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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 10, 2000
REGISTRATION NO. 333-93465
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
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TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INNKEEPERS USA TRUST
(Exact name of registrant as specified in its charter)
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MARYLAND 65-0503831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
MARK A. MURPHY
GENERAL COUNSEL AND SECRETARY
INNKEEPERS USA TRUST
306 ROYAL POINCIANA WAY 306 ROYAL POINCIANA WAY
PALM BEACH, FLORIDA 33480 PALM BEACH, FLORIDA 33480
(561) 835-1800 (561) 835-1800
(Address, including zip code, and (Name, address, including zip code,
telephone number, including area code, and telephone, number, including area
of registrant's principal executive code, of agent for service)
offices)
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Copy to:
DAVID C. WRIGHT, ESQ.
HUNTON & WILLIAMS
RIVERFRONT PLAZA, EAST TOWER
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 in light of
market conditions and other factors.
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IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED
PURSUANT TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING
BOX: [ ]
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE
OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE
SECURITIES ACT OF 1933, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH
DIVIDEND OR INTEREST REINVESTMENT PLANS, CHECK THE FOLLOWING BOX: [X]
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING: [ ]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE
462(C) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES
ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION
STATEMENT FOR THE SAME OFFERING: [ ]
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE
434 UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX: [ ]
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933, as amended, or until this registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said section 8(a), may determine.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any state.
SUBJECT TO COMPLETION, DATED JANUARY 10, 2000
PRELIMINARY PROSPECTUS
218,307 SHARES
INNKEEPERS USA TRUST
COMMON SHARES
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Our common shares trade on the New York Stock Exchange under the symbol
"KPA".
Our wholly-owned subsidiary is the general partner of Innkeepers USA
Limited Partnership. Innkeepers USA Limited Partnership issued 218,307 units of
limited partnership interest to certain sellers of hotel properties. The
unitholders have the option of redeeming all or a portion of those partnership
units. When a unitholder redeems units, we determine whether to redeem the units
for cash or in exchange for our common shares. If we choose to acquire those
units in exchange for common shares rather than cash, then the unitholder will
receive one of our common shares for each unit redeemed. This prospectus relates
to resales of the common shares by the selling shareholders named in the
prospectus, including one seller who is a trustee of our company.
Shares resold under this prospectus may be offered and sold from time
to time in open-market or privately-negotiated transactions that may involve
underwriters, brokers or dealers.
We will not receive any of the cash proceeds from the issuance or sale
of the shares covered by this prospectus, and the registration of the shares
does not necessarily mean that any of them will be issued by us, or offered or
sold by a shareholder.
In part so that we can continue to qualify as a "real estate investment
trust" under the federal income tax laws, our Declaration of Trust generally
does not permit anyone to own more than 9.8% of our outstanding common shares.
This limitation and other limits on who can own our common shares are described
in this prospectus under "Restrictions on Ownership and Transfer."
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is January _____, 2000.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
A WARNING ABOUT FORWARD-LOOKING STATEMENTS..............................2
SECURITIES TO BE OFFERED................................................3
DESCRIPTION OF CAPITAL SHARES...........................................3-4
RESTRICTIONS ON OWNERSHIP AND TRANSFER..................................4-5
FEDERAL INCOME TAX CONSEQUENCES OF THE COMPANY'S STATUS AS A REIT.......6-28
PLAN OF DISTRIBUTION....................................................29-30
EXPERTS.................................................................30
LEGAL MATTERS...........................................................31
WHERE YOU CAN FIND MORE INFORMATION.....................................31
</TABLE>
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A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus, and the documents incorporated by reference, may
contain "forward-looking" statements as described in Section 27A of the
Securities Act of 1993 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements usually include words like "believes,"
"anticipates" and "expects" and describe our expectations for the future. Of
course, these expectations may not be met in important ways for a variety of
reasons. We have described these reasons in our most recent Annual Report on
Form 10-K under the heading "Risk Factors" and the other reports we file with
the SEC, and you should review them before you make any investment decision. We
are not required to update any forward-looking statements we make and we may not
make any updates.
INNKEEPERS USA TRUST
Innkeepers USA Trust (the "Company") is a self-managed, self-advised
real estate investment trust ("REIT") that owns hotel properties. We generally
do business through Innkeepers USA Limited Partnership (the "Partnership"), of
which a wholly-owned subsidiary of the Company is the sole general partner and
owned an approximate 85% interest as of September 30, 1999, and various other
subsidiaries. The Company currently owns 67 hotels containing an aggregate of
8,138 rooms and suites located in 23 states. The hotels include (i) 51 upscale
and one mid-priced extended-stay hotels, including 44 Residence Inn hotels, six
Summerfield Suites hotels, one Sunrise Suites hotel and one TownePlace Suites by
Marriott hotel, and (ii) one upscale and 14 mid-priced limited service hotels,
including 12 Hampton Inn hotels, one Comfort Inn hotel, one Holiday Inn Express
hotel and one Courtyard by Marriott hotel.
The Company has a strategy of using multiple lessees and hotel
management companies for its hotels. The Company leases 60 of the hotels to
Innkeepers Hospitality, Inc. and its affiliates (collectively, the "IH Lessee"),
and leases the six Summerfield Suites hotels and one Sunrise Suites hotel
(collectively, the "Summerfield Hotels") to affiliates of Wyndham International,
Inc. (the "Summerfield Lessee" and, together with the IH Lessee, the "Lessees")
under percentage leases. The percentage leases allow the Company to participate
in revenue from its hotels by providing for the payment of rent based on
percentages of room revenues. The IH Lessee has entered into management
contracts with a subsidiaries of Marriott International, Inc., to manage 27 of
the Residence Inn hotels. The Summerfield Lessee has entered into management
contracts with its affiliate to manage the seven Summerfield Hotels.
Jeffrey H. Fisher is the majority shareholder and Frederic M. Shaw is
the other shareholder of the IH Lessee. Mr. Fisher is the Chairman of the Board,
Chief Executive Officer and President of the Company. Mr. Shaw is the Executive
Vice President and Chief Operating Officer of the Company. Rolf E. Ruhfus, a
trustee of the Company, serves on the Board of Directors of Wyndham
International, Inc. and serves as the non-executive chairman of Wyndham's
all-suites division.
We are a Maryland real estate investment trust. Our executive offices
are located at 306 Royal Poinciana Way, Palm Beach, Florida 33480, and our
telephone number is (561) 835-1800. Our common shares are traded under the New
York Stock Exchange ("NYSE") under the symbol "KPA" and our Series A Cumulative
Convertible Preferred Shares are traded on the NYSE under the symbol KPA pa.
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SECURITIES TO BE OFFERED
This prospectus relates to the offer and sale from time to time of up
to 218,307 common shares that may be issued to certain of our limited partners
- - including one of our trustees, Rolf E. Ruhfus - if and when they tender for
redemption units of limited partnership interest in the Partnership ("Units").
The Partnership issued 157,513 Units beneficially owned by Mr. Ruhfus in
connection with the acquisition of the Summerfield Hotels and 60,794 Units in
connection with the acquisition of its TownePlace Suites by Marriott hotel in
Horsham, Pennsylvania.
DESCRIPTION OF CAPITAL SHARES
Innkeepers USA Trust is authorized to issue 100,000,000 common shares
of beneficial interest, par value $.01 per share, and 20,000,000 preferred
shares of beneficial interest, $.01 par value per share. As of September 30,
1999, there were 34,676,586 common shares outstanding and 4,630,000 Series A
Cumulative Convertible Preferred Shares outstanding. The following is only a
summary of some of the rights of shareholders that might be important to you.
You should refer to our Declaration of Trust and Bylaws for a complete statement
of your rights as a shareholder. Both the Declaration of Trust and the Bylaws
are filed with the SEC as exhibits to the registration statement of which this
prospectus is a part.
COMMON SHARES. As a holder of common shares, you will have one vote per
share on all matters voted on by shareholders, including elections of trustees.
The Declaration of Trust does not provide for cumulative voting in the election
of trustees or for preemptive rights to acquire new shares issued by the
Company. Common shareholders will receive dividends if the Board declares them
out of available funds, after payment of or provision for full cumulative
dividends on and any required redemptions of preferred shares then-outstanding.
In the event of any liquidation or dissolution of the Company, holders of common
shares are entitled to share ratably in the distributable assets of the Company
remaining after satisfaction of the prior preferential rights of the preferred
shares and all other debts and liabilities of the Company.
PREFERRED SHARES. Under the Declaration of Trust, the Board of Trustees
is authorized, without further stockholder action, to issue up to 20,000,000
preferred shares. The Board may issue preferred shares in series, with different
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or other provisions. The Company has
issued 4,630,000 Preferred Shares as 8.625% Series A Cumulative Convertible
Preferred Shares. Each Series A Preferred Share is convertible into 1.4811
common shares at any time and, therefore, the Company has reserved 6,857,493
common shares for issuance upon conversion. The Series A Preferred Shares may be
redeemed by the Company after May 18, 2003 and have no stated maturity or
sinking fund requirements. Each Series A Preferred Share has a liquidation
preference of $25 and is entitled to annual dividends equal to the greater of
(i) $2.15624 ($0.53906 payable quarterly) or (ii) the cash dividend paid or
payable on the number of common shares into which a Series A Preferred Share is
then convertible. The Series A Preferred Shares are described in more detail in
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the Company's registration statement on Form 8-A, which was filed with the SEC
on September 4, 1998.
The Transfer Agent for the common shares and the Series A Preferred
Shares is Harris Trust and Savings Bank, Chicago, Illinois.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
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
federal income tax laws 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. The
Company's Declaration of Trust prohibits direct or indirect ownership (taking
into account applicable ownership provisions of the Internal Revenue Code) of
more than 9.8% of the number of outstanding shares of each class of shares of
beneficial interest 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,
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 (i) the market price (as defined in the Declaration of
Trust) on the date the Company accepts the offer or (ii) the price per share in
the transaction that created such shares-in-trust (or in certain other cases
specified in the Declaration of Trust, such as a gift, the market price on the
date of such 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 Board of Trustees may grant an
exemption from the Ownership Limitation to any person so requesting, so long as
(a) the Board has determined that such exemption will not result in the Company
being "closely held" within the meaning of the federal income tax laws, and (b)
such person provides to the Board such representations and undertakings as the
Board may require.
REDEMPTION OF UNITS
Each limited partner may, subject to certain limitations, require that
the Partnership redeem all or a portion of his Units at any time after a
specified period following the date he acquired the Units, by delivering a
redemption notice to the Partnership. When a limited partner redeems his Units,
the Partnership or the Company can choose to redeem the Units for either:
(1) a number of common shares equal to the number of Units redeemed
(subject to certain adjustments), or
(2) cash in an amount equal to the market value of the number of common
shares he would have received pursuant to clause (1) above.
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Instead of the Partnership redeeming the Units, the Company may, in its
sole discretion, elect to purchase the Units directly from the limited partner
for either common shares or cash, as described above. The Company anticipates
that it generally will elect to exchange the Units for common shares. After a
limited partner redeems Units, he will no longer have a right to receive
distributions with respect to those Units.
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FEDERAL INCOME TAX CONSEQUENCES OF THE COMPANY'S
STATUS AS A REIT
This section summarizes the federal income tax issues that you, as a
shareholder, may consider relevant. Because this section is a summary, it does
not address all of the tax issues that may be important to you. In addition,
this section does not address the tax issues that may be important to
shareholders that are subject to special treatment under the federal income tax
laws, such as insurance companies, tax-exempt organizations, except to the
extent discussed in "--Taxation of Tax-Exempt Shareholders" below, financial
institutions or broker-dealers, and non-U.S. individuals and foreign
corporations, except to the extent discussed in "--Taxation of Non-U.S.
Shareholders" below.
The statements in this section are based on the current federal income
tax laws governing qualification as a REIT. We cannot assure you that new laws,
interpretations thereof, or court decisions, any of which may take effect
retroactively, will not cause any statement in this section to be inaccurate.
- --------------------------------------------------------------------------------
We urge you to consult your own tax advisor regarding the specific tax
consequences to you of owning the common shares and of the Company's election to
be taxed as a REIT. Specifically, you should consult your own tax advisor
regarding the federal, state, local, foreign, and other tax consequences of such
ownership and election, and regarding potential changes in applicable tax laws.
- --------------------------------------------------------------------------------
TAXATION OF THE COMPANY
The Company elected to be taxed as a REIT under the federal income tax
laws commencing with its short taxable year ended December 31, 1994. We believe
that the Company has operated in a manner intended to qualify as a REIT since
its election to be a REIT and the Company intends to continue to so operate.
This section discusses the laws governing the federal income tax treatment of a
REIT and its shareholders. These laws are highly technical and complex.
The Company's qualification as a REIT depends on its ability to meet on
a continuing basis qualification tests set forth in the federal tax laws. Those
qualification tests involve the percentage of income that the Company earns from
specified sources, the percentage of its assets that fall within specified
categories, the diversity of its share ownership, and the percentage of its
earnings that it distributes. We describe the REIT qualification tests in more
detail below. For a discussion of the tax treatment of the Company and its
shareholders if it fails to qualify as a REIT, see "--Failure to Qualify."
If the Company qualifies as a REIT, it generally will not be subject to
federal income tax on the taxable income that it distributes to its
shareholders. The benefit of that tax treatment is that the Company avoids the
"double taxation," or taxation at both the corporate and shareholder levels,
that generally results from owning stock in a corporation. However, the Company
will be subject to federal tax in the following circumstances:
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- The Company will pay federal income tax on taxable income,
including net capital gain, that it does not distribute to its
shareholders during, or within a specified time period after, the
calendar year in which the income is earned.
- The Company may be subject to the "alternative minimum tax" on
any items of tax preference that it does not distribute or
allocate to its shareholders.
- The Company will pay income tax at the highest corporate rate on
(1) net income from the sale or other disposition of property
acquired through foreclosure ("foreclosure property") that it
holds primarily for sale to customers in the ordinary course of
business and (2) other nonqualifying income from foreclosure
property.
- The Company will pay a 100% tax on net income from sales or other
dispositions of property, other than foreclosure property, that
it holds primarily for sale to customers in the ordinary course
of business.
- If the Company fails to satisfy the 75% gross income test or the
95% gross income test, as described below under "--Requirements
for Qualification--Income Tests," and nonetheless continues to
qualify as a REIT because it meets other requirements, it will
pay a 100% tax on (1) the gross income attributable to the
greater of the amounts by which it fails the 75% and 95% gross
income tests, multiplied by (2) a fraction intended to reflect
its profitability.
- If the Company fails to distribute during a calendar year at
least the sum of (1) 85% of its REIT ordinary income for such
year, (2) 95% of its REIT capital gain net income for such year,
and (3) any undistributed taxable income from prior periods, it
will pay a 4% excise tax on the excess of such required
distribution over the amount it actually distributed.
- The Company may elect to retain and pay income tax on its net
long-term capital gain.
- If the Company acquires any asset from a C corporation, or a
corporation generally subject to full corporate-level tax, in a
merger or other transaction in which the Company acquires a basis
in the asset that is determined by reference to the C
corporation's basis in the asset, or another asset, the Company
will pay tax at the highest regular corporate rate applicable if
it recognizes gain on the sale or disposition of such asset
during the 10-year period after it acquires such asset. The
amount of gain on which the Company will pay tax is the lesser of
(1) the amount of gain that it recognizes at the time of the sale
or disposition and (2) the amount of gain that it would have
recognized if it had sold the asset at the time it acquired the
asset. The rule described in this paragraph will apply assuming
that the Company makes an election under IRS Notice 88-19 upon
its acquisition of an asset from a C corporation.
REQUIREMENTS FOR QUALIFICATION
A REIT is a corporation, trust, or association that meets the following
requirements:
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1. it is managed by one or more trustees or directors;
2. its beneficial ownership is evidenced by transferable shares, or
by transferable certificates of beneficial interest;
3. it would be taxable as a domestic corporation, but for the REIT
provisions of the federal income tax laws;
4. it is neither a financial institution nor an insurance company
subject to special provisions of the federal income tax laws;
5. at least 100 persons are beneficial owners of its shares or
ownership certificates;
6. not more than 50% in value of its outstanding shares or ownership
certificates is owned, directly or indirectly, by five or fewer
individuals, as defined in the federal income tax laws to include
specified entities, during the last half of any taxable year;
7. it elects 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 Internal Revenue
Service that must be met to elect and maintain REIT status;
8. it uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the federal
income tax laws; and
9. it meets other qualification tests, described below, regarding
the nature of its income and assets.
The Company must meet requirements 1 through 4 during its entire
taxable year and must meet requirement 5 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. If the Company complies with all the requirements for ascertaining
the ownership of its outstanding shares in a taxable year and has no reason to
know that it violated requirement 6, it will be deemed to have satisfied
requirement 6 for such taxable year. For purposes of determining share ownership
under requirement 6, an "individual" generally includes a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of a
trust permanently set aside or used exclusively for charitable purposes. An
"individual," however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under the federal income tax laws, and
beneficiaries of such a trust will be treated as holding the Company's shares in
proportion to their actuarial interests in the trust for purposes of requirement
6.
The Company believes that it has issued sufficient shares of beneficial
interest with sufficient diversity of ownership to satisfy requirements 5 and 6
set forth above. In addition, the Company's Declaration of Trust restricts the
ownership and transfer of its outstanding shares of beneficial interest so that
it should continue to satisfy requirements 5 and 6. The provisions of the
Declaration of Trust restricting the ownership and transfer of the common shares
are described in "Restrictions on Ownership of Shares of Beneficial Interest."
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The Company currently has a significant number of wholly-owned
corporate subsidiaries and may have additional corporate subsidiaries in the
future. A corporation that is a "qualified REIT subsidiary" is not treated as a
corporation separate from its parent REIT. All assets, liabilities, and items of
income, deduction, and credit of a "qualified REIT subsidiary" are 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. The Company's current corporate subsidiaries are
"qualified REIT subsidiaries." Thus, in applying the requirements described
herein, those subsidiaries and any other "qualified REIT subsidiary" that the
Company acquires or forms will be ignored, and all assets, liabilities, and
items of income, deduction, and credit of each such subsidiary will be treated
as assets, liabilities, and items of income, deduction, and credit of the
Company.
In the case of a REIT that is a partner in a partnership, the REIT is
treated as owning its proportionate share of the assets of the partnership and
as earning its allocable share of the gross income of the partnership for
purposes of the applicable REIT qualification tests. Thus, the Company's
proportionate share of the assets, liabilities, and items of income of the
Partnership, its subsidiary partnerships, and any other partnership in which the
Company acquires an interest are treated as assets and gross income of the
Company for purposes of applying the various REIT qualification requirements.
INCOME TESTS
The Company must satisfy two gross income tests annually to maintain
its qualification as a REIT. First, at least 75% of its gross income for each
taxable year must consist of defined types of income that it derives, directly
or indirectly, from investments relating to real property or mortgages on real
property or temporary investment income. Qualifying income for purposes of the
75% gross income test includes:
- rents from real property;
- interest on debt secured by mortgages on real property or on
interests in real property; and
- dividends or other distributions on and gain from the sale of
shares in other REITs.
Second, in general, at least 95% of the Company's gross income for each
taxable year must consist of income that is qualifying income for purposes of
the 75% gross income test, dividends, other types of interest, gain from the
sale or disposition of stock or securities, or any combination of the foregoing.
Gross income from the sale of property that the Company holds primarily for sale
to customers in the ordinary course of business is excluded from both income
tests. The following paragraphs discuss the specific application of these tests
to the Company.
Rents. Pursuant to percentage leases, the Lessees lease from the
Partnership and the subsidiary partnerships (together, the "Innkeepers
Partnerships") the land, buildings, improvements, furnishings and equipment
comprising the hotels for up to a 13-year period. The percentage leases provide
that the Lessees are obligated to pay (1) the greater of a base rent or
percentage rent and (2) other additional charges. The percentage rent is
calculated by multiplying fixed percentages by the
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gross room revenues above and below established thresholds for each of the
hotels. The base rent accrues and is required to be paid monthly. Percentage
rent is due monthly or quarterly.
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:
- the intent of the parties;
- the form of the agreement;
- the degree of control over the property that is retained by the
property owner, such as whether the lessee has substantial
control over the operation of the property or whether the lessee
is required simply to use its best efforts to perform its
obligations under the agreement; and
- the extent to which the property owner retains the risk of loss
with respect to the property, such as whether the lessee bears
the risk of increases in operating expenses or the risk of damage
to the property.
In addition, federal income tax law 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:
- the service recipient is in physical possession of the property;
- the service recipient controls the property;
- the service recipient has a significant economic or possessory
interest in the property - such as whether 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;
- the service provider does not bear any risk of substantially
diminished receipts or substantially increased expenditures if
there is nonperformance under the contract;
- the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service
recipient; and
- 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.
The Company believes that the percentage leases will be treated as true
leases for federal income tax purposes. Such belief is based, in part, on the
following facts:
- the Innkeepers Partnerships and the Lessees intend for their
relationship to be that of a
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lessor and lessee and such relationship is documented by lease
agreements;
- the Lessees have the right to the exclusive possession, use, and
quiet enjoyment of the hotels during the term of the percentage
leases;
- the Lessees bear the cost of, and are responsible for, day-to-day
maintenance and repair of the hotels, other than the cost of
maintaining underground utilities and structural elements and the
cost of certain capital improvements, and dictate how the hotels
are operated, maintained, and improved;
- 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 and personal property taxes, property and casualty insurance
premiums (other than with respect to the Summerfield Hotels,
where the Summerfield Lessee is responsible for such premiums),
the cost of replacement or refurbishment of furniture, fixtures
and equipment, and certain capital expenditures;
- the Lessees benefit from any savings in the costs of operating
the hotels during the term of the percentage leases;
- in the event of damage to or destruction of a hotel, generally
the applicable Lessee is at economic risk because it is obligated
either (A) to restore the property to its prior condition, in
which event it will bear all costs of such restoration in excess
of any insurance proceeds, or (B) to purchase the hotel for an
amount generally equal to the fair market value of the property,
less any insurance proceeds;
- each Lessee has indemnified the applicable Innkeepers Partnership
against all liabilities imposed on the Innkeepers Partnerships
during the term of the percentage leases by reason of (A) injury
to persons or damage to property occurring at the hotels, (B) its
use, management, maintenance, or repair of the hotels, (C) any
environmental liability caused by acts or grossly negligent
failures to act of the Lessee, (D) taxes and assessments in
respect of the hotels that are the obligation of the Lessee, or
(E) any breach of the percentage leases or of any sublease of a
hotel by the Lessee;
- the Lessees are obligated to pay substantial fixed rent for the
period of use of the hotels;
- the Lessees stand to incur substantial losses or reap substantial
gains depending on how successfully they operate the hotels;
- the Innkeepers Partnerships cannot use the hotels concurrently to
provide significant services to entities unrelated to the
Lessees; and
- 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.
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 Innkeepers 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 base rent, the percentage rent, and the additional
charges to constitute "rents from real property," the following conditions must
be met:
- First, the rent must not be based, in whole or in part, on the
income or profits of any person, but may be based on a fixed
percentage or percentages of receipts or sales.
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<PAGE> 15
- Second, neither the Company nor a direct or indirect owner of 10%
or more of its shares of beneficial interest may own, actually or
constructively, 10% or more of a tenant from whom the Company
receives rent.
- Third, all of the rent received under a lease of real property
will not qualify as "rents from real property" unless the rent
attributable to the personal property leased in connection with
such lease is no more than 15% of the total rent received under
the lease.
- Finally, the Company generally must not operate or manage its
real property or furnish or render services to its tenants, other
than through an "independent contractor" who is adequately
compensated and from whom the Company does not derive revenue.
However, the Company need not provide services through an
"independent contractor," but instead may provide services
directly, if the services are "usually or customarily rendered"
in connection with the rental of space for occupancy only and are
not considered to be provided for the tenants' convenience. In
addition, the Company may provide a minimal amount of
"noncustomary" services to the tenants of a property, other than
through an independent contractor, as long as its income from the
services does not exceed 1% of its income from the related
property.
As stated above, the percentage rent must not be based in whole or in
part on the income or profits of any person. Percentage rent, however, will
qualify as "rents from real property" if it is based on percentages of receipts
or sales and the percentages:
- are fixed at the time the percentage leases are entered into;
- 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
- 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. Because the percentage rent is based on fixed percentages of the gross
room revenues from the hotels that are established in the percentage leases, and
the Company has represented that the percentages (1) will not be renegotiated
during the term of the percentage leases in a manner that has the effect of
basing the percentage rent on income or profits and (2) 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.
Second, the Company must not own, actually or constructively, 10% or
more of any lessee (a "related party tenant"). The constructive ownership rules
of the federal income tax laws generally provide that, if 10% or more in value
of the Company's shares of beneficial interest is owned, directly or indirectly,
by or for any person, the Company is considered as owning the stock owned,
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directly or indirectly, by or for such person. The Company does not own directly
any stock in any Lessee. The Company's Declaration of Trust prohibits any
shareholder from transferring common and preferred shares if the transfer would
cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of its real property. 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 hotel properties that it
acquires in the future, it will not lease any property to a "related party
tenant." However, because the constructive ownership rules are broad and it is
not possible to monitor continually direct and indirect transfers of the shares
of beneficial interest, the Company cannot guarantee that such transfers or
other events of which it has no knowledge will not cause it to own
constructively own 10% or more of a lessee at some future date.
Third, the Company's rent attributable to personal property leased in
connection with a hotel must not exceed 15% of the rent received under the
lease. The rent 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 adjusted basis ratio has
exceeded 15% for certain taxable years. As a consequence, the portion of the
rent received with respect to those hotels in those taxable years that is
attributable to personal property did not and does not qualify as rents from
real property. The amount of disqualified income from those hotels, however, did
not and will not prevent the Company from qualifying as a REIT or subject it to
any federal income taxation. With respect to the Company's other hotels, if the
adjusted basis ratio for 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
or an Innkeepers 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 it acquires will not
cause it to lose its REIT status or subject it to any federal income taxation.
There can be no assurance, however, that the Internal Revenue Service will not
assert that the personal property that the Company acquires has a value in
excess of its appraised value, or that a court will not uphold such assertion.
Finally, neither the Company nor the Innkeepers Partnerships can
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 they do not derive or receive any income.
However, the Company may provide a minimal amount of noncustomary services to
the tenants of a property, other than through an independent contractor, as long
as its income from the services does not exceed 1% of its income from the
related property. Provided that the percentage leases are respected as true
leases, the Company should satisfy that requirement because neither the Company
nor any Innkeepers Partnership performs, nor will it perform, any services other
than customary ones for the Lessees. Furthermore, the Company has
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<PAGE> 17
represented that, with respect to each other hotel property 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 rent likely
would be disqualified as "rents from real property" because the Innkeepers
Partnerships 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.
Additional Charges. In addition to the rent, the Lessees are required
to pay the additional charges to the Innkeepers Partnerships. To the extent that
the additional charges represent either (1) reimbursements of amounts that the
Lessees are obligated to pay to third parties or (2) 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 accrued on the late payment of the rent 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.
Interest. The term "interest" generally does not include any amount
received or accrued 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.
Foreclosure Property. The Company will incur a 100% tax on the net
income derived from any sale or other disposition of property, other than
foreclosure property, that the Company holds primarily for sale to customers in
the ordinary course of a trade or business. The Company believes that none of
its assets is held for sale to customers and that a sale of any such asset would
not be in the ordinary course of business. Whether a REIT holds an asset
"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 asset. Nevertheless, the Company will
attempt to comply with the terms of safe-harbor provisions in the federal income
tax laws prescribing when an asset sale will not be characterized as a
prohibited transaction. The Company cannot assure investors, however, that it
can comply with such safe-harbor provisions or that it will avoid owning
property that may be characterized as property that is held "primarily for sale
to customers in the ordinary course of a trade or business."
Hedging Activities. In the future, the Company and/or an Innkeepers
Partnership may enter into hedging transactions with respect to one or more of
its assets or liabilities. Those hedging activities may include entering into
interest rate swaps, caps, and floors, options to purchase such items, and
futures and forward contracts. To the extent that the Company or an Innkeepers
Partnership enters into an interest rate swap or cap contract, option, futures
contract, forward rate agreement, or any similar financial instrument to hedge
indebtedness incurred to acquire or carry "real estate assets," any periodic
income or gain from the disposition of such contract should be qualifying income
for purposes of the 95% gross income test, but not the 75% gross income test. To
the extent that the Company or an Innkeepers Partnership hedges with other types
of financial instruments, or in other situations, it is not entirely clear how
the income from those transactions will be treated for purposes of the gross
income tests. The Company intends to structure any hedging transactions in a
manner that does not jeopardize its status as a REIT.
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<PAGE> 18
Failure to Satisfy Income Tests. The Company's investment, through the
Innkeepers Partnerships, in the hotels in major part gives rise to income that
is qualifying income for purposes of both gross income tests. The Company
believes that, other than the late charges attributable to rent, which are
treated as interest that qualifies for the 95% gross income test but not the 75%
gross income test, those revenues qualify as rents from real property for
purposes of both gross income tests. Gains on sales of the hotels or a sale of
the Company's interest in the Partnership generally will be qualifying income
for purposes of both gross income tests. The Company anticipates that income on
its other investments will not result in its failing either gross income test
for any year.
If, however, the Company fails to satisfy one or both of the gross
income tests for any taxable year, the Company nevertheless may qualify as a
REIT for such year if it qualifies for relief under the federal income tax laws.
Those relief provisions generally will be available if:
- its failure to meet such tests is due to reasonable cause and not
due to willful neglect;
- it attaches a schedule of the sources of its income to its tax
return; and
- any incorrect information on the schedule was not due to fraud
with intent to evade tax.
The Company cannot predict, however, whether in all circumstances it
would qualify for the relief provisions. In addition, as discussed above in
"--Taxation of the Company," even if the relief provisions apply, the Company
would incur a 100% tax on the gross income attributable to the greater of the
amounts by which it fails the 75% and 95% gross income tests, multiplied by a
fraction intended to reflect its profitability.
ASSET TESTS
To maintain its qualification as a REIT, the Company also must satisfy
two asset tests at the close of each quarter of each taxable year. First, at
least 75% of the value of its total assets must consist of:
- cash or cash items, including receivables;
- government securities;
- interests in real property, including leaseholds and options to
acquire real property and leaseholds;
- interests in mortgages on real property;
- stock in other REITs; and
- investments in stock or debt instruments during the one-year
period following the receipt of new capital that the Company
raises through equity offerings or offerings of debt with at
least a five-year term.
The second asset test has two components:
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- First, of the Company's investments not included in the 75% asset
class, the value of its interest in any one issuer's securities
may not exceed 5% of the value of its total assets; and
- Second, the Company may not own more than 10% of any one issuer's
outstanding voting securities.
For purposes of both components of the second asset test, the term "securities"
does not include the Company's stock in any qualified REIT subsidiary or its
interest in any Innkeepers Partnership.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, it would not lose its REIT status if (1) it satisfied the
asset tests at the close of the preceding calendar quarter and (2) the
discrepancy between the value of its assets and the asset test requirements
arose from changes in the market values of its assets and was not wholly or
partly caused by the acquisition of one or more nonqualifying assets. If the
Company did not satisfy the condition described in clause (2) of the preceding
sentence, it still could avoid disqualification as a REIT by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which the
discrepancy arose.
The U.S. House and Senate recently passed legislation (the "Extender
Bill") that would allow the Company to own up to 100% of the stock of taxable
REIT subsidiaries ("TRSs"), which could perform activities unrelated to the
Company's tenants, such as third-party management, development, and other
independent business activities, as well as provide services to the Company's
tenants. The Company and a subsidiary would elect for the subsidiary to be
treated as a TRS. The Extender Bill also would prevent the Company from owning
more than 10% of the voting power or value of the stock of a taxable subsidiary
that is not treated as a TRS. Current law only prevents the Company from owning
more than 10% of the voting stock of a taxable subsidiary. Overall, no more than
20% of the Company's assets could consist of securities of TRSs under the
Extender Bill. President Clinton is expected to sign the Extender Bill, in which
case the TRS provisions of the Extender Bill would apply for taxable years
beginning after December 31, 2000. There can be no assurance that the Extender
Bill will be enacted into law.
DISTRIBUTION REQUIREMENTS
Each taxable year, the Company must distribute dividends, other than
capital gain dividends and deemed distributions of retained capital gain, to its
shareholders in an aggregate amount at least equal to:
- the sum of (1) 95% of its "REIT taxable income," computed without
regard to the dividends paid deduction and its net capital gain
or loss, and (2) 95% of its after-tax net income, if any, from
foreclosure property; minus
- the sum of specified items of noncash income.
The Company must pay such distributions in the taxable year to which they
relate, or in the following taxable year if it declares the distribution before
it timely files its federal income tax return for such year and pays the
distribution on or before the first regular dividend payment date after such
declaration. Under the Extender Bill, the 95% distribution requirement discussed
above would be
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<PAGE> 20
reduced to 90%. If enacted, that provision of the Extender Bill would apply for
taxable years beginning after December 31, 2000. Again, there can be no
assurance that the Extender Bill will be enacted into law.
The Company will pay federal income tax on taxable income, including
net capital gain, that it does not distribute to its shareholders. Furthermore,
if (a) the Company fails to distribute during a calendar year, or by the end of
January following such calendar year in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, at least the sum of:
- 85% of its REIT ordinary income for such year;
- 95% of its REIT capital gain income for such year; and
- any undistributed taxable income from prior periods,
then (b) the Company will incur a 4% nondeductible excise tax on the excess of
such required distribution over the amount it actually distributed.
The Company may elect to retain and pay income tax on the net long-term
capital gain it receives in a taxable year. See "--Taxation of Taxable U.S.
Shareholders." If the Company so elects, it will be treated as having
distributed any such retained amount for purposes of the 4% excise tax described
above. The Company has made, and intends to continue to make, timely
distributions sufficient to satisfy the annual distribution requirements.
It is possible that, from time to time, the Company may experience
timing differences between (1) the actual receipt of income and actual payment
of deductible expenses and (2) the inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income. For example, under some of
the percentage leases, the percentage rent is not due until 30 days after the
end of the calendar quarter. In that case, the applicable Innkeepers Partnership
still would be required to recognize as income the excess of the percentage rent
over the base rent paid by the Lessee in the calendar quarter to which such
excess relates. In addition, the Company may not deduct recognized capital
losses from its "REIT taxable income." 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. As a result of the foregoing, the Company may have
less cash than is necessary to distribute all of its taxable income and thereby
avoid corporate income tax and the 4% excise tax. In such a situation, the
Company may need to borrow funds or issue additional shares of beneficial
interest.
The Company may be able to correct a failure to meet the 95%
distribution requirement for a year by paying "deficiency dividends" to its
shareholders in a later year. The Company may include such deficiency dividends
in its deduction for dividends paid for the earlier year. Although the Company
may be able to avoid income tax on amounts distributed as deficiency dividends,
it will be required to pay interest to the Internal Revenue Service based upon
the amount of any deduction it takes for deficiency dividends.
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RECORDKEEPING REQUIREMENTS
The Company must maintain records in order to qualify as a REIT. In
addition, to avoid a monetary penalty, it must request on an annual basis
information from its shareholders designed to disclose the actual ownership of
its outstanding shares of beneficial interest. The Company has complied, and
intends to continue to comply, with such requirements.
FAILURE TO QUALIFY
If the Company fails to qualify as a REIT in any taxable year, and no
relief provision applies, it would be subject to federal income tax and any
applicable alternative minimum tax on its taxable income at regular corporate
rates. In calculating its taxable income in a year in which it fails to qualify
as a REIT, the Company would not be able to deduct amounts paid out to
shareholders. In fact, it would not be required to distribute any amounts to
shareholders in such year. In such event, to the extent of its current and
accumulated earnings and profits, all distributions to shareholders would be
taxable as ordinary income. Subject to limitations, corporate shareholders might
be eligible for the dividends received deduction. Unless the Company qualified
for relief under specific statutory provisions, it also would be disqualified
from taxation as a REIT for the four taxable years following the year during
which it ceased to qualify as a REIT. The Company cannot predict whether in all
circumstances it would qualify for such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, a taxable "U.S.
shareholder" must take into account as ordinary income distributions made out of
the Company's current or accumulated earnings and profits that the Company does
not designate as capital gain dividends or retained long-term capital gain. A
U.S. shareholder will not qualify for the dividends received deduction generally
available to corporations. As used herein, the term "U.S. shareholder" means a
holder of shares of beneficial interest that for U.S. federal income tax
purposes is:
- a citizen or resident of the United States;
- a corporation, partnership, or other entity created or organized
in or under the laws of the United States or of a political
subdivision thereof;
- an estate whose income from sources outside 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
- any trust with respect to which (1) a U.S. court is able to
exercise primary supervision over the administration of such
trust and (2) one or more U.S. persons have the authority to
control all substantial decisions of the trust.
A U.S. shareholder generally will recognize distributions that the
Company designates as capital gain dividends as long-term capital gain without
regard to the period for which the U.S. shareholder has held its common shares.
The Company generally will designate capital gain dividends as either 20% or 25%
rate distributions. A corporate U.S. shareholder, however, may be required to
treat up to 20% of capital gain dividends as ordinary income.
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<PAGE> 22
The Company may elect to retain and pay income tax on the net long-term
capital gain that it receives in a taxable year. In that case, a U.S.
shareholder would be taxed on its proportionate share of the Company's
undistributed long-term capital gain. The U.S. shareholder would receive a
credit or refund for its proportionate share of the tax the Company paid. The
U.S. shareholder would increase the basis in its common shares by the amount of
its proportionate share of the Company's undistributed long-term capital gain,
minus its share of the tax the Company paid.
A U.S. shareholder will not incur tax on a distribution in excess of
the Company's current and accumulated earnings and profits if such distribution
does not exceed the adjusted basis of the U.S. shareholder's common shares.
Instead, such distribution will reduce the adjusted basis of such common shares.
A U.S. shareholder will recognize a distribution in excess of both the Company's
current and accumulated earnings and profits and the U.S. shareholder's adjusted
basis in its common shares 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 a capital asset in the hands of the U.S. shareholder. In addition, if
the Company declares a distribution in October, November, or December of any
year that is payable to a U.S. shareholder of record on a specified date in any
such month, such distribution shall be treated as both paid by the Company and
received by the U.S. shareholder on December 31 of such year, provided that the
Company actually pays the distribution during January of the following calendar
year.
Shareholders may not include in their individual income tax returns any
of the Company's net operating losses or capital losses. Instead, the Company
generally would carry over such losses for potential offset against its future
income. 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 some 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 its 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 U.S. SHAREHOLDERS ON THE DISPOSITION OF THE COMMON SHARES
In general, a U.S. shareholder who is not a dealer in securities must
treat any gain or loss realized upon a taxable disposition of the common shares
as long-term capital gain or loss if the U.S. shareholder has held the common
shares for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. shareholder must treat any loss upon a sale or exchange of
common shares held by such shareholder for six months or less as a long-term
capital loss to the extent of capital gain dividends and other distributions
from the Company that the U.S. shareholder treats as long-term capital gain. All
or a portion of any loss that a U.S. shareholder realizes upon a taxable
disposition of the common shares may be disallowed if the U.S. shareholder
purchases other common shares within 30 days before or after the disposition.
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CAPITAL GAINS AND LOSSES
A taxpayer generally must hold a capital asset for more than one year
for gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%.
The maximum tax rate on long-term capital gain applicable to noncorporate
taxpayers is 20% for sales and exchanges of assets held for more than one year.
The maximum tax rate on long-term capital gain from the sale or exchange of
"section 1250 property," or depreciable real property, 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 that the Company
designates as capital gain dividends and any retained capital gain that it is
deemed to distribute, the Company generally may designate whether such a
distribution is taxable to its noncorporate shareholders at a 20% or 25% 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 gain or ordinary income may affect the deductibility of
capital losses. A noncorporate taxpayer may deduct capital losses not offset by
capital gains against its ordinary income only up to a maximum annual amount of
$3,000. A noncorporate taxpayer may carry forward unused capital losses
indefinitely. A corporate taxpayer must pay tax on its net capital gain 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 shareholders and to the Internal Revenue
Service the amount of distributions it pays during each calendar year and the
amount of tax it withholds, if any. Under the backup withholding rules, a
shareholder may be subject to backup withholding at the rate of 31% with respect
to distributions unless such holder (1) is a corporation or comes within another
exempt category and, when required, demonstrates this fact or (2) 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
its correct taxpayer identification number also may be subject to penalties
imposed by the Internal Revenue 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 Treasury Department has issued final regulations regarding the backup
withholding rules as applied to non-U.S. shareholders. Those regulations alter
the procedural aspects of backup withholding compliance and are effective for
distributions made after December 31, 2000.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts and annuities, generally are
exempt from federal income taxation. However, they are subject to tax on their
unrelated business taxable income. While many investments in real estate
generate unrelated business taxable income, the Internal Revenue Service has
issued a published ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute unrelated business taxable income,
provided that the exempt employee pension trust does not otherwise use the
shares of the REIT in an unrelated trade or business of the pension trust. Based
on that ruling, amounts that the Company distributes to tax-exempt shareholders
generally should not constitute unrelated business taxable income.
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If, however, a tax-exempt shareholder were to finance its acquisition
of the common shares with debt, a portion of the income that it receives from
the Company would constitute unrelated business taxable income 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 special
provisions of the federal income tax laws are subject to different unrelated
business taxable income rules, which generally will require them to characterize
distributions that they receive from the Company as unrelated business taxable
income. Finally, a qualified employee pension or profit sharing trust that owns
more than 10% of the Company's shares of beneficial interest may be required to
treat a percentage of the dividends that it receives from the Company as
unrelated business taxable income. Such percentage is equal to the gross income
that the Company derives from an unrelated trade or business, determined as if
it were a pension trust, divided by its total gross income for the year in which
it pays the dividends. That rule applies to a pension trust holding more than
10% of the Company's shares of beneficial interest only if:
- the percentage of the Company's dividends that the tax-exempt
trust must treat as unrelated business taxable income is at least
5%;
- the Company qualifies as a REIT by reason of the modification of
the rule requiring that no more than 50% of its shares be owned
by five or fewer individuals, which modification allows the
beneficiaries of the pension trust to be treated as holding its
shares of beneficial interest in proportion to their actuarial
interests in the pension trust; and
- either (1) one pension trust owns more than 25% of the value of
the Company's shares of beneficial interest or (2) a group of
pension trusts individually holding more than 10% of the value of
its shares of beneficial interest collectively owns more than 50%
of the value of its shares of beneficial interest.
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. This section
is only a summary of such rules. WE URGE NON-U.S. SHAREHOLDERS TO CONSULT THEIR
OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX
LAWS ON OWNERSHIP OF THE COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
A non-U.S. shareholder that receives a distribution that is not
attributable to gain from the Company's sale or exchange of U.S. real property
interests, as defined below, and that the Company does not designate as a
capital gain dividend or retained capital gain will recognize ordinary income to
the extent that the Company pays such distribution out of its current or
accumulated earnings and profits. A withholding tax equal to 30% of the gross
amount of the distribution ordinarily will apply to such distribution unless an
applicable tax treaty reduces or eliminates the tax. However, if a distribution
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 on the distribution at graduated rates, in the same manner as
U.S. shareholders are taxed with respect to
21
<PAGE> 25
such distributions. The non-U.S. shareholder also may be subject to the 30%
branch profits tax if it is a non-U.S. corporation. The Company plans to
withhold U.S. income tax at the rate of 30% on the gross amount of any such
distribution paid to a non-U.S. shareholder unless either:
- a lower treaty rate applies and the non-U.S. shareholder files
the required form evidencing eligibility for that reduced rate
with the Company; or
- the non-U.S. shareholder files an IRS Form 4224 with the Company
claiming that the distribution is effectively connected income.
The Treasury Department has issued final regulations that modify the
manner in which the Company will comply with the withholding requirements. Those
regulations are effective for distributions made after December 31, 2000.
A non-U.S. shareholder will not incur tax on a distribution in excess
of the Company's current and accumulated earnings and profits if such
distribution does not exceed the adjusted basis of the shareholder's common
shares. Instead, the distribution will reduce the adjusted basis of the
shareholder's common shares. A non-U.S. shareholder will be subject to tax on a
distribution that exceeds both the Company's current and accumulated earnings
and profits and the adjusted basis of its common shares, if the non-U.S.
shareholder otherwise would be subject to tax on gain from the sale or
disposition of its common shares, as described below. Because the Company
generally cannot determine at the time it makes a distribution whether the
distribution will exceed its current and accumulated earnings and profits, it
normally will withhold tax on the entire amount of any distribution at the same
rate as it would withhold on a dividend. However, a non-U.S. shareholder may
obtain a refund of amounts that the Company withholds if it is later determined
that a distribution in fact exceeded the Company's current and accumulated
earnings and profits.
The Company must withhold 10% of any distribution that exceeds its
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 it does not do so, it will withhold at a rate of 10% on any
portion of a distribution not subject to withholding at a rate of 30%.
For any year in which the Company qualifies as a REIT, a non-U.S.
shareholder will incur tax on distributions that are attributable to gain from
its sale or exchange of "U.S. real property interests" under special provisions
of the federal income tax laws ("FIRPTA"). The term "U.S. real property
interests" includes interests in real property and stock in corporations at
least 50% of whose assets consists of interests in real property. Under those
rules, a non-U.S. shareholder is taxed on distributions attributable to gain
from sales of U.S. real property interests as if such gain were effectively
connected with a U.S. business of the non-U.S. shareholder. A non-U.S.
shareholder thus would be taxed on a distribution attributable to gain from
sales of U.S. real property interests 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 a nonresident alien
individual. A non-U.S. corporate shareholder not entitled to treaty relief or
exemption also may be subject to the 30% branch profits tax on such a
distribution. The Company must withhold 35% of any distribution that it could
designate as a capital gain dividend. A non-U.S. shareholder may receive a
credit against its tax liability for the amount withheld.
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<PAGE> 26
A non-U.S. shareholder generally will not incur tax under FIRPTA as
long as at all times non-U.S. persons hold, directly or indirectly, less than
50% in value of the Company's outstanding shares of beneficial interest. The
Company cannot assure you that test will be met. However, a non-U.S. shareholder
that owned, actually or constructively, 5% or less of the common shares at all
times during a specified testing period will not incur tax under FIRPTA if the
common shares are "regularly traded" on an established securities market. If the
gain on the sale of the common shares were taxed under FIRPTA, a non-U.S.
shareholder would be taxed in the same manner 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. Furthermore, a non-U.S. shareholder will incur tax on gain not
subject to FIRPTA if:
- the gain 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
- the non-U.S. shareholder is a nonresident alien individual who
was present in the U.S. for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the
non-U.S. shareholder will incur a 30% tax on his capital gains.
OTHER TAX CONSEQUENCES
STATE AND LOCAL TAXES
The Company, the Innkeepers Partnerships, and you may be subject to
state and local tax in various states and localities, including those states and
localities in which the Company or you transact business, own property, or
reside. The state and local tax treatment in such jurisdictions may differ from
the federal income tax treatment described above. Consequently, you should
consult your own tax advisor regarding the effect of state and local tax laws
upon the ownership of the common shares.
TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE INNKEEPERS PARTNERSHIPS
The following discussion summarizes the federal income tax
considerations applicable to the Company's direct or indirect investments in the
Innkeepers Partnerships. 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 is entitled to include in its income its distributive share
of an Innkeepers Partnership's income and to deduct its distributive share of a
hotel partnership's losses only if the partnership is classified for federal
income tax purposes as a partnership rather than as a corporation or an
association taxable as a corporation. An organization will be classified as a
partnership, rather than as a corporation, for federal income tax purposes if
it:
- is treated as a partnership under Treasury regulations, effective
January 1, 1997, relating to entity classification (the
"check-the-box regulations"); and
23
<PAGE> 27
- is not a "publicly traded" partnership.
Under the check-the-box regulations, an unincorporated entity with at
least two members may elect to be classified either as an association taxable as
a corporation 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 Partnership (and certain other Innkeepers
Partnerships), will be respected for all periods prior to January 1, 1997 if:
- the entity had a reasonable basis for its claimed classification;
- 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
- 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 Innkeepers Partnership in existence prior to January 1, 1997
reasonably claimed partnership classification under the Treasury regulations
relating to entity classification in effect prior to January 1, 1997. In
addition, each Innkeepers Partnership intends to continue to be classified as a
partnership for federal income tax purposes and will not elect to be treated 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 not, however, be treated as a corporation for any taxable year
if 90% or more of the partnership's gross income for such year consists of
passive-type income, including real property rents, gains from the sale or other
disposition of real property, interest, and dividends (the "90% passive income
exception").
Treasury regulations 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:
- all interests in the partnership were issued in a transaction or
transactions that were not required to be registered under the
Securities Act of 1933, as amended; and
- 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 partnership, grantor trust, or S corporation that owns an interest
in the partnership is treated as a partner in the partnership only if:
24
<PAGE> 28
- substantially all of the value of the owner's interest in the
entity is attributable to the entity's direct or indirect
interest in the partnership; and
- a principal purpose of the use of the entity is to permit the
partnership to satisfy the 100-partner limitation.
Each Innkeepers Partnership qualifies for the private placement exclusion.
If an Innkeepers Partnership is considered a publicly traded
partnership because it is deemed to have more than 100 partners, it should not
be treated as a corporation because it should be eligible for the 90% passive
income exception. If, however, for any reason an Innkeepers 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 Consequences of the Company's Status as a REIT -- Requirements for
Qualification -- Income Tests" and "-- Requirements for Qualification -- Asset
Tests." In addition, any change in the Innkeepers Partnership's status for tax
purposes might be treated as a taxable event, in which case the Company might
incur tax liability without any related cash distribution. See "Federal Income
Tax Consequences of the Company's Status as a REIT -- Requirements for
Qualification -- Distribution Requirements." Further, items of income and
deduction of the Innkeepers Partnership would not pass through to its partners,
and its partners would be treated as shareholders for tax purposes.
Consequently, the Innkeepers 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 the Innkeepers
Partnership's taxable income.
INCOME TAXATION OF THE INNKEEPERS PARTNERSHIPS AND THEIR PARTNERS
Partners, Not Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company is required
to take into account its allocable share of each Innkeepers Partnership's
income, gains, losses, deductions, and credits for any taxable year of such
Innkeepers Partnership ending within or with its taxable year, without regard to
whether the Company has received or will receive any distribution from the
partnership.
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 if they do not comply with the
provisions of the federal income tax laws governing partnership allocations. 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 Innkeepers Partnership's allocations of
taxable income, gain, and loss are intended to comply with the requirements of
the federal income tax laws governing partnership allocations.
Tax Allocations With Respect to Contributed Properties. 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 in a manner such that the contributing partner is charged with, or
benefits from, respectively, 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
25
<PAGE> 29
is generally equal to the difference between the fair market value of
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. Such allocations are solely for
federal income tax purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners.
The Partnership was formed by way of contributions of appreciated
property and has received contributions of appreciated property since the
Company's initial public offering. The partnership agreement governing the
Partnership requires such allocations to be made in a manner consistent with the
federal income tax laws governing partnership allocations.
Under the partnership agreement for the Partnership, depreciation or
amortization deductions of the Partnership generally are allocated among the
partners in accordance with their respective interests in the Partnership,
except to the extent that the Partnership is required under the federal income
tax laws governing partnership allocations to use a method for allocating tax
depreciation deductions attributable to contributed properties that results in
the Company receiving a disproportionate share of such deductions. In addition,
gain on the sale of a contributed hotel will be specially allocated to the
contributing partners to the extent of any "built-in" gain with respect to such
hotel for federal income tax purposes.
Basis in Partnership Interest. The Company's adjusted tax basis in the
Partnership (through its wholly-owned subsidiary) generally is equal to the
following:
- the amount of cash and the basis of any other property the
Company has contributed to the Partnership;
- increased by (1) its allocable share of the Partnership's income
and (2) its allocable share of the Partnership's indebtedness;
and
- reduced, but not below zero, by (1) its allocable share of the
Partnership's loss and (2) the amount of cash distributed to the
Company, including constructive distributions resulting from a
reduction in its share of the Partnership's indebtedness.
If the allocation of the Company's distributive share of the Partnership's loss
would reduce its adjusted tax basis in its partnership interest below zero, the
recognition of such loss will be deferred until such time as the recognition of
such loss would not reduce its adjusted tax basis below zero. To the extent that
the Partnership's distributions, or any decrease in the Company's share of the
indebtedness of the Partnership, which is considered a constructive cash
distribution, would reduce its adjusted tax basis below zero, such distributions
would 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 Partnership has been held for
longer than one year, the distributions and constructive distributions will
constitute long-term capital gain.
Depreciation Deductions Available to the Innkeepers Partnerships. To
the extent that an Innkeepers Partnership has acquired a hotel for cash, its
initial basis in such hotel for federal income tax purposes generally was equal
to the purchase price paid by the Innkeepers Partnership. The Innkeepers
Partnerships depreciate such depreciable hotel property under either the
modified accelerated cost recovery system of depreciation ("MACRS") or the
alternative depreciation system
26
<PAGE> 30
of depreciation ("ADS"). The Innkeepers Partnerships use MACRS for furnishings
and equipment. Under MACRS, the Innkeepers 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, the Innkeepers
Partnerships place more than 40% of their 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 Innkeepers Partnerships use ADS for buildings and
improvements. Under ADS, the Innkeepers Partnerships generally depreciate such
buildings and improvements over a 40-year recovery period using a straight line
method and a mid-month convention.
To the extent that the Partnership has acquired hotels in exchange for
Units, its 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 Partnership generally depreciates
such depreciable property for federal income tax purposes over the same
remaining useful lives and under the same methods used by the transferors. The
Partnership's tax depreciation deductions are allocated among the partners in
accordance with their respective interests in the Partnership, except to the
extent that the Partnership is required under the federal income tax laws 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 AN INNKEEPERS PARTNERSHIP'S PROPERTY
Generally, any gain realized by an Innkeepers 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 on the disposition of contributed properties will
be allocated first to the partners of an Innkeepers Partnership to the extent of
their "built-in gain" on those properties for federal income tax purposes. The
partners' "built-in gain" on the contributed properties sold will equal the
excess of the partners' proportionate share of the book value of those
properties over the partners' tax basis allocable to those properties at the
time of the sale. Any remaining gain recognized by an Innkeepers Partnership on
the disposition of the contributed properties, and any gain recognized by an
Innkeepers Partnership or the disposition of the other properties, will be
allocated among the partners in accordance with their respective percentage
interests in the partnership.
The Company's share of any gain realized by an Innkeepers Partnership
on the sale of any property held by the partnership as inventory or other
property held primarily for sale to customers in the ordinary course of the
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 Consequences of the
Company's Status as a REIT -- Requirements for Qualification -- Income Tests."
The Company, however, does not presently intend to allow any Innkeepers
Partnership to acquire or hold any property that represents inventory or other
property held primarily for sale to customers in the ordinary course of the
Company's or any Innkeepers Partnership's trade or business.
27
<PAGE> 31
SELLING SHAREHOLDERS
The "Selling Shareholders" named below may receive common shares upon
redemption of Units and one of the Selling Shareholders, Rolf E. Ruhfus, as a
trustee of the Company, is an affiliate of the Company. Because the Selling
Shareholders may redeem all, some or none of their 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 common shares which may be
offered and sold by the Selling Shareholders pursuant to this prospectus. The
Selling Shareholders may transfer their Units to a transferee prior to tendering
the Units for redemption. In the table below, the Selling Shareholders are
assumed to have redeemed 218,307 Units and received common shares therefor, and
to be selling all such common shares pursuant to this prospectus. The table sets
forth as of September 30, 1999, and as adjusted to reflect the sale of all
218,307 Common shares, certain information regarding the Selling Shareholders'
beneficial ownership of common shares.
<TABLE>
<CAPTION>
Prior to Offering After Offering
-------------------------- ----------------
Common Shares
Registered
Selling Shareholder Shares Owned Hereunder Shares Owned(2)
------------------- ------------ --------- ---------------
<S> <C> <C> <C>
Rolf E. Ruhfus 746,546(1) 157,513 589,033
Brickstone Lodging, L.P. #1 60,794 60,794 0
</TABLE>
- -----------------------------
(1) Includes 729,874 shares issuable upon redemption of Units, 7,500 Series
A Preferred Shares, 5,172 common shares which are subject to vesting
requirements and 4,000 common shares issuable upon the exercise of
vested options granted under the Company's Trustees Share Incentive
Plan.
(3) Assuming all common shares offered hereunder are sold. For Mr. Ruhfus,
this reflects the common shares and Units described in footnote (1)
above, less the 157,513 common shares offered hereunder. The holdings
of Mr. Rufhus will represent approximately 1.7% of all outstanding
common shares of the Company (based on common shares outstanding at
September 30, 1999, assuming no other unitholder redeems Units and
receives common shares therefor, no exercise of outstanding options
and no conversion of outstanding convertible preferred shares).
28
<PAGE> 32
PLAN OF DISTRIBUTION
This prospectus relates to the offer and sale from time to time of
common shares by a Selling Shareholder. The Company is registering the common
shares to which this prospectus relates to provide the holders thereof with
freely tradeable securities, but registration of such shares does not
necessarily mean that any of such shares will be issued by the Company or
offered or sold by the holders thereof.
Common shares may be offered and sold under this prospectus from time
to time to purchasers directly by the Selling Shareholders or their pledgees,
donees, transferees or successors in interest. Alternatively, the Selling
Shareholders or their pledgees, donees, transferees or other successors in
interest may from time to time offer and sell common shares under this
prospectus through brokers, dealers or agents. These offers and sales may be
made from time to time in one or more transactions (which may involve crosses or
block trade transactions, with a broker or dealer acting as principal, agent, or
both) (i) on any exchange or in the over-the-counter market, (ii) other than in
the over-the-counter market, including privately negotiated transactions, or
(iii) in settlement of short sales of the common shares, puts, calls and other
transactions in securities of the Company or derivatives thereof (whether listed
on an exchange or not). The price(s) at which such common shares are offered or
sold may be stipulated by the Selling Shareholders, negotiated by the parties or
at the then-prevailing market price(s). Any brokers, dealers or agents involved
in such transactions may receive compensation in the form of commissions from
the Selling Shareholders or their transferees and/or the purchasers of common
shares for whom they may act as agent. The Selling Shareholders or their
transferees and any brokers, dealers or agents that participate in the
distribution of common shares under this prospectus may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, and any profit
on the sale of common shares by them and any commissions received by any such
brokers, dealers or agents may be deemed to be underwriting commissions under
the Securities Act of 1933.
At the time a particular offer of common shares is made under this
prospectus by the Selling Shareholders or their pledgees, donees or transferees,
a prospectus supplement, if required, may be distributed which will set forth
the name of any transferees of the Units or common shares, any broker-dealers or
agents and any commissions and other terms constituting compensation from the
Selling Shareholders and any other required information. Common shares may be
sold under this prospectus from time to time at varying prices determined at the
time of sale or at negotiated prices.
29
<PAGE> 33
In certain states common shares may be sold only through registered or
licensed brokers or dealers. In addition, in certain states, common 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.
EXPERTS
The consolidated financial statements and related financial statement
schedule of Innkeepers USA Trust, as of December 31, 1998 and 1997, and for each
of the three years in the period ended December 31, 1998 and the combined
financial statements of the IH Lessee as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998 incorporated by
reference in this prospectus have been so incorporated in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
30
<PAGE> 34
LEGAL MATTERS
The validity of the issuance of the common shares offered pursuant to
this prospectus will be passed upon for the Company by Hunton & Williams,
Richmond, Virginia.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available on the SEC's Website at "http://www.sec.gov."
The SEC allows us to "incorporate by reference" into this prospectus
certain information from other documents that we file with them, which means
that we can disclose important information by referring to those documents. The
information incorporated by reference is considered to be part of this
prospectus, and information that we file later with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below and any future filings we make with the SEC under Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the sale of
all the shares covered by this prospectus:
- Annual Report on Form 10-K for the year ended December 31, 1998;
- Quarterly Reports on Form 10-Q for the three months ended March
31, 1999, the six months ended June 30, 1999 and the nine months
ended September 30, 1999; and
- The descriptions of the common shares and Series A Preferred
Shares contained in our Registration Statements on Form 8-A,
filed with the SEC on September 19, 1996 and September 4, 1998.
You may request a copy of these filings, at no cost, by writing or
telephoning:
Innkeepers USA Trust
306 Royal Poinciana Way
Palm Beach, Florida 33480
Attention: Investor Relations
Telephone: (561) 835-1800
As you read the above documents, you may find some inconsistencies in
information from one document to another. If you find inconsistencies between
the documents, or between a document and this prospectus, you should rely on the
statements made in the most recent document.
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized anyone
else to provide you with different information. We will not make an offer of
these shares in any state where the offer is not permitted. You should not
assume that the information in this prospectus or any supplement is accurate as
of any date other than the date on the front of those documents.
31
<PAGE> 35
================================================================================
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 JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF.
---------------------
TABLE OF CONTENTS
---------------------
PAGE
----
SECURITIES AND EXCHANGE COMMISSION.......................1
A WARNING ABOUT FORWARD-LOOKING STATEMENTS...............2
INNKEEPERS USA TRUST.....................................2
SECURITIES TO BE OFFERED.................................3
DESCRIPTION OF CAPITAL SHARES............................3
RESTRICTIONS ON OWNERSHIP AND TRANSFER...................4
REDEMPTION OF UNITS......................................4
FEDERAL INCOME TAX CONSEQUENCES OF THE COMPANY'S
STATUS AS A REIT.......................................6
SELLING SHAREHOLDER.....................................28
PLAN OF DISTRIBUTION....................................29
EXPERTS.................................................30
LEGAL MATTERS...........................................31
WHERE YOU CAN FIND MORE INFORMATION.....................31
----------------
================================================================================
================================================================================
INNKEEPERS USA TRUST
218,307 SHARES
COMMON SHARES
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
___________, 2000
================================================================================
<PAGE> 36
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee $ 478
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 $31,478
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Maryland law applicable to REITs permits a Maryland REIT 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 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 REIT, corporation, partnership, joint venture, trust, employee benefit
plan or any other enterprise as a trustee, director, officer or partner of such
REIT, 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 REIT,
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer or partner of such REIT,
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
II-1
<PAGE> 37
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 law applicable to REITs permits a Maryland REIT to indemnify
and advance expenses to its trustees, officers, employees and agents to the same
extent as is permitted by Maryland law for directors and officers of Maryland
corporations. Maryland law 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. 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.
<TABLE>
<S> <C>
3.1 - Amended and Restated Declaration of Trust of the Registrant (previously filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-11 (Registration
No. 33-81362) and incorporated 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 the Company's Registration Statement on Form S-3
(Registration No. 333-58811) 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
</TABLE>
II-2
<PAGE> 38
<TABLE>
<S> <C>
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 PricewaterhouseCoopers LLP
23.2* - Consent of Hunton & Williams (included in Exhibit 5.1)
24.1* - Power of Attorney (located on the signature page of this Registration Statement)
</TABLE>
- -------------
* Previously filed
** Filed herewith
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
registration statement (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement; notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective 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;
II-3
<PAGE> 39
(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 the 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 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 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 a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 40
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 this Amendment No. 1 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 Town of Palm Beach, State of Florida, on
the 10th day of January, 2000.
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
1
<PAGE> 41
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed below on the 10th day of
January, 2000 by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Jeffrey H. Fisher Chairman of the Board, President and
-------------------------------- Chief Executive Officer (Principal Executive Officer)
Jeffrey H. Fisher
/s/ Bruce Zenkel* Trustee
--------------------------------
Bruce Zenkel
/s/ Miles Berger* Trustee
--------------------------------
Miles Berger
/s/ C. Gerald Goldsmith* Trustee
--------------------------------
C. Gerald Goldsmith
/s/ Rolf E. Ruhfus* Trustee
--------------------------------
Rolf E. Ruhfus
/s/ Jack P. DeBoer* Trustee
--------------------------------
Jack P. DeBoer
/s/ Thomas J. Crocker* Trustee
--------------------------------
Thomas J. Crocker
/s/ David Bulger Chief Financial Officer and Treasurer
-------------------------------- (Principal Financial Officer)
David Bulger
/s/ Gregory M. Fay Vice President of Accounting
-------------------------------- (Principal Accounting Officer)
Gregory M. Fay
</TABLE>
* By attorney-in-fact
2
<PAGE> 42
EXHIBITS
<TABLE>
<S> <C>
3.1 - Amended and Restated Declaration of Trust of the Registrant (previously filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-11 (Registration No.
33-81362) and incorporated 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 the Company's Registration Statement on Form S-3 (Registration
No. 333-58811) and incorporated by referecne 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 PricewaterhouseCoopers LLP
23.2* - Consent of Hunton & Williams (included in Exhibit 5.1)
24.1* - Power of Attorney (located on the signature page of this Registration Statement)
</TABLE>
- -------------
* Previously filed
** Filed herewith
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Amendment
No. 1 to the registration statement on Form S-3 of Innkeepers USA Trust of our
report dated February 19, 1999, except Note 8 as to which the date is March 1,
1999, relating to the consolidated financial statements, which appears in the
1998 Annual Report to Shareholders of Innkeepers USA Trust, which is
incorporated by reference in Innkeepers USA Trust's Annual Report on Form 10-K
for the year ended December 31, 1998. We also consent to the incorporation by
reference of our report dated February 19, 1999, relating to the financial
statement schedule, which appears in such Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report dated March 19, 1999,
relating to the combined financial statements of Innkeepers Hospitality, which
also appears in such Annual Report on Form 10-K. We also consent to the
reference to our firm under the heading "Experts" in such Registration
Statement.
PricewaterhouseCoopers LLP
Dallas, Texas
January 6, 2000
