As filed with the Securities and Exchange Commission on August 4, 2000.
Registration Statement No. 333- _____
================================================================================
SECURITIES AND EXCHANGE
WASHINGTON, DC 20549
--------------------
FORM S-8
(including registration of shares for resale by means of a Form S-3 Prospectus)
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
--------------------
INNKEEPERS USA TRUST
(Exact name of Registrant as specified in its Charter)
Maryland 65-0503831
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
306 Royal Poinciana Way
Palm Beach, Florida 33480
(Address of principal executive office, including zip code)
1994 SHARE INCENTIVE PLAN
(Full title of the Plan)
Mark A. Murphy
General Counsel and Secretary
Innkeepers USA Trust
306 Royal Poinciana Way
Palm Beach, Florida 33480
(561) 835-1800
(Name, address, including zip code, and telephone number including
area code, of agent for service)
With a copy to:
David C. Wright, Esquire
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
(804) 788-8638
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================
Proposed maximum Proposed maximum
Title of securities Amount to be offering price Aggregate Amount of
To be registered Registered (1) per share offering price Registration fee
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Shares, $.01 par
value 3,700,000 shares 11.32 (2) $41,884,000 $11,058
================================================================================================================
</TABLE>
(1) Plus such additional number of shares as may hereafter become
issuable pursuant to the Innkeepers USA Trust 1994 Share Incentive Plan (the
"Plan") in the event of a share dividend, share split, recapitalization or
other similar transaction without receipt of consideration, which results in an
increase in the number of share outstanding.
(2) Estimated solely for the purpose of computing the registration fee.
This amount was calculated pursuant to Rules 457(c) and 457(h)(i) promulgated
under the Securities Act of 1933, as amended. The price per share is based on
(i) 1,662,500 Common Shares reserved for issuance under the Plan at a price per
share of $10.34, which is the average of the high and low prices of the Common
Shares on the New York Stock Exchange on August 1, 2000, as reported in the Wall
Street Journal, and (ii) 2,037,500 Common Shares reserved for issuance under the
Plan and subject to options already granted at a price per share of $12.12,
which is the weighted average exercise price per share of the outstanding
options.
<PAGE>
PART I
EXPLANATORY NOTE
This Registration Statement relates to (i) the resale of 407,188 Common
Shares previously issued under our 1994 Share Incentive Plan and (ii) 3,292,812
Common Shares that may be issued in the future upon the exercise of options or
the grant of Common Shares under the 1994 Share Incentive Plan.
<PAGE>
PROSPECTUS
407,188 COMMON SHARES
INNKEEPERS USA TRUST
COMMON SHARES
----------------------------------
This Prospectus relates to 407,188 common shares of Innkeepers USA
Trust, which may be offered from time to time by certain selling shareholders of
the Company. We will receive no part of the proceeds from sales of the shares.
The shares were acquired by the selling shareholders under the Company's 1994
Share Incentive Plan.
The Company's common shares are listed on the New York Stock Exchange
under the symbol "KPA".
SEE "RISK FACTORS" ON PAGE 4 FOR INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS.
----------------------------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------------------------------
The date of this Prospectus is August 4, 2000
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. CERTAIN SELLING
STOCKHOLDERS ARE OFFERING TO SELL SHARES AND SEEKING OFFERS TO BUY SHARES ONLY
IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED
IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE
DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS
OR ANY SALE OF THE SHARES.
TABLE OF CONTENTS
Where You Can Find Additional Information................................ 4
Information Incorporated by Reference.................................... 4
The Company.............................................................. 5
Special Note Regarding Forward-Looking Statements........................ 6
Risk Factors............................................................. 7
Federal Income Tax Consequences of the Company's Status as a REIT........ 10
Use of Proceeds.......................................................... 23
Selling Shareholders..................................................... 23
Plan of Distribution..................................................... 24
Legal Matters............................................................ 25
Experts.................................................................. 25
2
<PAGE>
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 some of these reasons in the section of this
Prospectus entitled "Risk Factors", and these reasons are also discussed from
time to time in the other reports we file with the SEC. 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 June 30, 2000, 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 subsidiaries of Marriott International, Inc. ("Marriott") 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.
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".
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
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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.
RISK FACTORS
Competition
-----------
For Guests
The hotel industry, and the upscale extended-stay and mid-price
segments of the lodging market in which the Company operates, is highly
competitive. Competitive factors within the industry include room rates, quality
of accommodations, name recognition, service levels, reputation, reservation
systems, convenience of location and the supply and availability of alternative
lodging. The Hotels compete with other existing and new hotels in their
geographic markets. The extended-stay and mid-price segments of the hotel
industry are very competitive, as several new competitors have entered the
market. Many competitors have substantially greater marketing and financial
resources than the Company and the Lessees.
Each of the Hotels is located in a developed area that includes other
hotels, many of which are competitive with the Hotels in their locality. The
number of competitive hotels in a particular area could have a material adverse
effect on the revenues derived from the Hotels or hotels acquired in the future.
Many industry analysts have noted that the favorable supply/demand imbalance
that characterized much of the 1990s has moderated, and in many cases increases
in supply now exceed increases in demand in certain geographic markets and in
certain market segments. This has, in turn, resulted in lower occupancies,
moderating ADR increases and may result in RevPAR decreases.
There can be no assurances that competitive new supply in the Company's
markets does not or will not negatively impact the performance of the Company's
hotels. Customers may be drawn to newly or recently constructed hotels offering
lodging in comparable locations at prices competitive with (or lower than) those
offered by the Company's hotels. Similarly, there can be no assurance that new
or existing competitors will not significantly reduce their rates or offer
greater convenience, services or amenities or significantly expand or improve
their hotels in the markets in which the Company does or will compete, all of
which could materially adversely affect the Company's business and results of
operations.
For Acquisitions
Competition exists for investment opportunities in upscale
extended-stay and mid-price hotels from entities organized for purposes
substantially similar to the Company's objectives as well as other purchasers of
hotels. The Company may be competing for such hotel investment opportunities
with entities that have substantially greater financial resources than the
Company or better relationships with franchisors, sellers or lenders. These
entities may also generally be able to accept more risk than the Company
prudently can manage. Competition may generally reduce the number of suitable
hotel investment opportunities offered to the Company and increase the
bargaining power of property owners seeking to sell, thereby increasing prices.
Business Risks
--------------
Dependence on Payments under Percentage Leases; Lack of Control
Certain rules relating to the qualification of a REIT prohibit a REIT
from operating hotels. Therefore, the Company leases the Hotels to the Lessee
pursuant to the Percentage Leases. (See "-- Recent Developments") The
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<PAGE>
Company's primary source of revenue is rent payments under the Percentage
Leases. The Company must rely on the Lessees and any third-party managers
retained by the Lessees, such as Marriott and Summerfield, to operate the Hotels
in a manner that generates sufficient cash flow to enable the Lessees to make
the rent payments under the Percentage Leases. Ineffective operation of the
Hotels may result in the Lessees being unable to pay rent to the Company,
including the higher tier percentage rent necessary for the Company to fund its
current level of distributions to shareholders.
Other than as set forth in the applicable Percentage Lease, the Company
does not have the authority to require a Hotel to be operated in a particular
manner, or to govern any particular aspect of its operation (e.g., setting room
rates). Thus, even if the Company's management believes a hotel is being
operated inefficiently or in a manner that does not result in a maximization of
rent to the Company, the Company cannot require a change in the method of
operation. The Company is limited to seeking redress only if the lessee violates
the terms of the Percentage Leases, and then only to the extent of the remedies
set forth therein.
Dependence on Lessees and Third-Party Managers
The Company's success depends upon the ability of the Lessees and any
third-party manager retained by the Lessees, such as Marriott and Summerfield,
to manage effectively the Hotels, as well as any additional hotels in which the
Company invests. The Lessees have limited assets and generally the Lessees must
generate sufficient cash flow from the operation of the Hotels, after payment of
all operating expenses, to fund the Lessees' rent obligations under the
Percentage Leases. There can be no assurance that the Lessees or their
third-party managers will effectively operate the Hotels. In the event that the
Lessees and their third-party managers fail to effectively operate the Hotels,
the Company's internal growth strategy and acquisition strategy would be more
difficult to achieve and, therefore, cash available for distribution could be
adversely affected.
Availability of Capital
The ability of the Company to implement its growth strategy depends on
access to capital necessary to invest in additional hotels through the use of
borrowings, subsequent issuances of common or preferred shares or other
securities or operating cash flow. Access to capital, and in particular equity
capital, may be negatively affected by economic conditions or negative
perceptions about the performance of or prospects for the real estate industry
in general, the hotel industry specifically and, more particularly, the Company.
Operating Costs and Capital Expenditures; Hotel Renovation
Hotels in general, including the Hotels, have an ongoing need for
renovations and other capital improvements, particularly in older structures,
including periodic replacement of furniture, fixtures and equipment at the
hotels. Under the terms of the Percentage Leases, the Company is obligated to
pay the cost of certain capital expenditures at the Hotels and pay for
furniture, fixtures and equipment. If these expenses exceed the Company's
estimate, the additional cost could have an adverse effect on the cash available
for distribution to shareholders. In addition, renovation of hotels involves
certain risks, including construction cost overruns and delays, uncertainties as
to market demand or deterioration in market demand after commencement of
renovation and the emergence of unanticipated competition in the local
geographic market.
Operating Risks
The Hotels are subject to all operating risks common to the hotel
industry. The hotel industry has experienced volatility in the past, as have the
Hotels, and there can be no assurance that such volatility will not occur in the
future. These risks include, among other things, declining economic conditions;
competition from other hotels; over-building in the hotel industry which has
adversely affected occupancy, ADR and RevPAR; increases in operating costs due
to inflation and other factors, which increases may not be, and may not
necessarily in the future be, offset by increased room rates; dependence on
business and commercial travelers and tourism; strikes and other labor
disturbances of hotel employees; increases in energy costs and other expenses of
travel; and adverse effects of general and local economic conditions. These
factors could decrease room revenue of the Hotels and adversely affect the
Lessees's ability to make payments of rent under the Percentage Leases to the
Company, including payments at the higher tier Percentage Rent levels.
5
<PAGE>
Risks of Operating Hotels under Franchise Licenses and Marriott
Management Agreements
The continuation of the franchise licenses under which certain of the
Hotels are operated is subject to specified operating standards and other terms
and conditions. The franchisors that have issued or will issue the franchise
licenses periodically inspect their licensed hotels to confirm adherence to
their operating standards. The failure of the Company or the Lessees to maintain
such standards respecting a Hotel or to adhere to such other terms and
conditions could result in the loss or cancellation of a franchise license. The
Marriott Management Agreements will allow the Hotels subject thereto to be
operated as Residence Inn by Marriott hotels so long as the Company does not
breach its obligations under the Marriott Management Agreements or the
Percentage Leases relating to such Hotels. Continued operation of such Hotels as
Residence Inn by Marriott hotels also requires the Company to make capital
improvements as required by Marriott to maintain the hotel in accordance with
system standards. It is possible that a franchisor or Marriott, as applicable,
could condition the continuation of a franchise license or a Marriott Management
Agreement, as applicable, on the completion of capital improvements which
management or the Board of Trustees determines are too expensive or otherwise
not economically feasible in light of general economic conditions or the
operating results or prospects of the affected hotel. In that event, management
or the Board of Trustees may elect to allow the franchise license or Marriott
Management Agreement to lapse or be terminated. Similarly, the IH Lessee is
obligated to fund any operating loss at a Hotel operating under a Marriott
Management Agreement. Operating losses could result from a number of factors,
including increased expenses resulting from changes in Marriott's system
standards. The IH Lessee has limited assets from which to fund operating losses.
If the IH Lessee fails or is unable to fund such operating losses, Marriott may
have the right to terminate the related Marriott Management Agreement and with
it the affected Hotel's right to operate as a Residence Inn by Marriott hotel.
In addition, when the term of a franchise license or a Marriott Management
Agreement expires, the franchisor or Marriott has no obligation to issue a new
franchise license or management agreement, as applicable, for the hotel. The
loss of a franchise license or a Marriott Management Agreement could have a
material adverse effect upon the operations or the underlying value of the
affected Hotel because of the loss of associated name recognition, marketing
support and centralized reservation systems provided by the franchisor or
Marriott. The loss of a franchise license or Marriott Management Agreement for
one or more of the Hotels could also have a material adverse effect on rent
under the Percentage Leases and cash available for distribution to shareholders.
Development
The Company regularly considers development opportunities for hotels
that are consistent with its target market, product and brand strategies. Risks
associated with development and construction activities may include: (i) the
abandonment of development opportunities explored by the Company and the
write-off of associated costs; (ii) construction costs exceeding original
estimates due to increased materials, labor or other expenses, which could make
completion of the hotel uneconomical; (iii) operating results at a newly
completed hotel are dependent on a number of factors, including market and
general economic conditions, competition and market acceptance, and such hotels
may not meet pre-development operating projections; (iv) financing may not be
available on favorable terms for the development of a hotel; and (v)
construction and stabilization may not be completed on schedule, resulting in
increased debt service and construction costs. Development activities are also
subject to risks relating to the inability to obtain, or delays in obtaining,
all necessary zoning, land-use, building, occupancy, and other required
governmental permits and authorizations. The occurrence of any of the events
described above could adversely affect the Company's ability to achieve
projected yields on hotels that it develops or on newly built hotels that it
acquires, and could adversely affect the Company's ability to make expected
distributions.
Investment Concentration in Single Industry; Emphasis on Upscale
Extended-Stay Market Segment; and Emphasis on Residence Inn by Marriott and
Hampton Inn Hotels
The Company's current growth strategy is to acquire operating hotels,
primarily upscale extended-stay hotels. The Company will not seek to invest in
assets to reduce the risks associated with an investment in the hotel industry,
and is subject to risks inherent in concentrating investments in a single
industry and in a single market segment within that industry. The Company will
be subject to risks inherent in concentrating investments in any franchise
brand, in particular the Residence Inn by Marriott and the Hampton Inn brands,
such as a reduction in
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business following any adverse publicity related to a brand, which could have an
adverse effect on the Company's Rent under the Percentage Leases and cash
available for distribution to shareholders.
Concentration of Investments in California, Florida, Washington,
Michigan, Texas, Illinois and Pennsylvania
Eleven of the 67 Hotels are located in California, five are located in
each of Florida, Washington and Michigan and four are located in each of Texas,
Illinois and Pennsylvania. The concentration of the Company's investments in
California, Florida, Washington, Michigan, Texas, Illinois and Pennsylvania
could result in adverse events, or conditions which affect those areas in
particular, such as economic recessions and natural disasters, having a more
significant negative effect on the operations of the combined Hotels, and
ultimately cash distributions to shareholders of the Company, than if the
Company's investments were more geographically diverse.
Ownership Limitation
In order for the Company to maintain its qualification as a REIT, not
more than 50% in value of its outstanding shares of beneficial interest may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain entities). Furthermore, if any
shareholder or group of shareholders of the IH Lessee or the Summerfield Lessee
own, actually or constructively, 10% or more of the shares of beneficial
interest of the Company, the IH Lessee or the Summerfield Lessee, as the case
may be, could become a related-party tenant of the Company and the Partnership,
which likely would result in loss of REIT status for the Company. For the
purpose of preserving the Company's REIT qualification, the Company's
Declaration of Trust prohibits direct or indirect ownership (taking into account
applicable ownership provisions of the Code) of more than 9.8% of the
outstanding common shares or any other class of outstanding shares of beneficial
interest by any shareholder or group (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 prevent the Company from continuing to qualify as
a REIT under the Code will be void ab initio, the intended transferee of such
shares will be deemed never to have had an interest in such shares, and such
shares will be designated "Shares-in-Trust." Further, the Company shall be
deemed to have been offered Shares-in-Trust for purchase at the lesser of the
market price (as defined in the Declaration of Trust) on the date the Company
accepts the offer and the price per share in the transaction that created such
Shares-in-Trust (or, in the case of a gift, devise or non-transfer event (as
defined in the Declaration of Trust), the market price on the date of such gift,
devise or non-transfer event). Therefore, the record holder of shares of
beneficial interest in excess of the Ownership Limitation will experience a
financial loss when such shares are redeemed, if the market price falls between
the date of purchase and the date of redemption.
The Company has, in limited instances from time to time, permitted
certain owners to own shares in excess of the Ownership Limitation. The Board of
Trustees has waived the Ownership Limitation for such owners after following
procedures set out in the Company's Declaration of Trust, under which the owners
requesting the waivers provided certain information and the Company's counsel
provided certain opinions. These waivers established levels of permissible share
ownership for the owners requesting the waivers that are higher than the
Ownership Limitation - if the owners acquire shares in excess of the higher
limits, those shares are subject to the risks described above in the absence of
a further waivers. The Board of Trustees is not obligated to grant further
waivers and has no current intention to do so with respect to any owners who
(individually or aggregated as the Declaration of Trust requires) do not
currently own shares in excess of the Ownership Limitation.
General Risks of Investing in Real Estate
The Hotels are subject to varying degrees of risk generally incident to
the ownership of real property. Income from the Hotels may be adversely affected
by adverse changes in national economic conditions, adverse changes in local
market conditions due to changes in general or local economic conditions and
neighborhood characteristics, competition from other hotels, changes in interest
rates and in the availability, cost and terms of mortgage funds, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements, particularly in older
structures, changes in real estate tax rates and other operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts of
God, including
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earthquakes, hurricanes and other natural disasters (which may result in
uninsured losses), acts of war, adverse changes in zoning laws, and other
factors which are beyond the control of the Company.
Real estate investments are relatively illiquid. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions is limited. In particular, the Company may not sell any of the DeBoer
Hotels in a taxable transaction for a period of up to ten years following
November 1, 1996, without the consent of the applicable members of the DeBoer
Group. Certain provisions of the Marriott Management Agreements and the
Percentage Leases may also limit or delay the Company's ability to sell or
refinance the Hotels.
Each Percentage Lease specifies comprehensive insurance to be
maintained on each of the Hotels, including liability, property and casualty and
extended coverage. Management of the Company believes that such specified
coverage is of the type and amount customarily obtained by owners of hotels
similar to the Hotels. Percentage Leases for subsequently acquired hotels will
contain similar provisions. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes, floods and hurricanes,
that may be uninsurable or not economically insurable and which may impact
certain of the Hotels.
All 11 of the Hotels in California are located in areas that are
subject to earthquake activity. These Hotels are located in areas of high
seismic risk and some were constructed under pre-1985 building codes. No
assurance can be given that an earthquake would not render significant damage to
the Hotels that have been constructed in compliance with more recent building
codes, or are in areas of lower seismic risk. Additionally, areas in Florida
where five of the Hotels are located may experience hurricane or high-wind
activity. The Company has earthquake insurance policies on the Hotels located in
California and hurricane insurance policies on the Hotels located in Florida.
The Company's management and Board of Trustees has used and will use its
discretion in determining amounts, coverage limits and deductibility provisions
for insurance, with a view to maintaining appropriate insurance coverage on the
Company's investments at a reasonable cost and on suitable terms, and may from
time to time elect not to carry earthquake or hurricane insurance. This may
result in insurance coverage that, in the event of a substantial loss, would not
be sufficient to pay the full current market value or current replacement cost
of the Company's lost investment. Inflation, changes in building codes and
ordinances, environmental considerations, and other factors also might make it
not feasible to use insurance proceeds to replace a hotel after it has been
damaged or destroyed. Under such circumstances, the insurance proceeds received
by the Company might not be adequate to restore its economic position with
respect to a Hotel.
Conflicts of Interest
Mr. Fisher
----------
Conflicts of interest exist between the Company, on the one hand, and
the IH Lessee and Mr. Fisher (Chairman, Chief Executive Officer and President of
the Company and the majority shareholder of the IH Lessee), on the other hand,
with respect to the negotiation and enforcement of the terms of the current and
any future Percentage Leases with the IH Lessee. Conflicts also exist related to
possible adverse tax consequences to Mr. Fisher and his affiliates upon a sale,
refinancing or prepayment of indebtedness secured by certain Hotels contributed
to the Company by his affiliates. Additionally, the Company relies substantially
on Mr. Fisher and conflicting demands on his time occur, which could lead to
decisions which do not reflect solely the interests of the Company's
shareholders.
On March 11, 1996, an entity controlled by Mr. Fisher (the "Seller")
purchased a vacant parcel of land in Tysons Corner, Virginia for $915,000. The
Seller then began the process of obtaining the governmental approvals necessary
to build a hotel on the land and incurred costs of approximately $70,000 in such
efforts. In September 1997, the Seller contracted to sell the land to
Summerfield Hotel Corporation ("SHC") for $2,400,000. SHC then continued the
process of obtaining the governmental approvals and incurred costs of
approximately $200,000. In October 1998, SHC failed to close on the purchase of
the land and forfeited its deposit under the purchase agreement. The Seller
received several offers from unrelated buyers to purchase the land for amounts
approximating the SHC price between October 1998 and May 1999 and on May 26,
1999, the Company entered into a contract to purchase the land for $2,400,000
from the Seller. The Company is developing a 120-room Residence Inn by Marriott
hotel on the land at a cost of approximately $11,600,000 and anticipates opening
the hotel during the fourth quarter of 2000.
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Mr. DeBoer
-----------
Mr. DeBoer, who is one of the largest shareholders of the Company, on a
diluted basis, and who serves as a Trustee of the Company, and certain of his
affiliates have in the past, and continue to be, involved in the development of
hotels, including extended-stay hotels. Mr. DeBoer is the Chairman, Chief
Executive Officer and major shareholder of Candlewood Hotel Company, Inc.
("Candlewood"), a public hotel company that is the owner, operator and
franchisor of Candlewood hotels, an economy extended-stay hotel chain founded by
Mr. DeBoer. Hotels developed by Mr. DeBoer and his affiliates, including
Candlewood hotels, may compete with the Company's hotels for guests, and other
hotel companies with which Mr. DeBoer is affiliated, including Candlewood, may
compete with the Company for acquisition opportunities. On November 1, 1996, the
Company completed the acquisition of seven Residence Inn by Marriott hotels
("the DeBoer Hotels") from affiliates of Mr. DeBoer (the "DeBoer Group"). Due to
the potential adverse tax consequences to members of the DeBoer Group that may
result from a sale of the DeBoer Hotels, the Company has agreed with the DeBoer
Group that for a period of up to ten years following the closing of the
acquisition of the DeBoer Hotels, (i) any taxable sale of a DeBoer Hotel will
require the consent of the applicable members of the DeBoer Group and (ii) the
Company will maintain at all times outstanding indebtedness of $40 million,
subject to reduction upon the occurrence of certain events, including certain
redemptions or taxable transfers of Preferred Units by the applicable members of
the DeBoer Group (the "Required Indebtedness"). In the event that the Company
sells DeBoer Hotels without the required consent or fails to maintain the
Required Indebtedness, the Company will be liable for certain resulting income
tax liabilities incurred by the applicable members of the DeBoer Group which
could be significant. Accordingly, the interests of the Company and Mr. DeBoer
may differ with respect to the Hotels, proposed acquisitions of hotels by the
Company that are competitive with hotels owned or being considered for
acquisition or development by Mr. DeBoer or his affiliates, proposed
acquisitions of hotels or sites by the Company that Mr. DeBoer or his affiliates
may also have an interest in acquiring, or proposed dispositions of the DeBoer
Hotels that management believes are in the best interests of the Company.
Additionally, the Company has, for the last three years, placed
substantially all of its insurance (including officers' and trustees' liability,
property, casualty, earthquake and worker's compensation coverages) with Manning
& Smith, Wichita, Kansas, a full service commercial insurance broker that has
developed a specialty in insuring hotels. During that same period, the IH Lessee
placed substantially all of its insurance (including worker's compensation,
employment practices liability, and crime) with Manning & Smith. Manning & Smith
is a private company of which Mr. DeBoer owns 47% of the stock. Mr. DeBoer has
informed the Company that he is not an officer of Manning & Smith and does not
participate actively in its management. For the policy period ending November
30, 2000, the gross amount of the premiums paid for coverages placed by Manning
& Smith for the Company was approximately $886,000 and for the IH Lessee was
approximately $1,302,000.
Mr. Ruhfus
----------
Mr. Ruhfus is a Trustee of the Company, a shareholder of Wyndham and a
Board member of Wyndham. Wyndham is the franchisor of Summerfield Suites and
Sierra Suites hotels. Conflicts, therefore, exist between the Company and the
Summerfield Lessee and Mr. Ruhfus with respect to the enforcement of the terms
of the Percentage Leases with the Summerfield Lessee. In addition, Summerfield
Suites hotels that the Company does not own and Sierra Suites hotels may compete
with the Hotels for guests, and Wyndham may compete with the Company for
acquisition opportunities. Mr. Ruhfus is also Chairman of Summerfield Associates
LLP, a private company which may engage in hotel acquisition or development
activity. This activity may include the acquisition or development of upscale
extended-stay hotels, such as Summerfield Suites (or hotels that can be
converted to that brand). In June 1997, the Company acquired seven hotels from
affiliates of Rolf E. Ruhfus (the "Summerfield Group"). Due to the potential
adverse tax consequences to members of the Summerfield Group that may result
from a sale of the Summerfield Hotels, the Company has agreed with the
Summerfield Group that for a period of up to seven years following the closing
of the acquisition of the Summerfield Hotels, any taxable sale of a Summerfield
Hotel will require the consent of the applicable members of the Summerfield
Group. In the event that the Company sells Summerfield Hotels without the
required consent, the Company will be liable for certain resulting income tax
liabilities incurred by the Summerfield Group. Accordingly, the interests of the
Company and Mr. Ruhfus may differ with respect to the Hotels, proposed
acquisitions of
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hotels by the Company that are competitive with hotels owned or being considered
for acquisition or development by Mr. Ruhfus or his affiliates, proposed
acquisitions of hotels or sites by the Company that Mr. Ruhfus or his affiliates
may also have an interest in acquiring, or proposed dispositions of the
Summerfield Hotels that management believes are in the best interests of the
Company.
Leverage
--------
To the extent the Company continues to incur debt, its debt service
requirements will reduce cash available for distribution to shareholders.
Variable rate debt, such as the Company's Line of Credit, creates higher debt
service requirements if interest rates increase, which may decrease cash
available for distribution to shareholders. There can be no assurances that the
Company will be able to meet its debt service obligations. To the extent that it
cannot meet its debt service obligations, the Company risks the loss of some or
all of its assets to foreclosure or forced sale. Changes in economic conditions
could result in higher interest rates on variable rate debt, including
borrowings under the Company's Line of Credit, reduce the availability of debt
financing generally or at rates deemed favorable to the Company, reduce cash
available for distribution to shareholders and increase the risk of loss upon a
sale or foreclosure. The Company also may obtain one or more forms of interest
rate protection on variable rate debt (e.g., swap agreements or interest rate
cap contracts) and will consider additional long-term fixed-rate financing to
further hedge against the possible adverse effects of interest rate
fluctuations. Adverse economic conditions could cause the terms on which
borrowings become available to be less favorable than at present. In such
circumstances, if the Company is in need of capital to repay indebtedness in
accordance with its terms or otherwise, it could be required to liquidate one or
more investments in Hotels or lose one or more Hotels to foreclosure, either of
which could result in a material financial loss to the Company.
Environmental Matters
---------------------
Under various federal, state and local laws and regulations, an owner
or operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person that arranges for the disposal or transports for disposal or treatment of
a hazardous substance at a property owned by another may be liable for the costs
of removal or remediation of hazardous substances released into the environment
at that property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to promptly
remediate such substances, may adversely affect the owner's ability to sell real
estate or to borrow using such real estate as collateral. In connection with the
ownership and operation of the Hotels, the Company, the Partnership or the
Lessees, as the case may be, may be potentially liable for any such costs.
Phase I environmental site assessments ("ESAs") generally are obtained
on hotels at the time of acquisition by the Company. The Company generally
intends to obtain an ESA on any other hotel acquired in the future. The ESAs are
intended to identify potential environmental contamination at the Hotels for
which the Company may be responsible. The ESAs included historical reviews of
the Hotels, reviews of certain public records, preliminary investigations of the
sites and surrounding properties, screening for the presence of hazardous
substances, toxic substances and underground storage tanks, and the preparation
and issuance of a written report. The ESAs did not include invasive procedures,
such as soil sampling or ground water analysis.
The ESAs have not revealed any environmental liability or compliance
concerns that the Company believes would have a material adverse effect on the
Company's business, assets, results of operations or liquidity, nor is the
Company aware of any such liability. Nevertheless, it is possible that these
ESAs do not reveal all environmental liabilities or that there are material
environmental liabilities or compliance concerns of which the Company is
unaware. Moreover, no assurances can be given that (i) future laws, ordinances
or regulations will not impose any material environmental liability, or (ii) the
current environmental condition of the Hotels will not be affected by the
condition of the properties in the vicinity of the Hotels (such as the presence
of leaking underground storage tanks) or by third parties unrelated to the
Partnership, the Lessees or the Company.
FEDERAL INCOME TAX CONSEQUENCES OF THE COMPANY'S
STATUS AS A REIT
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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:
o 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.
o 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.
o 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.
o 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.
o 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
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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.
o 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.
o The Company may elect to retain and pay income tax on its net
long-term capital gain.
o 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:
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
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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."
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:
o rents from real property;
o interest on debt secured by mortgages on real property or on
interests in real property; and
o 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 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.
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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:
o the intent of the parties;
o the form of the agreement;
o 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
o 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:
o the service recipient is in physical possession of the property;
o the service recipient controls the property;
o 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;
o the service provider does not bear any risk of substantially
diminished receipts or substantially increased expenditures if
there is nonperformance under the contract;
o the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service
recipient; and
o 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:
o the Innkeepers Partnerships and the Lessees intend for their
relationship to be that of a lessor and lessee and such
relationship is documented by lease agreements;
o the Lessees have the right to the exclusive possession, use, and
quiet enjoyment of the hotels during the term of the percentage
leases;
o 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;
o 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;
o the Lessees benefit from any savings in the costs of operating the
hotels during the term of the percentage leases;
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o 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;
o 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;
o the Lessees are obligated to pay substantial fixed rent for the
period of use of the hotels;
o the Lessees stand to incur substantial losses or reap substantial
gains depending on how successfully they operate the hotels;
o the Innkeepers Partnerships cannot use the hotels concurrently to
provide significant services to entities unrelated to the Lessees;
and
o 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:
o 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.
o 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.
o 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.
o 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:
o are fixed at the time the percentage leases are entered into;
o 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
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o 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,
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:
o 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
o 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
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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 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. Furthermore, President Clinton as
signed into law legislation that will allow the Company to provide services
through "taxable REIT subsidiaries." See "--Asset Tests."
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.
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.
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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:
o its failure to meet such tests is due to reasonable cause and not
due to willful neglect;
o it attaches a schedule of the sources of its income to its tax
return; and
o 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:
o cash or cash items, including receivables;
o government securities;
o interests in real property, including leaseholds and options to
acquire real property and leaseholds;
o interests in mortgages on real property;
o stock in other REITs; and
o 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:
o 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
o 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.
President Clinton recently signed into law legislation (the "Tax Bill")
that allows the Company to own up to 100% of the stock of taxable REIT
subsidiaries ("TRSs"), which can perform activities unrelated to the Company's
tenants, such as third-party management, development, and other independent
business activities, as
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well as provide services to the Company's tenants. The Company and a subsidiary
must elect for the subsidiary to be treated as a TRS. The Tax 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. Prior to the Tax
Bill, the Company only was prohibited from owning more than 10% of the voting
stock of a taxable subsidiary. Overall, no more than 20% of the Company's assets
can consist of securities of TRSs under the Tax Bill. The TRS provisions of the
Tax Bill apply for taxable years beginning after December 31, 2000.
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:
o 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
o 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 Tax Bill, the 95% distribution requirement discussed
above was reduced to 90% for taxable years beginning after December 31, 2000.
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:
o 85% of its REIT ordinary income for such year;
o 95% of its REIT capital gain income for such year; and
o 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.
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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.
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:
o a citizen or resident of the United States;
o a corporation, partnership, or other entity created or organized
in or under the laws of the United States or of a political
subdivision thereof;
o 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
o 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.
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
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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.
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
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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.
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:
o the percentage of the Company's dividends that the tax-exempt
trust must treat as unrelated business taxable income is at least
5%;
o 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
o 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
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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 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:
o 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
o 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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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:
o 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
o 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.
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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:
o is treated as a partnership under Treasury regulations, effective
January 1, 1997, relating to entity classification (the
"check-the-box regulations"); and
o 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:
o the entity had a reasonable basis for its claimed classification;
o 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
o 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").
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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:
o 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
o 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:
o 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
o 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 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
26
<PAGE>
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:
o the amount of cash and the basis of any other property the Company
has contributed to the Partnership;
o increased by (1) its allocable share of the Partnership's income
and (2) its allocable share of the Partnership's indebtedness; and
o 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 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
27
<PAGE>
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.
28
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Common Shares. All proceeds from the sale of the Common Shares will be for the
account of the selling shareholders, as described below.
SELLING SHAREHOLDERS
Each of the selling shareholders is an executive officer of the
Company. The Common Shares registered hereunder were granted to the Selling
Shareholders under the 1994 Share Incentive Plan subject to certain vesting
schedules. The table sets forth as of June 30, 2000, and as adjusted to reflect
the sale of all 407,188 Common Shares, certain information regarding the Selling
Shareholders' beneficial ownership of Common Shares.
<TABLE>
<CAPTION>
Prior to Offering After Offering
----------------- --------------
Common Shares
Selling Shareholder Shares Owned(1) Registered Hereunder Shares Owned(1)
------------------- --------------- -------------------- ------------
<S> <C> <C> <C>
Jeffrey H. Fisher 2,343,380(2) 360,000 1,983,380
David Bulger 170,761 39,688 131,073
Gregory M. Fay 144,018 38,125 105,893
Mark A. Murphy 162,283 38,125 124,158
</TABLE>
--------------------------------
(1) For each selling shareholder, assumes that (a) all units of limited
partnership interest in the Partnership held by the named person are
redeemed for Common Shares, (b) the named person exercised all options
to acquire Common Shares held by him which are currently exercisable or
which become exercisable on or before September 1, 2000 and (c) the
named person exercised his right to convert all of his Series A
Cumulative Convertible Preferred Shares of Beneficial Interest of the
Company into Common Shares. Outstanding Units may be tendered for
redemption by the limited partners on a one-for-one basis for Common
Shares, or at the election of the Company an equivalent amount of cash.
Prior to the offering Mr. Fisher owned approximately 6.3% of the
outstanding Common Shares, and each of Messrs. Bulger, Fay and Murphy
owned less that 1% of the outstanding Common Shares.
(2) Includes 278,813 shares owned by the IH Lessee, in which Mr. Fisher
owns 80% of the capital stock. Mr. Fisher disclaims beneficial
ownership of 55,763 (20%) of the included shares owned by the IH
Lessee.
29
<PAGE>
PLAN OF DISTRIBUTION
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.
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, 1999 and 1998, and for each
of the three years in the period ended December 31, 1999 and the combined
financial statements of the IH Lessee as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999 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.
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
30
<PAGE>
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:
o Annual Report on Form 10-K for the year ended December 31, 1999;
o Quarterly Reports on Form 10-Q for the three months ended March
31, 2000 and June 30, 2000; and
o 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>
================================================================================
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
----
A WARNING ABOUT FORWARD-LOOKING STATEMENTS..........2
INNKEEPERS USA TRUST................................2
SECURITIES TO BE OFFERED............................3
RESTRICTIONS ON OWNERSHIP AND TRANSFER..............4
FEDERAL INCOME TA CONSEQUENCES OF THE
COMPANY'S STATUS AS A REIT.....................5
SELLING SHAREHOLDERS...............................27
PLAN OF DISTRIBUTION...............................28
EPERTS.............................................28
LEGAL MATTERS......................................29
WHERE YOU CAN FIND MORE INFORMATION................29
----------------
================================================================================
================================================================================
INNKEEPERS USA TRUST
407,188 Shares
Common Shares
----------------------
PROSPECTUS
----------------------
August 4, 2000
================================================================================
<PAGE>
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 3. Incorporation of Documents by Reference.
The following documents filed by Innkeepers USA Trust (the "Company")
with the Commission (file No. 001-12201) are incorporated herein by reference
and made a part hereof: (i) the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999; (ii) the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000; and (iii) the description of the
Company's common shares of beneficial interest, par value $.01 per share
("Common Shares") contained in the Company's Registration Statement on Form 8-A,
filed with the Commission on September 19, 1996.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), after the date of the Prospectus and prior to the filing of a
post-effective amendment that indicates that all securities offered have been
sold or that deregisters all securities then remaining unsold, shall be deemed
to be incorporated by reference in the Prospectus and to be a part hereof from
the date of filing of such documents. Any statement contained in a document
incorporated by reference in this Registration Statement shall be deemed to be
modified or superseded for purposes of the Prospectus to the extent that a
statement contained in the Registration Statement or in any other subsequently
filed document that is incorporated by reference in this Registration Statement
modifies or supersedes such earlier statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of the Prospectus.
Item 4. Description of Securities.
Not applicable.
Item 5. Interests of Named Experts and Counsel.
Not applicable.
Item 6. Indemnification of Directors and Officers.
Maryland law applicable to real estate investment trusts ("REIT"s),
such as the Company, 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 (i) any present or
former Trustee or officer who is made a party to the proceeding by reason of his
service in that capacity or (ii) 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
II-2
<PAGE>
Bylaws also permit the Company to indemnify and advance expenses to any person
who served a predecessor of the Company in any of the capacities described above
and to any employee or agent of the Company or a predecessor of the Company. The
Bylaws require the Company to indemnify a Trustee or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity.
Maryland 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 7. Exemption from Registration Claimed.
The issuance of the Common Shares being offered by the Form S-3 resale
prospectus were deemed exempt from registration under the Securities Act in
reliance upon Section 4(2) of the Securities Act.
Item 8. Exhibits.
Exhibit No.
4.1 - 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)
4.1(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)
4.1(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).
4.2 - 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)
5.1* - Opinion of Hunton & Williams as to the legality of the
securities being registered.
23.1* - Consent of PricewaterhouseCoopers LLP
23.2* - Consent of Hunton & Williams (included in the opinion filed as
Exhibit 5.1 to the Registration Statement).
24.1* - Power of Attorney (included on signature page)
II-3
<PAGE>
* Filed herewith
Item 9. Undertakings
(a) The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are made, 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 (the "Securities
Act");
(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;
(iii) To include any
material information with respect to the
plan of distribution not previously
disclosed in the registration statement or
any material change in such information in
the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 ("Exchange
Act") that are incorporated by reference in the registration statement.
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) 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.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described under Item 6 above, or
otherwise, the registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities
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 Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-8 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 this 3rd day of
August, 2000.
INNKEEPERS USA TRUST
By /s/ Jeffrey H. Fisher
--------------------------------
Jeffrey H. Fisher
Chairman of the Board, Chief
Executive Officer and President
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Jeffrey H. Fisher and Mark A. Murphy, and each or either of them, his
true and lawful attorney-in-fact with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any registration statement that is to be
effective upon filing pursuant to Rule 462 under the Securities Act of 1933, as
amended, and to cause the same to be filed with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting to said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing whatsoever
requisite or desirable to be done in and about the premises, as fully to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all acts and things that said attorneys-in-fact and
agents, or either of them, or their substitutes or substitute, may lawfully do
or cause to be done by virtue hereof.
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on the 3rd day of August, 2000 by
the following persons in the capacities indicated.
/s/ Jeffrey H. Fisher Chairman of the Board, President and
------------------------------- Chief Executive Officer (Principal
Jeffrey H. Fisher Executive Officer)
/s/ Miles Berger Trustee
-------------------------------
Miles Berger
/s/ Thomas J. Crocker Trustee
-------------------------------
Thomas J. Crocker
/s/ Jack P. DeBoer Trustee
-------------------------------
Jack P. DeBoer
/s/ C. Gerald Goldsmith Trustee
-------------------------------
C. Gerald Goldsmith
/s/ Rolf E. Ruhfus Trustee
-------------------------------
Rolf E. Ruhfus
/s/ Bruce Zenkel Trustee
-------------------------------
Bruce Zenkel
/s/ David Bulger Chief Financial Officer and Treasurer
------------------------------- (Principal Financial Officer)
David Bulger
/s/ Gregory M. Fay Vice President of Accounting
-------------------------------
Gregory M. Fay
II-6
<PAGE>
EXHIBIT INDEX
Exhibit No.
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)
4.1(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)
4.1(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).
4.2 - 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)
5.1* - Opinion of Hunton & Williams as to the legality of the
securities being registered.
23.1* - Consent of PricewaterhouseCoopers LLP
23.2* - Consent of Hunton & Williams (included in the opinion filed as
Exhibit 5.1 to the Registration Statement).
24.1* - Power of Attorney (included on signature page)
* Filed herewith
