluding for
this purpose any shares held by persons exercising
investment management authority over the assets of the
Company or providing investment advice for a fee with
respect to such assets and any affiliates of such
persons), the Company will have the right to cause any
number of Series A Preferred Shares that are held by
Benefit Plan Investors to be redeemed so that following
such redemption Benefit Plan Investors own less than 25%
of the outstanding Series A Preferred Shares (but in no
event may such redemptions reduce Benefit Plan Investor
ownership to less than 20% of the Series A Preferred
Shares) (excluding for this purpose any shares held by
persons exercising investment management authority over
the assets of the Company or providing investment advice
for a fee with respect to such assets and any affiliates
of such persons). Any such redemption will follow the
redemption procedures set forth herein, except that the
Redemption Date may be fewer than 30 days after the
first notice of redemption to the extent necessary to
prevent the Company's assets from being deemed Plan
Assets and the Redemption Price shall be the Fair Market
Value of such Series A Preferred Shares. If fewer than
all the outstanding Series A Preferred Shares that are
held by Benefit Plan Investors are to be redeemed, the
number of Series A Preferred Shares to be redeemed will
be determined by the Board of Trustees and such shares
will be redeemed on a pro-rata basis from the holders of
such shares that are Benefit Plan Investors in
proportion to the number of Series A Preferred Shares
held by such holders or by any other method as may be
determined by the Board of Trustees in its sole
discretion.
(e) Notice of redemption will be given by publication in a
newspaper of general circulation in the City of New
York, such publication to be made once a week for two
successive weeks commencing not less than 30 nor more
than 60 days prior to the date fixed for redemption. A
similar notice will be mailed by the Company, postage
prepaid, not less than 30 nor more than 60 days prior to
the redemption date, addressed to the respective holders
of record of the Series A Preferred Shares to be
redeemed at their respective addresses as they appear on
the share transfer records of the Company. The notice
provided shall state the Company's election to redeem
such shares, stating (i) the date fixed for redemption
thereof (the "Series A Preferred Shares Redemption
Date"), (ii) the redemption price, (iii) the number of
shares to be redeemed (and, if fewer than all the Series
A Preferred Shares are to be redeemed, the number of
shares to be redeemed from such holder), (iv) the
place(s) where the Series A Preferred Share certificates
are to be surrendered for payment, (v) that
distributions on the Series A Preferred Shares will
cease to accrue on the specified redemption date and
(vi) the date on which such holder's conversion rights
as to the Series A Preferred Shares shall terminate.
(f) On or after the Series A Preferred Shares Redemption
Date, each holder of Series A Preferred Shares to be
redeemed must present and surrender his Series A
Preferred Share certificate(s) to the Company at the
place designated in such notice and thereupon the
redemption price of such shares will be paid to or on
the order of the person whose name appears on such
Series A Preferred Share certificate(s) as the owner
thereof and each such Series A Preferred Share
certificate(s) surrendered will be canceled. From and
after the Series A Preferred Shares Redemption Date
(unless the Company defaults in payment of the
redemption price), all distributions on the Series A
Preferred Shares designated for redemption in such
notice will cease to accrue and all rights of the
holders thereof (including conversion rights), except
the right to receive the redemption price thereof
(including all accrued and unpaid distributions up to
the Series A Preferred Shares Redemption Date), will
cease and terminate and such shares will not thereafter
be transferred (except with the consent of the Company)
in the share transfer records of the Company, and such
shares shall not be deemed to be outstanding for any
purpose whatsoever. At its election, the Company, prior
to the Series A Preferred Shares Redemption Date, may
irrevocably deposit the Redemption Price of the Series A
Preferred Shares so called for redemption in trust for
the holders thereof with a bank or trust company, in
which case such notice to holders of the Series A
Preferred Shares to be redeemed will (i) state the date
of such deposit, (ii) specify the office of such bank or
trust company as the place of payment of the Redemption
Price and (iii) call upon such holders to surrender the
Series A Preferred Share certificates representing such
shares at such place on or about the date fixed in such
redemption notice (which may not be later than the
Series A Preferred Shares Redemption Date) against
payment of the Redemption Price. Any monies so deposited
which remain unclaimed by the holders of the Series A
Preferred Shares at the end of two years after the
Series A Preferred Shares Redemption Date will be
returned by such bank or trust company to the Company.
(g) Notwithstanding the foregoing, unless full cumulative
distributions on all outstanding Series A Preferred
Shares for all past Distribution Periods and the then
current Distribution Period have been paid, or declared
and a sum sufficient for the payment thereof set apart
for payment, (i) no Series A Preferred Shares shall be
redeemed unless all outstanding Series A Preferred
Shares are simultaneously redeemed; provided, however,
that the foregoing shall not prevent the purchase or
acquisition of Series A Preferred Shares (A) pursuant to
subparagraphs (5)(d) and (9) of paragraph B or (B)
pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding Series A
Preferred Shares, and, (ii) the Company shall not
purchase or otherwise acquire directly or indirectly any
Series A Preferred Shares (except by conversion into or
exchange for shares of beneficial interest of the
Company ranking junior to the Series A Preferred Shares
as to distribution rights and liquidation preference).
(h) The holders of Series A Preferred Shares at the close of
business on a Record Date will be entitled to receive
the distribution payable with respect to such Series A
Preferred Shares on the corresponding Distribution
Payment Date notwithstanding the redemption thereof
between such Record Date and the corresponding
Distribution Payment Date or the Company's default in
the payment of the distribution due. Except as provided
above, the Company will make no payment or allowance for
unpaid distributions, whether or not in arrears, on
Series A Preferred Shares which have been called for
redemption.
(i) The Company covenants that any Common Shares issued upon
redemption of the Series A Preferred Shares shall be
validly issued, fully paid and nonassessable. The
Company shall use its reasonable best efforts to list
the Common Shares required to be delivered upon
redemption of the Series A Preferred Shares, prior to
such delivery, upon each national securities exchange,
if any, upon which the outstanding Common Shares are
listed at the time of such delivery.
(j) The Series A Preferred Shares have no stated maturity
date and are not subject to any sinking fund or
mandatory redemption provisions.
(6) Reclassification of Converted Shares; Shares to be Retired.
(a) All Series A Preferred Shares which shall have been
converted pursuant to paragraph B(7) herein shall
automatically be reclassified as Common Shares. The
number of Common Shares issuable upon conversion shall
be determined in accordance with paragraph B(7) hereof.
(b) All Series A Preferred Shares which shall have been
issued and reacquired in any manner by the Company shall
be restored to the status of authorized but unissued
Preferred Shares, without designation as to series.
(7) Conversion.
Holders of Series A Preferred Shares shall have the right to
convert all or a portion of such shares into Common Shares, as
follows:
(a) Subject to and upon compliance with the provisions of
this subparagraph (7), a holder of Series A Preferred
Shares shall have the right, at his option, at any time
to convert such shares into the number of fully paid and
nonassessable Common Shares obtained by dividing the
aggregate Liquidation Preference of such shares by the
Conversion Price (as in effect at the time and on the
date provided for in the last paragraph of subsection
(b) of this subparagraph (7)) by surrendering such
shares to be converted, such surrender to be made in the
manner provided in subsection (b) of this subparagraph
(7); provided, however, that the right to convert shares
called for redemption pursuant to subparagraph (5) shall
terminate at the close of business on the Series A
Preferred Shares Redemption Date fixed for such
redemption, unless the Company shall default in making
payment of any amounts payable upon such redemption
under subparagraph (5) hereof.
(b) In order to exercise the conversion right, the holder of
each Series A Preferred Share to be converted shall
surrender the certificate evidencing such share, duly
endorsed or assigned to the Company or in blank, at the
office of the Transfer Agent, accompanied by written
notice to the Company that the holder thereof elects to
convert such Series A Preferred Share. Unless the shares
issuable on conversion are to be issued in the same name
as the name in which such Series A Preferred Share is
registered, each share surrendered for conversion shall
be accompanied by instruments of transfer, in form
satisfactory to the Company, duly executed by the holder
or such holder's duly authorized agent and an amount
sufficient to pay any transfer or similar tax (or
evidence reasonably satisfactory to the Company
demonstrating that such taxes have been paid).
Holders of Series A Preferred Shares at the close of
business on a Record Date shall be entitled to receive
the distribution payable on such shares on the
corresponding Distribution Payment Date notwithstanding
the conversion thereof following such Record Date and
prior to such Distribution Payment Date. However, Series
A Preferred Shares surrendered for conversion during the
period between the close of business on any Record Date
and the opening of business on the corresponding
Distribution Payment Date (except shares converted after
the issuance of a notice of redemption with respect to a
Series A Preferred Shares Redemption Date during such
period or coinciding with such Distribution Payment
Date, such Series A Preferred Shares being entitled to
such distribution on the Distribution Payment Date) must
be accompanied by payment of an amount equal to the
distribution payable on such shares on such Distribution
Payment Date. A holder of Series A Preferred Shares on a
Record Date who (or whose transferee) tenders any such
shares for conversion into Common Shares on such
Distribution Payment Date will receive the distribution
payable by the Company on such Series A Preferred Shares
on such date, and the converting holder need not include
payment of the amount of such distribution upon
surrender of Series A Preferred Shares for conversion.
The Company shall make further payment or allowance for,
and a converting holder shall be entitled to, unpaid
distributions in arrears (excluding the then-current
quarter) on converted shares and for distributions on
the Common Shares issued upon such conversion.
As promptly as practicable after the surrender of
certificates for Series A Preferred Shares as aforesaid,
the Company shall issue and shall deliver at such office
to such holder, or on his written order, a certificate
or certificates for the number of full Common Shares
issuable upon the conversion of such shares in
accordance with the provisions of this subparagraph (7),
and any fractional interest in respect of a Common Share
arising upon such conversion shall be settled as
provided in subsection (c) of this subparagraph (7).
Each conversion shall be deemed to have been effected
immediately prior to the close of business on the date
on which the certificates for Series A Preferred Shares
shall have been surrendered and such notice (and if
applicable, payment of an amount equal to the
distribution payable on such shares) received by the
Company as aforesaid, and the person or persons in whose
name or names any certificate or certificates for Common
Shares shall be issuable upon such conversion shall be
deemed to have become the holder or holders of record of
the shares represented thereby at such time on such
date, and such conversion shall be at the Conversion
Price in effect at such time and on such date, unless
the share transfer books of the Company shall be closed
on that date, in which event such person or persons
shall be deemed to have become such holder or holders of
record at the opening of business on the next succeeding
day on which such share transfer books are open, but
such conversion shall be at the Conversion Price in
effect on the date on which such certificates for Series
A Preferred Shares have been surrendered and such notice
received by the Company.
(c) No fractional shares or scrip representing fractions of
Common Shares shall be issued upon conversion of the
Series A Preferred Shares. Instead of any fractional
interest in a Common Share that would otherwise be
deliverable upon the conversion of a share of Series A
Preferred Shares, the Company shall pay to the holder of
such share an amount in cash based upon the Current
Market Price of Common Shares on the Trading Day
immediately preceding the date of conversion. If more
than one Series A Preferred Share shall be surrendered
for conversion at one time by the same holder, the
number of full Common Shares issuable upon conversion
thereof shall be computed on the basis of the aggregate
number of Series A Preferred Shares so surrendered.
(d) The Conversion Price shall be adjusted from time to time
as follows:
(i) If the Company shall after the Issue Date (A) make a
distribution to holders of any class of shares of
beneficial interest of the Company in Common Shares,
(B) subdivide its outstanding Common Shares into a
greater number of shares, (C) combine its
outstanding Common Shares into a smaller number of
shares or (D) issue any shares of beneficial
interest by reclassification of its Common Shares,
the Conversion Price shall be adjusted so that the
holder of any Series A Preferred Shares thereafter
surrendered for conversion shall be entitled to
receive the number of Common Shares that such holder
would have owned or have been entitled to receive
after the happening of any of the events described
above had such shares been converted immediately
prior to the record date in the case of a
distribution or the effective date in the case of a
subdivision, combination or reclassification. An
adjustment made pursuant to this subsection (i)
shall become effective immediately after the opening
of business on the day next following the record
date (except as provided in paragraph (h) below) in
the case of a distribution and shall become
effective immediately after the opening of business
on the day next following the effective date in the
case of a subdivision, combination or
reclassification. Such adjustment(s) shall be made
successively whenever any of the events listed above
shall occur.
(ii) If the Company shall issue after the Issue Date
rights, options or warrants to all holders of Common
Shares entitling them (for a period expiring within
45 days after the record date fixed for such
issuance) to subscribe for or purchase Common Shares
(or securities convertible into or exchangeable for
Common Shares) at a price per share less than the
Fair Market Value per Common Share on the record
date for the determination of shareholders entitled
to receive such rights, options or warrants, then
the Conversion Price shall be adjusted to equal the
price determined by multiplying (A) the Conversion
Price in effect immediately prior to the opening of
business on the Business Day next following the date
fixed for such determination by (B) a fraction, the
numerator of which shall be the sum of (I) the
number of Common Shares outstanding on the close of
business on the date fixed for such determination
and (II) the number of Common Shares that could be
purchased at the Current Market Price on the date
fixed for such determination with the aggregate
proceeds to the Company from the exercise of such
rights, options or warrants, and the denominator of
which shall be the sum of (x) the number of Common
Shares outstanding on the close of business on the
date fixed for such determination and (y) the number
of additional Common Shares offered for subscription
or purchase pursuant to such rights, options or
warrants. Such adjustment shall be made successively
whenever any such rights, options or warrants are
issued, and shall become effective immediately after
the opening of business on the day next following
the record date for any such rights, options, or
warrants issued (except as provided in subsection
(h) below). In determining whether any rights,
options or warrants entitle the holders of Common
Shares to subscribe for or purchase Common Shares at
less than the Current Market Price, there shall be
taken into account any consideration received by the
Company upon issuance and upon exercise of such
rights, options or warrants, the value of such
consideration, if other than cash, to be determined
by the Chief Executive Officer of the Company or the
Board of Trustees whose decision is final,
conclusive, and binding. Any adjustment(s) made
pursuant to this subsection (ii) shall become
effective immediately after the opening of business
on the Business Day next following such record date.
Such adjustment(s) shall be made successively
whenever any of the events listed above shall occur.
(iii) If the Company shall distribute to all holders of
its Common Shares any shares of beneficial interest
of the Company (other than Common Shares) or
evidence of its indebtedness or assets (including
securities or cash, but excluding cash distributions
paid out of the total equity applicable to Common
Shares, less the amount of stated capital
attributable to Common Shares, determined on the
basis of the most recent annual or quarterly
consolidated cost basis and current value basis and
consolidated balance sheets of the Company and its
consolidated subsidiaries available at the time of
the declaration of the distribution) or rights or
warrants to subscribe for or purchase any of its
securities (excluding those rights and warrants
issued to all holders of Common Shares entitling
them for a period expiring within 45 days after the
record date referred to in subsection (ii) above to
subscribe for or purchase Common Shares, which
rights and warrants are referred to in and treated
under subsection (ii) above) (any of the foregoing
being hereinafter in this subsection (iii) called
the "Securities"), then in each case the Conversion
Price shall be adjusted so that it shall equal the
price determined by multiplying (A) the Conversion
Price in effect immediately prior to the close of
business on the date fixed for the determination of
shareholders entitled to receive such distribution
by (B) a fraction, the numerator of which shall be
the Current Market Price per Common Share on the
record date described in the immediately following
paragraph less the then Fair Market Value of the
shares of beneficial interest or assets or evidences
of indebtedness so distributed or of such rights or
warrants applicable to one Common Share, and the
denominator of which shall be the Current Market
Price per Common Share on the record date described
in the immediately following paragraph.
Such adjustment shall become effective immediately
at the opening of business on the Business Day next
following (except as provided in subsection (h)
below) the record date for the determination of
shareholders entitled to receive such distribution.
For the purposes of this subsection (iii), the
distribution of a Security which is distributed not
only to the holders of the Common Shares on the date
fixed for the determination of shareholders entitled
to such distribution of such Security, but also is
distributed with each Common Share delivered to a
Person converting a Series A Preferred Share after
such determination date, shall not require an
adjustment of the Conversion Price pursuant to this
subsection (iii); provided that on the date, if any,
on which a Person converting a Series A Preferred
Share would no longer be entitled to receive such
Security with a Common Share (other than as a result
of the termination of all such Securities), a
distribution of such Securities shall be deemed to
have occurred, and the Conversion Price shall be
adjusted as provided in this subsection (iii) (and
such day shall be deemed to be "the date fixed for
the determination of the shareholders entitled to
receive such distribution" and "the record date"
within the meaning of the two preceding sentences).
Such adjustment(s) shall be made successively
whenever any of the events listed above shall occur.
(iv) No adjustment in the Conversion Price shall be
required unless such adjustment would require a
cumulative increase or decrease of at least 1% in
such price; provided, however, that any adjustments
that by reason of this subsection (iv) are not
required to be made shall be carried forward and
taken into account in any subsequent adjustment
until made; and provided, further, that any
adjustment shall be required and made in accordance
with the provisions of this subparagraph (7) (other
than this subsection (iv)) not later than such time
as may be required in order to preserve the tax-free
nature of a distribution to the holders of Common
Shares. Notwithstanding any other provisions of this
subparagraph (7), the Company shall not be required
to make any adjustment to the Conversion Price for
the issuance of any Common Shares pursuant to any
plan providing for the reinvestment of distributions
or interest payable on securities of the Company and
the investment of additional optional amounts in
Common Shares under such plan. All calculations
under this subparagraph (7) shall be made to the
nearest cent (with $.005 being rounded upward) or to
the nearest one-tenth of a share (with .05 of a
share being rounded upward),as the case may be.
(e) If the Company shall be a party to any transaction
(including without limitation a merger, consolidation,
statutory share exchange, self tender offer for all or
substantially all of the Common Shares, sale of all or
substantially all of the Company's assets or
recapitalization of the Common Shares and excluding any
transaction as to which subsection (d)(i) of this
subparagraph (7) applies (each of the foregoing being
referred to herein as a "Transaction"), in each case as
a result of which Common Shares shall be converted into
the right to receive shares, stock, securities or other
property (including cash or any combination thereof),
each Series A Preferred Share which is not converted
into the right to receive shares, stock, securities or
other property in connection with such Transaction shall
thereafter be convertible into the kind and amount of
shares, stock, securities and other property (including
cash or any combination thereof) receivable upon the
consummation of such Transaction by a holder of that
number of Common Shares into which one Series A
Preferred Share was convertible immediately prior to
such Transaction, assuming such holder of Common Shares
(i) is not a Person with which the Company consolidated
or into which the Company merged or which merged into
the Company or to which such sale or transfer was made,
as the case may be (a "Constituent Person"), or an
affiliate of a Constituent Person and (ii) failed to
exercise his or her rights of election, if any, as to
the kind or amount of shares, stock, securities and
other property (including cash) receivable upon
consummation of such Transaction (each a "Non-Electing
Share") (provided that if the kind or amount of shares,
stock, securities and other property (including cash)
receivable upon consummation of such Transaction by each
Non-Electing Share is not the same for each Non-Electing
Share, then the kind and amount of shares, stock,
securities and other property (including cash)
receivable upon consummation of such Transaction for
each Non-Electing Share shall be deemed to be the kind
and amount so receivable per share by a plurality of the
Non-Electing Shares). The Company shall not be a party
to any Transaction unless the terms of such Transaction
are consistent with the provisions of this subsection
(e), and it shall not consent or agree to the occurrence
of any Transaction until the Company has entered into an
agreement with the successor or purchasing entity, as
the case may be, for the benefit of the holders of the
Series A Preferred Shares, that will require such
successor or purchasing entity, as the case may be, to
make provision in its certificate or articles of
incorporation or other constituent documents to the end
that the provisions of this subsection (e) shall
thereafter correspondingly be made applicable as nearly
as may reasonably be, in relation to any shares of stock
or other securities or property thereafter deliverable
upon conversion of the Series A Preferred Shares. The
provisions of this subsection (e) shall similarly apply
to successive Transactions.
(f) If:
(i) the Company shall declare a distribution on the
Common Shares other than in cash out of the total
equity applicable to Common Shares, less the amount
of stated capital attributable to Common Shares,
determined on the basis of the most recent annual or
quarterly consolidated cost basis and current value
basis and consolidated balance sheets of the Company
and its consolidated subsidiaries available at the
time of the declaration of the distribution; or
(ii) the Company shall authorize the granting to the
holders of the Common Shares of rights or warrants
to subscribe for or purchase any shares of any class
or any other rights or warrants; or
(iii) there shall be any reclassifications of the Common
Shares (other than an event to which subsection
(d)(i) of this subparagraph (7) applied) or any
consolidation or merger to which the Company is a
party and for which approval of any shareholders of
the Company is required, or a statutory share
exchange involving the conversion or exchange of
Common Shares into securities or other property, or
a self tender offer by the Company for all or
substantially all of its outstanding Common Shares,
or the sale or transfer of all or substantially all
of the assets of the Company as an entity and for
which approval of any shareholder of the Company is
required; or
(iv) there shall occur the voluntary or involuntary
liquidation, dissolution or winding up of the
Company;
then the Company shall cause to be filed with the
Transfer Agent and shall cause to be mailed to the
holders of the Series A Preferred Shares at their
addresses as shown on the share records of the Company,
as promptly as possible, but at least 15 days prior to
the applicable date hereinafter specified, a notice
stating (A) the record date as of which the holders of
Common Shares of record to be entitled to such
distribution or grant of rights or warrants are to be
determined, provided, however, that no such notification
need be made in respect of a record date for a
distribution or grant of rights unless the corresponding
adjustment in the Conversion Price would be an increase
or decrease of at least 1%, or (B) the date on which
such reclassification, consolidation, merger, statutory
share exchange, sale, transfer, liquidation, dissolution
or winding up is expected to become effective, and the
date as of which it is expected that holders of Common
Shares of record shall be entitled to exchange their
Common Shares for securities or other property, if any,
deliverable upon such reclassification, consolidation,
merger, statutory share exchange, sale, transfer,
liquidation, dissolution or winding up. Failure to give
or receive such notice or any defect therein shall not
affect the legality or validity of the proceedings
described in this subparagraph (7).
(g) Whenever the Conversion Price is adjusted as herein
provided, the Company shall promptly file with the
Transfer Agent an officer's certificate setting forth
the Conversion Price after such adjustment and setting
forth a brief statement of the facts requiring such
adjustment, which certificate shall be conclusive
evidence of the correctness of such adjustment absent
manifest error. Promptly after delivery of such
certificate, the Company shall prepare a notice of such
adjustment of the Conversion Price setting forth the
adjusted Conversion Price and the effective date on
which such adjustment becomes effective and shall mail
such notice of such adjustment of the Conversion Price
to the holder of each Series A Preferred Share at such
holder's last address as shown on the share records of
the Company.
(h) In any case in which subsection (d) of this subparagraph
(7) provides that an adjustment shall become effective
on the date next following the record date for an event,
the Company may defer until the occurrence of such event
(I) issuing to the holder of any Series A Preferred
Shares converted after such record date and before the
occurrence of such event the additional Common Shares
issuable upon such conversion by reason of the
adjustment required by such event over and above the
Common Shares issuable upon such conversion before
giving effect to such adjustment and (II)
fractionalizing any Series A Preferred Share and/or
paying to such holder any amount of cash in lieu of any
fraction pursuant to subsection (c) of this subparagraph
(7).
(i) There shall be no adjustment of the Conversion Price in
case of the issuance of any shares of beneficial
interest of the Company in a reorganization, acquisition
or other similar transaction except as specifically set
forth in this subparagraph (7). If any action or
transaction would require adjustment of the Conversion
Price pursuant to more than one subsection of this
subparagraph (7), only one adjustment shall be made, and
such adjustment shall be the amount of adjustment that
has the highest absolute value.
(j) If the Company shall take any action affecting the
Common Shares, other than an action described in this
subparagraph (7), that in the opinion of the Board of
Trustees would materially and adversely affect the
conversion rights of the holders of the Series A
Preferred Shares, the Conversion Price for the Series A
Preferred Shares may be adjusted, to the extent
permitted by law, in such manner, if any, and at such
time, as the Board of Trustees, in its sole discretion,
may determine to be equitable in the circumstances.
(k) The Company covenants that it will at all times reserve
and keep available, free from preemptive rights, out of
the aggregate of its authorized but unissued Common
Shares, for the purpose of effecting conversion of the
Series A Preferred Shares, the full number of Common
Shares deliverable upon the conversion of all
outstanding Series A Preferred Shares not theretofore
converted. For purposes of this subsection (k), the
number of Common Shares that shall be deliverable upon
the conversion of all outstanding Series A Preferred
Shares shall be computed as if at the time of
computation all such outstanding shares were held by a
single holder.
The Company covenants that any Common Shares issued upon
conversion of the Series A Preferred Shares shall be
validly issued, fully paid and nonassessable. Before
taking any action that would cause an adjustment
reducing the Conversion Price below the then par value
of the Common Shares deliverable upon conversion of the
Series A Preferred Shares, the Company will take any
action that, in the opinion of its counsel, may be
necessary in order that the Company may validly and
legally issue fully paid and nonassessable Common Shares
at such adjusted Conversion Price.
The Company shall use its reasonable best efforts to
list the Common Shares required to be delivered upon
conversion of the Series A Preferred Shares, prior to
such delivery, upon each national securities exchange,
if any, upon which the outstanding Common Shares are
listed at the time of such delivery.
Prior to the delivery of any securities that the Company
shall be obligated to deliver upon conversion of the
Series A Preferred Shares, the Company shall endeavor to
comply with all federal and state laws and regulations
thereunder requiring the registration of such securities
with, or any approval of or consent to the delivery
thereof by, any governmental authority.
(l) The Company will pay any and all documentary stamp or
similar issue or transfer taxes payable in respect of
the issue or delivery of Common Shares or other
securities or property on conversion of the Series A
Preferred Shares pursuant hereto; provided, however,
that the Company shall not be required to pay any tax
that may be payable in respect of any transfer involved
in the issue or delivery of Common Shares or other
securities or property in a name other than that of the
holder of the Series A Preferred Shares to be converted,
and no such issue or delivery shall be made unless and
until the person requesting such issue or delivery has
paid to the Company the amount of any such tax or has
established, to the reasonable satisfaction of the
Company, that such tax has been paid.
In addition to the foregoing adjustments, the Company
shall be entitled to make such reductions in the
Conversion Price, in addition to those required herein,
as it in its discretion considers to be advisable in
order that any share distributions, subdivisions of
shares, reclassification or combination of shares,
distribution of rights, options, warrants to purchase
shares or securities, or a distribution of other assets
(other than cash distributions) will not be taxable or,
if that is not possible, to diminish any income taxes
that are otherwise payable because of such event.
(8) Voting Rights.
Except as provided below, the holders of the Series A
Preferred Shares shall not be entitled to vote at any meeting of
the shareholders for election of trustees or for any other
purpose or otherwise to participate in any action taken by the
Company or the shareholders thereof, or to receive notice of any
meeting of shareholders.
(a) In any matter in which the Series A Preferred Shares are
entitled to vote (as expressly provided herein),
including any action by written consent, each Series A
Preferred Share shall be entitled to one vote.
(b) Whenever distributions on any Series A Preferred Shares
or any other Parity Shares shall be in arrears, whether
or not earned or declared, for six or more quarterly
periods, the holders of the Series A Preferred Shares,
voting separately as a class with all other series of
Parity Shares upon which like voting rights have been
conferred and are exercisable, will be entitled to vote
for the election of two additional Trustees of the
Company at a special meeting called by the holders of
record of at least ten percent (10%) of any series of
Parity Shares, or ten percent (10%) of the outstanding
Series A Preferred Shares, so in arrears (unless such
request is received less than 90 days before the date
fixed for the next annual or special meeting of the
shareholders) or at the next annual or special meeting
of shareholders. In such case, the entire Board of
Trustees of the Company will be increased by two
Trustees. Voting rights of the holders of the Series A
Preferred Shares shall continue at each subsequent
annual meeting until all distributions accumulated on
such Series A Preferred Shares for the past Distribution
Periods and the then current Distribution Period shall
have been fully paid or declared and a sum sufficient
for the payment thereof set aside for payment, at which
time the term of the two Trustees elected pursuant to
this paragraph shall terminate.
(c) As long as any Series A Preferred Shares remain
outstanding, the Company will not, without the
affirmative vote or consent of the holders of at least
two-thirds of the Series A Preferred Shares outstanding
at the time, given in person or by proxy, either in
writing or at a meeting (such series voting separately
as a class), (i) authorize or create, or increase the
authorized or issued amount of, any class or series of
shares of beneficial interest ranking prior to the
Series A Preferred Shares with respect to the payment of
distributions or the distribution of assets upon
liquidation, dissolution or winding up or reclassify any
authorized shares of beneficial interest of the Company
into such shares, or create, authorize or issue any
obligation or security convertible into or evidencing
the right to purchase any such shares; or (ii) amend,
alter or repeal the provisions of the Company's
Declaration of Trust or these Articles Supplementary for
the Series A Preferred Shares whether by merger,
consolidation or otherwise (an "Event"), so as to
materially and adversely affect any right, preference,
privilege or voting power of the Series A Preferred
Shares (as determined by the Board of Trustees);
provided, however, with respect to the occurrence of any
of the Events set forth in (ii) above, so long as the
Series A Preferred Shares (or shares into which the
Series A Preferred Shares have been converted in any
successor entity to the Company) remain outstanding or,
if the Company is not the surviving entity, are
converted into a security with substantially identical
rights, preferences, privileges and voting power, then
the occurrence of any such Event shall not be deemed to
materially and adversely affect such rights,
preferences, privileges or voting power of the Series A
Preferred Shares; and provided further that (x) any
increase in the amount of the authorized Preferred
Shares or the designation or issuance of any additional
Series A Preferred Shares or Parity Shares, or (y) any
increase in the amount of authorized Series A Preferred
Shares or any other Preferred Shares, in each case
ranking on a parity with or junior to the Series A
Preferred Shares with respect to payment of
distributions or the distribution of assets upon
liquidation, dissolution or winding up, shall not be
deemed to materially and adversely affect such rights,
preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or
prior to the time when the act with respect to which such
vote would otherwise be required shall be effected, all
outstanding Series A Preferred Shares shall have been redeemed or
called for redemption and sufficient funds to effect such
redemption shall have been deposited in accordance with paragraph
5.
(9) Ownership and Transfer Limitations
(a) REIT-Related Restrictions. The Ownership and transfer
of the Series A Preferred Shares shall be restricted as
provided in the Declaration of Trust.
(b) ERISA-Related Restrictions. No Benefit Plan Investor
may acquire Series A Preferred Shares without the
Company's prior written consent (which consent may be
withheld in the Company's sole and absolute discretion).
Prior to the Series A Preferred Shares qualifying as a
"publicly-offered security" or the availability of
another exception to the "look-through" rule (i.e., the
provisions of paragraph (a)(2) of the Plan Asset
Regulation), transfers of Series A Preferred Shares to
Benefit Plan Investors that would increase aggregate
Benefit Plan Investor ownership of the Series A
Preferred Shares above the 25% Threshold will be void ab
initio. In addition, in the event that the aggregate
number of Series A Preferred Shares owned by Benefit
Plan Investors, but for the operation of this sentence,
would meet or exceed the 25% Threshold, (i) the Series A
Preferred Shares held by Benefit Plan Investors shall be
deemed to be Shares-in-Trust, pro-rata, to the extent
necessary to reduce aggregate Benefit Plan Investor
ownership of the Series A Preferred Shares below the 25%
Threshold, and (ii) such number of Series A Preferred
Shares (rounded up, in the case of each holder, to the
nearest whole share) shall be transferred automatically
and by operation of law to the Share Trust (as described
in Article VII of the Declaration of Trust) to be held
in accordance with this subparagraph (9)(b) and
otherwise in accordance with Article VII, Section 2 of
the Declaration of Trust and (iii) the Benefit Plan
Investors previously owning such Shares-in-Trust shall
submit such number of Series A Preferred Shares for
registration in the name of the Share Trust. Such
transfer to a Share Trust and the designation of Series
A Preferred Shares as Shares-in-Trust shall be effective
as of the close of business on the business day prior to
the date of the event that otherwise would have caused
aggregate Benefit Plan Investor ownership of Series A
Preferred Shares to meet or exceed the 25% Threshold.
Prior to the discovery of the existence of the Share
Trust, any transfer of Series A Preferred Shares by a
Benefit Plan Investor to a non-Benefit Plan Investor
shall reduce the number of Shares-in-Trust on a one-for-
one basis, and to that extent such shares shall cease to
be designated as Shares-in-Trust and shall be returned,
effective at exactly the time of the transfer to the
non-Benefit Plan Investor, automatically and without
further action by the Company or the Benefit Plan
Investor, to all Benefit Plan Investors (or the
transferee, if applicable) pro rata in accordance with
the Benefit Plan Investors' prior holdings. After the
discovery of the existence of the Share Trust, but prior
to the redemption of all discovered Shares-in-Trust
and/or the submission of all discovered Shares-in-Trust
for registration in the name of the Share Trust, any
transfer of Series A Preferred Shares by a Benefit Plan
Investor to a non-Benefit Plan Investor shall reduce the
number of Shares-in-Trust on a one-for-one basis, and to
that extent such shares shall cease to be designated as
Shares-in-Trust and shall be returned, automatically
without further action by the Company or the Benefit
Plan Investor, to the transferring Benefit Plan Investor
(or its transferee, if applicable).
In the event that any Series A Preferred Shares are
deemed "Shares-in-Trust" pursuant to this subparagraph
(9)(b), the holder shall cease to own any right or
interest with respect to such shares and the Company
will have the right to redeem such Shares-in-Trust for
an amount equal to their Fair Market Value, which
proceeds shall be payable to the purported owner. This
subparagraph (9)(b) shall cease to apply and all Shares-
in-Trust shall cease to be designated as Shares-in-Trust
and shall be returned, automatically and by operation of
law, to their purported owners, all of which shall occur
at such time as the Series A Preferred Shares qualify as
a publicly offered security or if another exception to
the "look-through" rule under the Plan Asset Regulation
applies.
C. EXCLUSION OF OTHER RIGHTS.
Except as may otherwise be required by law, the Series A
Preferred Shares shall not have any voting powers, preferences or
relative, participating, optional or other special rights, other
than those specifically set forth in these Articles Supplementary
(as such Articles Supplementary may be amended from time to time)
and in the Declaration of Trust. The Series A Preferred Shares
shall have no preemptive or subscription rights.
D. HEADINGS OF SUBDIVISIONS.
The headings of the various subdivisions hereof are for
convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
E. SEVERABILITY OF PROVISIONS.
If any voting powers, preferences or relative,
participating, optional and other special rights of the Series A
Preferred Shares or qualifications, limitations or restrictions
thereof set forth in these Articles Supplementary (as such
Articles Supplementary may be amended from time to time) is
invalid, unlawful or incapable of being enforced by reason of any
rule of law or public policy, all other voting powers,
preferences and relative, participating, optional and other
special rights of Series A Preferred Shares and qualifications,
limitations and restrictions thereof set forth in these Articles
Supplementary (as so amended) which can be given effect without
the invalid, unlawful or unenforceable voting powers, preferences
or relative, participating, optional or other special rights of
Series A Preferred Shares or qualifications, limitations and
restrictions thereof shall be given such effect. None of the
voting powers, preferences or relative participating, optional or
other special rights of the Series A Preferred Shares or
qualifications, limitations or restrictions thereof herein set
forth shall be deemed dependent upon any other such voting
powers, preferences or relative, participating, optional or other
special right of Series A Preferred Shares or qualifications,
limitations or restrictions thereof unless so expressed herein.
F. ADOPTION.
These Articles Supplementary were duly adopted by the Board
of Trustees of the Company in the manner and by the vote required
by law.
* * * * * * * * *
<PAGE>
IN WITNESS WHEREOF, I hereby certify that I, Jeffrey H.
Fisher, am the Chairman of the Board and President of Innkeepers
USA Trust (the "Company") and that as such, I am authorized to
execute and file with the State Department of Assessments and
Taxation of Maryland Articles Supplementary (the "Articles
Supplementary") on behalf of the Company and I further certify on
behalf of the Company that these Articles Supplementary were
authorized by the Board of Trustees at a meeting held by such
Board of Trustees on May 6, 1998 and are still in full force and
effect as of the date hereof. I further certify that my signature
to this document is my free act and deed, that to the best of my
knowledge, information and belief, the matters and facts set
forth herein are true in all material respects and that this
statement is made under penalty for perjury.
INNKEEPERS USA TRUST
/s/ Jeffrey H. Fisher
Name: Jeffrey H. Fisher
Title: Chairman of the Board
and President
The undersigned, Mark A. Murphy, the General Counsel and
Secretary of the Company, hereby certifies that Jeffrey H. Fisher
is the Chairman of the Board and President of the Company and
that the signature set forth above is his genuine signature.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 15th day of May, 1998.
/s/ Mark A. Murphy
Name: Mark A. Murphy
Title: General Counsel and
Secretary
IN WITNESS WHEREOF, I hereby certify that I, Frederic M.
Shaw, am the Executive Vice President of Innkeepers USA Trust
(the "Company") and that as such, I am authorized to execute and
file with the State Department of Assessments and Taxation of
Maryland Articles Supplementary (the "Articles Supplementary") on
behalf of the Company and I further certify on behalf of the
Company that these Articles Supplementary were authorized by the
Board of Trustees at a meeting held by such Board of Trustees on
May 6, 1998 and are still in full force and effect as of the date
hereof. I further certify that my signature to this document is
my free act and deed, that to the best of my knowledge,
information and belief, the matters and facts set forth herein
are true in all material respects and that this statement is made
under penalty for perjury.
INNKEEPERS USA TRUST
/s/ Frederic M. Shaw
Name: Frederic M. Shaw
Title: Executive Vice President
The undersigned, Mark A. Murphy, the General Counsel and
Secretary of the Company, hereby certifies that Frederic M. Shaw
is the Executive Vice President of the Company and that the
signature set forth above is his genuine signature.
IN WITNESS WHEREOF, the undersigned has hereunto set his
hand this 15th day of May, 1998.
/s/ Mark A. Murphy
Name: Mark A. Murphy
Title: General Counsel and
Secretary
EXHIBIT 5.1
May 29, 1998
Innkeepers USA Trust
306 Royal Poinciana Way
Palm Beach, Florida 33480
Gentlemen:
We have acted as counsel for Innkeepers USA Trust, a
Maryland real estate investment trust (the "Company"), in
connection with the Registration Statement on Form S-3 (the
"Registration Statement"), filed under the Securities Act of
1933, as amended, with respect to the registration of 1,572,861
shares of beneficial interest, $0.01 par value (the "Shares"),
as described in the Registration Statement.
In connection therewith, we have relied upon, among other
things, our examination of such documents, records of the
Company, certificates of its officers and public officials, as we
have deemed necessary for purposes of the opinion expressed
below.
Based upon the foregoing, and having regard for such legal
considerations as we have deemed relevant, we are of the opinion
that the issuance of the Shares as described in the Registration
Statement has been validly authorized and, upon issuance of the
Shares as described in the Registration Statement, the Shares
will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to
the Registration Statement and to the reference to this firm
under the heading "Legal Matters" therein.
Very truly yours,
/s/ HUNTON & WILLIAMS
HUNTON & WILLIAMS
EXHIBIT 8.1
May 29, 1998
Innkeepers USA Trust
306 Royal Poinciana Way
Palm Beach, Florida 33480
Innkeepers USA Trust
Qualification as
Real Estate Investment Trust
Ladies and Gentlemen:
We have acted as counsel to Innkeepers USA Trust, a Maryland
real estate investment trust (the "Company"), in connection with
the preparation of a Form S-3 registration statement filed with
the Securities and Exchange Commission ("SEC") on May 29, 1998,
as amended through the date hereof (the "Registration
Statement"), with respect to (i) the possible issuance by the
Company of up to 1,477,307 common shares ("Redemption Shares") of
beneficial interest, par value $0.01 per share, of the Company
(the "Common Shares") if, and to the extent that, the current
holders of 1,477,307 units of limited partnership interest
("Units") in Innkeepers USA Limited Partnership, a Virginia
limited partnership (the "Operating Partnership"), tender such
Units for redemption and the Company elects to redeem the Units
for Common Shares and (ii) the offer and sale from time to time
of up to 95,554 Common Shares (the "Secondary Shares") that may
be issued to a certain selling shareholder named in the
Registration Statement who is an affiliate of the Company (the
"Selling Shareholder") upon presentation by the Selling
Shareholder of Units to the Partnership for redemption by such
person. You have requested our opinion regarding certain U.S.
federal income tax matters.
The Company, through the Operating Partnership and its
subsidiary partnerships (the "Subsidiary Partnerships"),
currently owns 62 hotels and associated personal property (the
"Current Hotels"). The Company, or a wholly-owned subsidiary of
the Company, owns a 1% general partnership interest, and the
Operating Partnership owns a 99% limited partnership interest, in
each Subsidiary Partnership. The Operating Partnership and
Subsidiary Partnerships lease (i) 53 of the Current Hotels to JF
Hotel, Inc., a Virginia corporation, and its affiliated sister
corporations (collectively, the "JF Lessee") pursuant to
substantially similar operating leases (the "JF Leases") and (ii)
nine of the Current Hotels to an affiliate of Summerfield Hotel
Corporation (the "Summerfield Lessee") pursuant to substantially
similar operating leases (the "Summerfield Leases" and, together
with the JF Leases, the "Leases"). The JF Lessee operates 31 of
the Current Hotels. A wholly-owned subsidiary of Marriott
International, Inc., a Delaware corporation, operates and manages
20 of the Current Hotels on behalf of the JF Lessee pursuant to
substantially similar management agreements (the "Marriott
Management Agreements") with the JF Lessee. TMH Hotels, Inc., a
Kansas corporation, operates and manages two of the Current
Hotels on behalf of the JF Lessee pursuant to substantially
similar management agreements (the "TMH Management Agreements")
with the JF Lessee. An affiliate of Summerfield Hotel
Corporation operates and manages nine of the Current Hotels on
behalf of the Summerfield Lessee pursuant to substantially
similar management agreements (the "Summerfield Management
Agreements" and, together with the Marriott Management Agreements
and the TMH Management Agreements, the "Management Agreements")
with the Summerfield Lessee.
In giving the opinions set forth herein, we have examined
the following:
1. the Company's Amended and Restated Declaration of
Trust, as filed with the Department of Assessments and Taxation
of the State of Maryland on September 21, 1994, as amended on
October 4, 1995, September 18, 1996, and the Articles
Supplementary to the Declaration of Trust, as filed with the
Department of Assessments and Taxation of the State of Maryland
on May 15, 1998;
2. the Company's Amended and Restated By-Laws;
3. the prospectus contained as part of the Registration
Statement (the "Prospectus");
4. the Second Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, dated as of November 1,
1996 (the "Operating Partnership Agreement"), among the Company,
Innkeepers Financial Corporation, as general partner ("IFC"), and
several limited partners;
5. the partnership agreements of the Subsidiary
Partnerships, which are listed on Exhibit A attached hereto;
6. the Leases;
7. the Management Agreements; and
8. such other documents as we have deemed necessary or
appropriate for purposes of this opinion.
In connection with the opinions rendered below, we have
assumed, with your consent, that:
1. each of the documents referred to above has been duly
authorized, executed, and delivered; is authentic, if an
original, or is accurate, if a copy; and has not been amended;
2. during its taxable year ending December 31, 1998 and
subsequent taxable years, the Company has operated and will
continue to operate in such a manner that makes and will continue
to make the representations contained in a certificate, dated the
date hereof and executed by a duly appointed officer of the
Company (the "Officer's Certificate"), true for such years;
3. the Company will not make any amendments to its
organizational documents, the Operating Partnership Agreement, or
the partnership agreement of any Subsidiary Partnership after the
date of this opinion that would affect its qualification as a
real estate investment trust (a "REIT") for any taxable year;
4. each partner (each, a "Partner") of the Operating
Partnership, other than IFC, that is a corporation or other
entity has a valid legal existence;
5. each Partner, other than IFC, has full power,
authority, and legal right to enter into and to perform the terms
of the Operating Partnership Agreement and the transactions
contemplated thereby; and
6. no action will be taken by the Company, the Operating
Partnership, the Subsidiary Partnerships, or the Partners after
the date hereof that would have the effect of altering the facts
upon which the opinions set forth below are based.
In connection with the opinions rendered below, we also have
relied upon the correctness of the representations contained in
the Officer's Certificate.
Based on the factual matters in the documents and
assumptions set forth above, the representations set forth in the
Officer's Certificate, the discussions in the Prospectus under
the caption "Federal Income Tax Considerations" (which are
incorporated herein by reference), and without further
investigation as to such factual matters, we are of the opinion
that:
(a) the Company qualified to be taxed as a REIT pursuant to
sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the "Code"), for its taxable years
ended December 31, 1994 through December 31, 1997, and
the Company's organization and current and proposed
method of operation will enable it to continue to qualify
as a REIT for its taxable year ended December 31, 1998,
and in the future; and
(b) the descriptions of the law contained in the Prospectus
under the caption "Federal Income Tax Considerations" are
correct in all material respects, and the discussions
thereunder fairly summarize the federal income tax
considerations that are likely to be material to a holder
of the Redemption Shares and the Secondary Shares.
We have performed no due diligence and have made no efforts
to verify the accuracy and genuineness of the documents and
assumptions set forth above, and the representations set forth in
the Officer's Certificate. We will not review on a continuing
basis the Company's compliance with such documents, assumptions
or representations. Accordingly, no assurance can be given that
the actual results of the Company's operations will satisfy the
requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of
the Code and the Treasury regulations thereunder (the
"Regulations"), published administrative interpretations thereof,
and published court decisions. The Internal Revenue Service has
not issued Regulations or administrative interpretations with
respect to various provisions of the Code relating to REIT
qualification. No assurance can be given that the law will not
change in a way that will prevent the Company from qualifying as
a REIT.
We hereby consent to the filing of this opinion as
an exhibit to the Registration Statement. In giving this
consent, we do not admit that we are in the category of persons
whose consent is required by Section 7 of the Securities Act of
1933, as amended, or the rules and regulations promulgated
thereunder by the SEC.
The foregoing opinions are limited to the U.S. federal
income tax matters addressed herein, and no other opinions are
rendered with respect to other federal tax matters or to any
issues arising under the tax laws of any other country, or any
state or locality. We undertake no obligation to update the
opinions expressed herein after the date of this letter. This
opinion letter is solely for the information and use of the
addressee, and it may not be distributed, relied upon for any
purpose by any other person, quoted in whole or in part or
otherwise reproduced in any document, or filed with any
governmental agency without our express written consent.
Very truly yours,
/s/ Hunton & Williams
Hunton & Williams
<PAGE>
EXHIBIT A
Subsidiary Partnership Agreements
1. the Limited Partnership Agreement of Innkeepers
Financing Partnership, L.P., a Virginia limited partnership,
dated March 20, 1995, between Innkeepers USA Trust, as
general partner, and Innkeepers USA Limited Partnership (the
"Operating Partnership"), as limited partner;
2. the Limited Partnership Agreement of Innkeepers
Financing Partnership II, L.P., a Virginia limited partnership,
dated October 6, 1995, between Innkeepers Financial Corporation
II, as general partner, and the Operating Partnership, as
limited partner;
3. the Limited Partnership Agreement of Innkeepers
Financing Partnership III, L.P., a Virginia limited partnership,
dated March 6, 1997, between Innkeepers Financial Corporation
III, as general partner, and the Operating Partnership, as
limited partner;
4. the Limited Partnership Agreement of Innkeepers
Residence San Mateo, L.P., a Virginia limited partnership,
dated October 9, 1996, between Innkeepers Residence San Mateo,
Inc., as general partner, and the Operating Partnership, as
limited partner;
5. the Limited Partnership Agreement of Innkeepers
Residence Sili I, L.P., a Virginia limited partnership, dated
October 9, 1996, between Innkeepers Financial Corporation III,
as general partner, and the Operating Partnership, as limited
partner;
6. the Limited Partnership Agreement of Innkeepers
Residence Sili II, L.P., a Virginia limited partnership, dated
October 9, 1996, between Innkeepers Residence Sili II, Inc.,
as general partner, and the Operating Partnership, as limited
partner;
7. the Limited Partnership Agreement of Innkeepers
Residence Denver-Downtown, L.P., a Virginia limited partnership,
dated October 9, 1996, between Innkeepers Financial Corporation
III, as general partner, and the Operating Partnership, as
limited partner;
8. the Limited Partnership Agreement of Innkeepers
Residence Atlanta-Downtown, L.P., a Virginia limited partnership,
dated October 9, 1996, between Innkeepers Residence Atlanta-
Downtown, Inc., as general partner, and the Operating Partnership,
as limited partner;
9. the Limited Partnership Agreement of Innkeepers
Residence Wichita East, L.P., a Virginia limited partnership,
dated October 9, 1996, between Innkeepers Financial Corporation
III, as general partner, and the Operating Partnership, as
limited partner;
10. the Limited Partnership Agreement of Innkeepers
Residence East Lansing, L.P., a Virginia limited partnership,
dated October 9, 1996, between Innkeepers Residence East Lansing,
Inc., as general partner, and the Operating Partnership, as
limited partner;
11. the Limited Partnership Agreement of Innkeepers
Residence Portland, L.P., a Virginia limited partnership, dated
October 9, 1996, between Innkeepers Residence Portland, Inc., as
general partner, and the Operating Partnership, as limited
partner;
12. the Limited Partnership Agreement of Innkeepers
Residence Grand Rapids, L.P., a Virginia limited partnership,
dated October 9, 1996, between Innkeepers Residence Grand
Rapids, Inc., as general partner, and the Operating Partnership,
as limited partner;
13. the Limited Partnership Agreement of Innkeepers
Hampton Norcross, L.P., a Virginia limited partnership, dated
October 9, 1996, between Innkeepers Hampton Norcross, Inc., as
general partner, and the Operating Partnership, as limited
partner;
14. the Limited Partnership Agreement of Innkeepers
Residence Eden Prairie, L.P., a Virginia limited partnership,
dated January 1, 1997, between Innkeepers Residence Eden
Prairie, Inc., as general partner, and the Operating
Partnership, as limited partner;
15. the Limited Partnership Agreement of Innkeepers
Residence Arlington (TX), L.P., a Virginia limited partnership,
dated January 24, 1997, between Innkeepers Residence Arlington,
Inc., as general partner, and the Operating Partnership, as
limited partner;
16. the Limited Partnership Agreement of Innkeepers
Residence Addison (TX), L.P., a Virginia limited partnership,
dated January 24, 1997, between Innkeepers Residence Addison,
Inc., as general partner, and the Operating Partnership, as
limited partner;
17. the Limited Partnership Agreement of Innkeepers
Schaumburg, L.P., dated as of June 26, 1997, between
Innkeepers Financial Corporation V, as general partner, and
the Operating Partnership, as limited partner;
18. the Limited Partnership Agreement of Innkeepers
Financing Partnership IV, L.P., dated as of June 26, 1997,
between Innkeepers Financial Corporation V, as general
partner, and the Operating Partnership, as limited partner;
19. the Limited Partnership Agreement of Innkeepers
Westchester, L.P., dated as of June 26, 1997, between
Innkeepers Financial Corporation V, as general partner, and
the Operating Partnership, as limited partner;
20. the Limited Partnership Agreement of Innkeepers
Summerfield General, L.P., dated as of July 2, 1997, between
Innkeepers Financial Corporation IV, as general partner, and
the Operating Partnership, as limited partner;
21. the Limited Partnership Agreement of Innkeepers
Sunrise Tinton Falls, L.P., dated as of July 2, 1997, between
Innkeepers Financial Corporation IV, as general partner, and
the Operating Partnership, as limited partner;
22. the Limited Partnership Agreement of Innkeepers
Summerfield General II, L.P., dated as of July 2, 1997,
between Innkeepers Financial Corporation V, as general
partner, and the Operating Partnership, as limited partner;
23. the Limited Partnership Agreement of Innkeepers
Residence Shelton, L.P., dated as of October 31, 1997,
between Innkeepers Residence Shelton, Inc., as general
partner, and the Operating Partnership, as limited partner;
24. the Limited Partnership Agreement of Innkeepers RI
Altamonte, L.P., dated as of December 23, 1997, between
Innkeepers RI Altamonte, Inc., as general partner, and the
Operating Partnership, as limited partner;
25. the Limited Partnership Agreement of Innkeepers RI
General, L.P., dated as of December 23, 1997, between
Innkeepers RI General, Inc., as general partner, and the
Operating Partnership, as limited partner;
26. the Limited Partnership Agreement of Innkeepers RI
Northwest, L.P., dated as of January 14, 1998, between
Innkeepers RI Northwest, Inc., as general partner, and the
Operating Partnership, as limited partner; and
27. the Limited Partnership Agreement of Westborough
Sierra Associates, L.P., dated as of August 7, 1997,
between Innkeepers Westborough, L.L.C., as general partner,
and the Operating Partnership, as limited partner.
EXHIBIT 23.1
Consent of Independent Accountants
We consent to the incorporation by reference in the registration
statement of Innkeepers USA Trust on Form S-3 of our report dated
February 20, 1998 on our audits of the consolidated financial
statements of Innkeepers USA Trust as of December 31, 1996 and
1997 and for the years ended December 31, 1995, 1996 and 1997,
our report dated March 23, 1998 on our audit of the financial
statement schedule of Innkeepers USA Trust as of December 31,
1997, and our report dated March 23, 1998 on our audits of the
combined financial statements of JF Hotel, Inc. as of December
31, 1996 and 1997 and for the years ended December 31, 1995, 1996
and 1997, which reports are included, or incorporated by
reference, in Innkeepers USA Trust's 1997 Annual Report on Form
10-K incorporated by reference herein; and the incorporation by
reference of our report dated July 3, 1997 on our audits of the
combined financial statements of the Summerfield Acquisition
Hotels as of January 3, 1997 and for the fiscal year then ended
which report is included in Innkeepers USA Trust's Form 8-K filed
on July 18, 1997 incorporated by reference herein. We also
consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Memphis, Tennessee
May 29, 1998
