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 (I.R.S. Employer
jurisdiction of incorporation Identification No.)
or 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 (Name, address, including
code, and telephone zip 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 4,063,329 $14.125 $57,394,522 $16,931
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 Shareholders
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
4,063,329 Shares
INNKEEPERS USA TRUST
Common Shares
This Prospectus relates to the offer and sale from time to
time by the selling shareholders named herein (the "Selling
Shareholders") of up to 4,063,329 common shares (the "Secondary
Shares") of beneficial interest, par value $.01 per share
("Common Shares"), of Innkeepers USA Trust (the "Company") that
may be issued to Selling Shareholders upon presentation by the
Selling Shareholders of units of limited partnership interest
("Units") in Innkeepers USA Limited Partnership (the
"Partnership"), of which a wholly-owned subsidiary of the Company
is the sole general partner, to the Partnership for redemption by
such persons and, to the extent that, pursuant to the terms of
the agreement of limited partnership of the Partnership (the
"Partnership Agreement"), the Company elects to acquire the Units
for Common Shares. The Partnership issued 4,063,329 preferred
units of limited partnership interest in the Partnership
("Preferred Units") in connection with the purchase of certain
hotel properties. The Preferred Units may be converted by the
holder into common units of limited partnership interest in the
Partnership ("Common Units") at any time on a one-for-one basis
(the Preferred Units and any Common Units into which Preferred
Units may be converted are referred to herein as the "Redemption
Units"). Pursuant to the Partnership Agreement, the holders of
the Redemption Units may tender the Redemption Units to the
Partnership for redemption for Common Shares at any time on or
after November 1, 1998. The holders of the Preferred Units may
pledge their Redemption Units to secure loans meeting certain
criteria. In the event of foreclosure, a lender will have the
right to tender immediately (even if before November 1, 1998) the
Redemption Units pledged to it as collateral ("Pledge Units").
One Selling Shareholder has pledged a portion of his Redemption
Units to secure a loan. The Company may elect to acquire
directly Redemption Units tendered for redemption in exchange for
Common Shares, on a one-for-one basis, or for cash. 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,
Secondary 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 3 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 Shareholders or their 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
Shareholders reserve 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 sale
of any Secondary Shares by the Selling Shareholders but has
agreed to bear certain expenses of registration of the sale of
the Secondary Shares under federal and state securities laws.
The Company will acquire Redemption Units in exchange for any
Secondary Shares that the Company may issue to Redemption Unit
holders.
The Selling Shareholders and any agents or broker-dealers
that participate with the Selling Shareholders 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.
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.
<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 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 the offer and sale from time to
time by Selling Shareholders of up to 4,063,329 Secondary Shares
that may be issued to the Selling Shareholders upon the tender of
the Redemption Units for redemption.
The Partnership issued the 4,063,329 Redemption Units in
connection with the acquisition of certain of the Hotels. The
Partnership has issued Common Units (as used herein, "Units"
shall include "Common Units" and "Preferred Units" unless
otherwise stated) to other sellers of hotel properties, 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 on or after
November 1, 1998, and Pledge Units may be tendered by the holder
on an earlier date in the event of foreclosure. 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 in exchange therefor rather
than paying cash. As a result, the Company may from time to time
issue up to 4,063,329 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 Secondary Shares
to provide the recipients thereof with freely tradable
securities.
The Company will not receive any cash proceeds from sale of
any Secondary Shares, but will acquire Redemption Units upon
issuance of Secondary Shares. The registration of the Secondary
Shares does not necessarily mean that any of such shares will be
issued by the Company or sold by the Selling Shareholders.
RISK FACTORS
Prospective investors and Redemption Unit holders should
carefully consider the following information in conjunction with
the other information contained in this Prospectus.
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 these 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 acquisition of the DeBoer Hotels. 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
extendedstay 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 2,484,720 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. In connection with the purchase of the
Summerfield Hotels, certain affiliates of Summerfield received an
aggregate of 1,937,947 Units (the "Summerfield Units"). In
addition to its obligation to effect the 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 traded. 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 Cumulative 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 management companies for its hotel properties. The
Company leases 53 of the Hotels to the JF Lessee and leases the
nine Summerfield Hotels to the Summerfield Lessee pursuant to
Percentage Leases. The JF Lessee has entered into management
contracts with Marriott to manage 20 of the Residence Inn Hotels.
The Summerfield Lessee has entered into management contracts with
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'Hara, 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 extent 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
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,
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 Preferred Units. The
Preferred Units have a liquidation preference of $11.00 per
Preferred Unit and are convertible at any time into Common Units
on a one-for-one basis (the "Preferred Conversion Right"). In
November 2006, each then outstanding 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 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 Preferred Units remain
outstanding, the Partnership is prohibited from issuing Units
with income, distribution or liquidation rights that are superior
to or equal to the income, distribution or liquidation rights of
the Preferred Units unless immediately after such issuance (i)
the value of all of the outstanding superior Units would not
exceed 18.7% of the value of all Units outstanding and (ii) the
value of all outstanding superior and equal Units would not
exceed (A) 22% of the value of all outstanding Units plus (B) the
aggregate value of the Preferred Units at issuance and minus (C)
the value of the remaining outstanding Preferred Units.
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 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 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 2,484,720 Units are
currently exercisable, and Redemption Rights will become
exercisable by the holders of the 4,063,329 Redemption 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
4,063,329 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 the
4,063,329 Redemption Units at any time after November 1, 1998 or
upon foreclosure on Redemption Units pledged as collateral, if
earlier. 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 4,063,329 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, (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
and (iv) a registration statement covering the issuance and
resale of 1,572,861 Common Shares issuable upon redemption of
Summerfield Units issued in connection with the purchase of the
Summerfield 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, 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 do not apply,
however, to business combinations that are approved or exempted
by the board of trustees of the trust prior to the time that the
Interested Shareholder becomes an Interested Shareholder.
Control Share Acquisition
The MGCL, as applicable to Maryland real estate investment
trusts, provides that "control shares" of a Maryland real estate
investment trust acquired in a "control share acquisition" have
no voting rights except to the extent approved by a vote of two
thirds of the votes entitled to be cast on the matter, excluding
shares of beneficial interest owned by the acquiror, by officers
or by trustees who are employees of the trust. "Control Shares"
are voting shares of beneficial interest which, if aggregated
with all other such shares of beneficial interest previously
acquired by the acquiror, or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing trustees within one
of the following ranges of voting power: (i) one-fifth or more
but less than one-third, (ii) one-third or more but less than a
majority, or (iii) a majority or more of all voting power.
Control Shares do not include shares the acquiring person is
entitled to vote as result of having previously obtained
shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including
an undertaking to pay expenses), may compel the board of trustees
of the trust to call a special meeting of shareholders to be held
within 50 days of demand to consider the voting rights of the
shares. If no request for a meeting is made, the trust may itself
present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement
as required by the statute, then, subject to certain conditions
and limitations, the trust may redeem any or all of the control
shares (except those for which voting rights have previously been
approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date
of the last control share acquisition by the acquiror or of any
meeting of shareholders at which the voting rights of such shares
are considered and not approved. If voting rights for control
shares are approved at a shareholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to
vote, all other shareholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share
paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to
shares acquired in a merger, consolidation or share exchange if
the trust is a party to the transaction or (b) to acquisitions
approved or exempted by the declaration of trust or bylaws of the
trust.
The Bylaws of the Company contain a provision exempting from
the control share acquisition statute any and all acquisitions by
any person of the Company's Common or Preferred Shares. There
can be no assurance that such provision will not be amended or
eliminated at any time in the future.
Amendment
The Declaration of Trust may be amended by the affirmative
vote of the holders of at least a majority of all of the votes
entitled to be cast on the matter; provided, that certain
provisions of the Declaration of Trust regarding (i)
disqualification of the company as a real estate investment
trust, (ii) Independent Trustees or the removal of Trustees,
(iii) the restrictions on transfer of the Common Shares and the
Preferred Shares, (iv) amendments to the Declaration of Trust,
(v) the Debt Limitation (as defined in "- Operations" below) and
(vi) the termination of the Company may not be amended, altered,
changed or repealed without the approval of two-thirds of all of
the votes entitled to be cast on the matter. The Company's
Bylaws may be amended or altered exclusively by the Board of
Trustees or a committee thereof, except for provision of the
Bylaws relating to the sale of a certain Hotel and 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 SHAREHOLDERS
As described elsewhere herein, "Selling Shareholders" are
those persons who have received and may receive Common Shares
upon redemption of Units. Because the Selling Shareholders may
redeem all, some or none of their 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 Shareholders pursuant to this Prospectus. The Selling
Shareholders may transfer their Redemption Units to a transferee
prior to a tendering of the Redemption Units (which may include
Pledge Units) for redemption. In the table below, the Selling
Shareholders are assumed to have redeemed all of their 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 26, 1998, and as adjusted to reflect the sale of
all the Secondary Shares, certain information regarding the
Selling Shareholders' ownership of Common Shares.
Prior to Offering After Offering
Secondary
Selling Shares Shares Shares
Shareholders Owned(1) Registered Owned(2)
Hereunder
Roy R. Baker 117,985 117,985 -0-
John H. Bemis 64,060 64,060 -0-
Jack P. DeBoer 2,465,570(2) 1,767,036 698,534
Marilyn DeBoer 112,178 112,178 -0-
Residence Hotel 328,763 328,763 -0-
Limited
Partnership
Penny Kay 288,987 288,987 -0-
DeBoer
Skyler Scott 288,987 288,987 -0-
DeBoer
Mike DePatie 14,968 14,968 -0-
Rolf E. Ruhfus 869,697(3) 476,808 392,889
G. Ronald Tyler 417,213 417,213 -0-
John Wagner 7,484 7,484 -0-
Marriott 178,860 178,860 -0-
International,
Inc.
- -----------------------------
(1) Includes Units beneficially owned by the Selling
Shareholder.
(2) Includes 4,000 Series A Preferred Shares, 6,382 restricted
Common Shares and 2,000 Common Shares issuable upon exercise
of vested options granted under the Company's Trustees Share
Incentive Plan.
(3) Includes 7,500 Series A Preferred Shares, 5,172 restricted
Common Shares and 2,000 Common Shares issuable upon exercise
of vested options granted under the Company's Trustees Share
Incentive Plan.
(4) Assuming all of the Secondary Shares owned by such Selling
Shareholder are sold.
<PAGE>
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.
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
oneyear 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 nonforeign 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 the offer and sale from time to
time of any Secondary Shares by the Selling Shareholders or their
transferees, if, and to the extent, that they tender Redemption
Units for redemption and the Company elects to redeem the
Redemption Units for Common Shares. The Company is registering
the Secondary Shares to provide the holders thereof with freely
tradeable securities, but registration of the Secondary 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 sale of
the Secondary Shares by the Selling Shareholders, although the
Company will acquire Redemption Units from such Limited Partners
in exchange for Secondary Shares.
The Secondary Shares may be sold from time to time to
purchasers directly by the Selling Shareholders or their
pledgees, donees or transferees. Alternatively, the Selling
Shareholders or their 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
Shareholders or their transferees and/or the purchasers of
Secondary Shares for whom they may act as agent. The Selling
Shareholders or their 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 Secondary Shares,
or, if applicable, the transferees of Redemption Units pledged as
collateral, or broker-dealers or agents and any commissions and
other terms constituting compensation from the Selling
Shareholders 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
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 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 by the Company of the Secondary
Shares 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.
4,063,329 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. . . . . . . . . . . . 10
THE PARTNERSHIP. . . . . . . . . . 10
THE LESSEES. . . . . . . . . . . . 11
DESCRIPTION OF THE PARTNERSHIP
AND UNITS. . . . . . . . . . . . 12
SHARES AVAILABLE FOR FUTURE SALE . 19 ________________
DESCRIPTION OF SHARES OF
BENEFICIAL INTEREST. . . . . . . 21
OWNERSHIP LIMITATIONS. . . . . . . 27 PROSPECTUS
CERTAIN PROVISIONS OF MARYLAND
LAW AND OF THE COMPANY'S C ________________
DECLARATION OF TRUST AND
BYLAWS . . . . . . . . . . . . . 29
SELLING SHAREHOLDERS . . . . . . . 32
FEDERAL INCOME TAX CONSIDERATIONS. 34
PLAN OF DISTRIBUTION . . . . . . . 50
EXPERTS. . . . . . . . . . . . . . 51
LEGAL MATTERS. . . . . . . . . . . 51
_____________________
____________, 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 $_____
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 $______
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 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 (previously filed as
Exhibit 3.1(b) to Registration Statement on Form S3
(Registration Statement No. 333-53919) and
incorporated by reference herein)
3.2 - Bylaws of the Registrant (previously filed as
Exhibit 3.2 to the Company's Registration
Statement on Form S-11 (Registration No. 33-81362)
and incorporated by reference herein)
4.1 - Form of Common Share Certificate (previously
filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-11 (Registration No. 33-81362)
and incorporated by reference herein)
5.1* - Opinion of Hunton & Williams
8.1* - Opinion of Hunton & Williams with respect to
certain tax matters.
10.1 - Second Amended and Restated Agreement of
Limited Partnership of Innkeepers USA Limited
Partnership (previously filed as Exhibit 4.2 to
Registration Statement on Form S-3 (Registration No.
333-12809) and incorporated by reference herein)
23.1* - Consent of Coopers & Lybrand L.L.P.
23.2* - Consent of Hunton & Williams (included in
Exhibit 5.1)
24.1* - Power of Attorney (located on the signature
page of this Registration Statement)
_____________
*Filed herewith
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made of the securities registered hereby, a post-effective
amendment to this registration statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of
1933; (ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent posteffective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement; provided, however, that the undertakings
set forth in subparagraphs (i) and (ii) above do not apply if the
information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in this registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the provisions described under Item 15 above or otherwise, the
registrant has been advised that the in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted against the
registrant by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate 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.
<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 29th 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 29th day
of May, 1998 by the following persons in the capacities
indicated.
Signature Title
/s/ Jeffrey H. Fisher Chairman of the Board,
Jeffrey H. Fisher President and Chief Executive
Officer (Principal Executive
Officer)
/s/ Bruce Zenkel Trustee
Bruce Zenkel
_________________________ 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
David Bulger Treasurer
(Principal Financial Officer)
/s/ Gregory Fay Vice President of Accounting
Gregory Fay (Principal Accounting
Officer)
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 4,063,329
shares of beneficial interest, $0.01 par value (the "Shares"),
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
Board of Directors
Innkeepers USA Trust
306 Royal Poinciana Way
Palm Beach, Florida 33480
Innkeepers USA Trust Qualification as
Real Estate Investment Trust
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 the offer and sale from time to time
of up to 4,063,329 common shares that may be issued to selling
shareholders named in the Registration Statement (the "Selling
Shareholders") upon presentation by the Selling Shareholders of
units of limited partnership interest ("Units") in Innkeepers USA
Limited Partnership, a Virginia limited partnership (the
"Operating Partnership") to the Operating 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 whollyowned 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;
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, 1998, 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.
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
