As filed with the Securities and Exchange Commission on April 6 , 1998
Registration No. 333-48583
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-11
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
HUMPHREY HOSPITALITY TRUST, INC.
(Exact name of registrant as specified in governing instruments)
12301 Old Columbia Pike
Silver Spring, Maryland 20904
(Address of principal executive offices)
James I. Humphrey, Jr.
12301 Old Columbia Pike
Silver Spring, Maryland 20904
(301) 680-4343
(Name and address of agent for service)
---------------
Copies to:
Kenneth J. Alcott, Esq. James J. Wheaton, Esq.
Cameron N. Cosby, Esq. Willcox & Savage, P.C.
Hunton & Williams 1800 NationsBank Center
951 East Byrd Street One Commercial Place
Richmond, Virginia 23219 Norfolk, Virginia 23510
(804) 788-8200 (804) 628-5619
Approximate date of commencement of the proposed sale of the securities
to the public: As soon as practicable after the effective date of this
Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<TABLE>
<CAPTION>
================================================================================================================================
Title of Securities Amount Being Proposed Proposed Maximum Amount of
Being Registered Registered Offering Price Per Share (2) Aggregate Offering Price (2) Registration Fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stock 1,150,000(1) shares $11.25 $12,937,500 $3,816
($.01 par value)
================================================================================================================================
</TABLE>
(1) Includes 150,000 shares that may be purchased pursuant to an over-allotment
option granted to the Underwriter.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c), based upon the average of the high and low prices
of the Common Stock on The Nasdaq National Market on March 17, 1998.
---------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number and Caption Heading in Prospectus
<S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus..................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges....................... Outside Front Cover Page; Prospectus Summary; Risk
Factors; Policies and Objectives With Respect to
Certain Activities; Shares Available for Future Sale
4. Determination of Offering Price.................... Outside Front Cover Page; Underwriting
5. Dilution........................................... Dilution
6. Selling Security Holders........................... Not Applicable
7. Plan of Distribution............................... Outside Front Cover Page; Underwriting
8. Use of Proceeds.................................... Use of Proceeds
9. Selected Financial Data............................ Selected Financial Information
10. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... Management's Discussion and Analysis of Financial
Condition and Results of Operations
11. General Information as to Registrant............... Prospectus Summary; Management; Business and
Properties
12. Policy With Respect to Certain Activities.......... Prospectus Summary; Risk Factors; Policies and
Objectives with Respect to Certain Activities; Certain
Provisions of Virginia Law and the Company's Articles
of Incorporation and Bylaws; Reports to Shareholders
13. Investment Policies of Registrant.................. Policies and Objectives with Respect to Certain
Activities; Prospectus Summary; Business and
Properties
14. Description of Real Estate......................... Prospectus Summary; Business and Properties
15. Operating Data..................................... Business and Properties
16. Tax Treatment of Registrant and its Security
Holders............................................ Prospectus Summary; Federal Income Tax
Considerations
17. Market Price of and Dividends on the
Registrant's Common Equity and Related
Shareholder Matters................................ Price Range of Common Stock and Distributions
18. Description of Registrant's Securities............. Description of Capital Stock
19. Legal Proceedings.................................. Business and Properties-- Legal Proceedings
20. Security Ownership of Certain Beneficial
Owners and Management.............................. Ownership of the Company's Common Stock
21. Directors and Executive Officers................... Management
22. Executive Compensation............................. Management
<PAGE>
23. Certain Relationships and Related Transactions..... Prospectus Summary; Business and Properties;
Management; Certain Relationships and Transactions;
The Lessee
24. Selection, Management and Custody of
Registrant's Investments........................... Outside Front Cover Page; Prospectus Summary;
Business and Properties; Management; Policies and
Objectives with Respect to Certain Activities
25. Policies With Respect to Certain Transactions...... Risk Factors; Policies and Objectives with Respect to
Certain Activities
26. Limitations of Liability........................... Management
27. Financial Statements and Information............... Prospectus Summary; Selected Financial Information;
Financial Statements
28. Interests of Named Experts and Counsel............. Experts; Legal Matters
29. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..... Management
</TABLE>
<PAGE>
[redherring language]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to completion, dated April 6, 1998
1,000,000 Shares
HUMPHREY HOSPITALITY TRUST, INC. [Logo]
Common Stock
Humphrey Hospitality Trust, Inc. (the "Company") is a self-administered
equity real estate investment trust ("REIT") that, through Humphrey Hospitality
Limited Partnership (the "Partnership"), owns interests in 20 existing
limited-service hotels (the "Hotels"). The Hotels include twelve Comfort Inn(R)
hotels, three Holiday Inn Express(R) hotels, one Best Western(R) hotel, one Best
Western Suites(R) hotel, one Comfort Suites(R) hotel, one Days Inn(R) hotel and
one Rodeway Inn(R) hotel, with an aggregate of 1,312 rooms. The Hotels are
located in nine states in the eastern United States.
All of the shares of the Company's common stock, $.01 par value per
share (the "Common Stock"), offered hereby are being sold by the Company. The
last reported sale price of the Common Stock, which is quoted under the symbol
"HUMP" on The Nasdaq National Market, was $11.00 per share on April 3, 1998. To
ensure compliance with certain rules relating to the Company's qualification as
a REIT, the Company's Articles of Incorporation generally prohibit direct or
indirect ownership of more than 9.9% of the outstanding shares of Common Stock
by any person. See "Description of Capital Stock - Restrictions on Ownership and
Transfer."
Assuming an offering price of $11.00, the net proceeds to the Company
from this offering will be approximately $10 million, after deducting expenses
payable by the Company estimated at $210,000. The Company will contribute all of
the net proceeds of this offering to the Partnership and, after such
contribution, will own an approximately 87.21% interest in the Partnership. The
Partnership will use the net proceeds of this offering to repay certain
indebtedness.
See "Risk Factors" beginning on page 14 of this Prospectus for a
discussion of certain factors that should be considered by prospective
purchasers of the shares of Common Stock offered hereby.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Selling Proceeds to
Public Commission(1) Company(2)
- --------------------------------------------------------------------------------
Per Share $ $ $
Total(3) ............. $ $ $
================================================================================
(1) See "Underwriting" for information concerning indemnification of the
Underwriter and other matters.
(2) Before deducting expenses payable by the Company, estimated at $210,000.
(3) The Company has granted the Underwriter an option for 30 days to purchase up
to an additional 150,000 shares at the public offering price per share, less
the underwriting discount, solely to cover over-allotments. If such option is
exercised in full, the total Price to Public, Selling Commission and Proceeds
to Company will be $ , $ and $ , respectively. See "Underwriting".
The shares of Common Stock offered hereby are being offered by Anderson
& Strudwick Incorporated (the "Underwriter"), as and if delivered to and
accepted by it, and subject to the right of the Underwriter to reject any order
in whole or in part. It is expected that the delivery of the Common Shares
will be made in New York, New York on or about April __, 1998.
---------------
ANDERSON & STRUDWICK
INCORPORATED
April __, 1998
<PAGE>
[COLOR PHOTOS AND ART WORK TO COME]
<PAGE>
THE PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THE
WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND WORDS OF SIMILAR IMPORT. SUCH
FORWARD- LOOKING STATEMENTS RELATE TO FUTURE EVENTS, THE FUTURE FINANCIAL
PERFORMANCE OF THE COMPANY, AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS
OF THE COMPANY OR INDUSTRY RESULTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER
THE VARIOUS FACTORS IDENTIFIED IN THE PROSPECTUS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER, INCLUDING, WITHOUT LIMITATION, THOSE DISCUSSED IN THE SECTIONS
ENTITLED "PROSPECTUS SUMMARY" AND "RISK FACTORS."
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
Web site at http://www.sec.gov, and reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission (including the Company) can be obtained from that site. The Common
Stock of the Company is traded on The Nasdaq National Market and such reports,
proxy and information statements and other information concerning the Company
can be inspected and copied at The Nasdaq Stock Market, 1735 K Street, N.W.,
Washington, D.C.
20006-1506.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-11 under the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations promulgated thereunder, with respect to the Common Shares offered
pursuant to this Prospectus. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information concerning the
Company and the Common Shares offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed therewith, which may
be examined without charge at, or copies obtained upon payment of prescribed
fees from, the Commission and its regional offices at the locations listed
above. Any statements contained herein concerning the provisions of any document
are not necessarily complete, and in each instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER (AND SELLING GROUP
MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
<PAGE>
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY........................................................ 1
The Company............................................................. 1
Risk Factors............................................................ 1
Recent Developments..................................................... 3
The Hotels.............................................................. 5
Growth Strategy......................................................... 6
Distribution Policy..................................................... 9
Tax Status.............................................................. 9
The Offering............................................................ 10
Summary Financial Data.................................................. 11
RISK FACTORS.............................................................. 14
Conflicts of Interest................................................... 14
Risks of Leverage....................................................... 15
Dependence on the Lessee................................................ 15
Tax Risks............................................................... 16
Risks of Mr. Humphrey's Personal Bankruptcy............................. 17
Risks Associated with Development....................................... 17
Inability to Operate the Properties..................................... 17
Growth Strategy......................................................... 17
Limited Number of Hotels................................................ 18
Emphasis on Comfort Inn Hotels.......................................... 18
Dilution................................................................ 18
Cross-Collateralized Debt............................................... 18
No Assurance of Return on Property Investments.......................... 19
Effect of Market Interest Rates on Price of the Common Stock............ 19
Reliance on Board of Directors and Management........................... 19
Limitation on Liability of Officers and Directors....................... 19
Limitation on Acquisition and Change in Control......................... 19
Ability of Board of Directors to Change Certain Policies................ 20
Hotel Industry Risks.................................................... 20
Real Estate Investment Risks............................................ 22
THE COMPANY............................................................... 23
GROWTH STRATEGY........................................................... 24
Acquisition Strategy.................................................... 24
Development Strategy.................................................... 25
Internal Growth Strategy................................................ 25
USE OF PROCEEDS........................................................... 27
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS............................. 28
CAPITALIZATION............................................................ 29
DILUTION.................................................................. 30
SELECTED FINANCIAL INFORMATION............................................ 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................... 36
Overview................................................................ 36
Results of Operations................................................... 36
Liquidity and Capital Resources......................................... 37
Inflation............................................................... 40
Seasonality of Hotel Business and the Hotels............................ 40
Year 2000............................................................... 40
BUSINESS AND PROPERTIES................................................... 40
Comfort Inn and Comfort Suites Hotels and Rodeway Inn Hotels............ 40
Best Western Hotels and Best Western Suites............................. 40
Days Inn Hotels......................................................... 40
Holiday Inn Express Hotels.............................................. 40
The Hotels.............................................................. 41
The Fixed Lease......................................................... 44
The Percentage Leases................................................... 44
Franchise Licenses...................................................... 50
Operating Practices..................................................... 51
Employees............................................................... 51
Environmental Matters....................................................52
Competition............................................................. 52
Depreciation............................................................ 53
Legal Proceedings....................................................... 53
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES................ 53
Investment Policies......................................................54
Financing............................................................... 54
Conflict of Interest Policies........................................... 54
Provisions of Virginia Law.............................................. 56
Policies with Respect to Other Activities............................... 56
MANAGEMENT.................................................................57
Directors and Executive Officers.........................................57
Acquisition Committee................................................... 58
Audit Committee......................................................... 58
Executive Compensation.................................................. 58
Compensation of Directors............................................... 58
Exculpation and Indemnification..........................................59
CERTAIN RELATIONSHIPS AND TRANSACTIONS.................................... 59
Revised Services Agreement.............................................. 59
Credit Facility......................................................... 59
Development Agreement................................................... 60
Acquisition of Certain Hotels from Humphrey Affiliates.................. 60
Guarantees by Mr. Humphrey and His Affiliates........................... 60
Leases.................................................................. 60
Franchise Licenses.......................................................61
Non-Competition Agreement and Option Agreement.......................... 61
Other................................................................... 61
THE LESSEE................................................................ 61
OWNERSHIP OF THE COMPANY'S COMMON STOCK................................... 63
DESCRIPTION OF CAPITAL STOCK.............................................. 64
General................................................................. 64
Common Stock............................................................ 64
Preferred Stock......................................................... 65
Restrictions on Ownership and Transfer.................................. 65
Other Matters........................................................... 67
CERTAIN PROVISIONS OF VIRGINIA LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS..................... 67
Board of Directors...................................................... 67
Amendment............................................................... 68
Business Combinations................................................... 68
Control Share Acquisitions.............................................. 69
Operations.............................................................. 69
Advance Notice of Director Nominations and New Business................. 69
SHARES AVAILABLE FOR FUTURE SALE.......................................... 69
PARTNERSHIP AGREEMENT..................................................... 70
Management.............................................................. 70
Transferability of Interests............................................ 71
Capital Contribution.................................................... 71
Redemption Rights....................................................... 71
Operations.............................................................. 72
Distributions........................................................... 72
Allocations............................................................. 72
Term.................................................................... 72
Tax Matters............................................................. 73
FEDERAL INCOME TAX CONSIDERATIONS......................................... 73
Taxation of the Company................................................. 73
Requirements for Qualification.......................................... 74
Failure to Qualify...................................................... 82
Taxation of Taxable U.S. Shareholders................................... 82
Taxation of Shareholders on the Disposition of the Common Stock......... 83
Capital Gains and Losses................................................ 83
Information Reporting Requirements and Backup Withholding............... 84
Taxation of Tax-Exempt Shareholders..................................... 84
Taxation of Non-U.S. Shareholders....................................... 84
Proposed Tax Legislation................................................ 86
Other Tax Consequences.................................................. 86
Tax Aspects of the Partnership and the Subsidiary Partnership........... 86
Sale of a Hotel Partnership's Property.................................. 89
UNDERWRITING.............................................................. 90
EXPERTS................................................................... 91
REPORTS TO SHAREHOLDERS................................................... 91
LEGAL MATTERS............................................................. 91
GLOSSARY.................................................................. 92
INDEX TO FINANCIAL STATEMENTS.............................................F-1
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, the information contained in
this Prospectus assumes that the Underwriter's over-allotment option is not
exercised and assumes that the offering price is $11.00 per share, the last
reported bid price of the Common Stock on The Nasdaq National Market as of March
24, 1998. Unless the context otherwise indicates, all references herein to the
"Company" include Humphrey Hospitality Trust, Inc., Humphrey Hospitality REIT
Trust, Humphrey Hospitality Limited Partnership and Solomons Beacon Inn Limited
Partnership. Unless the context otherwise indicates, all references herein to
the "Partnership" include Humphrey Hospitality Limited Partnership and Solomons
Beacon Inn Limited Partnership. The offering of 1,000,000 shares of the
Company's Common Stock pursuant to this Prospectus is referred to herein as the
"Offering." The Company's Common Stock, par value $.01 per share, is referenced
herein as the "Common Stock," and the shares of the Company's Common Stock that
are offered hereby are referenced herein as the "Common Shares." See "Glossary"
for the definitions of certain additional terms used in this Prospectus.
The Company
The Company is a self-administered REIT that, through the Partnership,
owns interests in twenty existing limited-service Hotels with an aggregate of
1,312 rooms and an average age of approximately nine years as of December 31,
1997. The Hotels include twelve Hotels operated as Comfort Inn hotels, three
Hotels operated as Holiday Inn Express hotels, one Hotel operated as a Best
Western hotel, one Hotel operated as a Best Western Suites hotel, one Hotel
operated as a Comfort Suites hotel, one Hotel operated as a Days Inn hotel and
one Hotel operated as a Rodeway Inn hotel. The Hotels are located in nine states
in the eastern United States. Ten of the Hotels were purchased from Affiliates
(as defined herein) of James I. Humphrey, Jr., the Company's Chairman and
President.
The Company will contribute all of the proceeds from the Offering, net
of all Offering expenses and fees to the Underwriter ("Net Proceeds"), to the
Partnership in exchange for 1,000,000 units of limited partnership interest in
the Partnership ("Units"). After the closing of the Offering (the "Closing"),
the Company will own an 87.21% partnership interest, and Mr. Humphrey and his
Affiliates (collectively, the "Humphrey Affiliates") will own a 12.79% limited
partnership interest in the Partnership. Humphrey Hospitality REIT Trust, a
Maryland real estate investment trust and wholly owned subsidiary of the Company
(the "General Partner"), will remain the sole general partner of the
Partnership. The Net Proceeds will be approximately $10 million, assuming an
offering price of $11.00 per share of Common Stock offered hereby (the "Offering
Price"), which was the last reported bid price of the Common Stock on the Nasdaq
National Market as of March 20, 1998. The Partnership will use the Net Proceeds
to repay approximately $10 million of outstanding debt on a credit facility (the
"Credit Facility"), which is secured by 17 of the Hotels. Upon the application
of the Net Proceeds, the Company will have approximately $21 million of total
indebtedness outstanding (the "Remaining Indebtedness"), all of which debt will
be secured by one or more of the Hotels.
In order to qualify as a REIT, the Company cannot operate hotels.
Therefore, the Hotels are leased to, and operated by, Humphrey Hospitality
Management, Inc. (the "Lessee"). The leases relating to the Hotels (the
"Percentage Leases"), with the exception of the Comfort Suites-Dover, Delaware
Hotel, are designed to allow the Company to participate in growth in revenues of
the Hotels by providing that percentages of such revenues are paid by the Lessee
as rent. The Comfort Suites-Dover, Delaware Hotel is leased pursuant to a lease
that provides for fixed rent payments (the "Fixed Lease"). Mr. Humphrey is the
sole shareholder of the Lessee.
Risk Factors
An investment in the Common Shares involves various risks, and
investors should carefully consider the matters discussed under "Risk Factors,"
including the following:
o Conflicts of interest between the Company, the limited
partners of the Partnership (the "Limited Partners"), which
consist of Mr. Humphrey and certain Humphrey Affiliates, and
the Lessee, including:
<PAGE>
o conflicts related to the adverse tax consequences to
the Limited Partners upon a sale of any Hotel in
which they once owned an interest, or the refinancing
or prepayment of any principal on any of the
Remaining Indebtedness related to such a Hotel and
the related risk that Mr. Humphrey's personal
interests with regard to a sale of a Hotel or
refinancing or prepayment of any of the Remaining
Indebtedness could be adverse to those of the Company
and its shareholders;
o lack of arm's-length negotiations with respect to the
terms of the Leases (as defined herein), the purchase
agreements for the Hotels, the Non-Competition
Agreement (as defined herein) and the Option
Agreement (as defined herein) and Mr. Humphrey's
conflicts relating to enforcing these agreements; and
o conflicts relating to competing demands on Mr. Humphrey's
and the Lessee's time.
o George R. Whittemore, a Director of the Company, is a
consultant to Mills Management II, Inc., which is the manager
and a member of a privately-held limited liability company
that was formed to, among other things, acquire hotels that
are substantially similar to the Hotels. Mr. Whittemore may
experience conflicts between his obligations as a consultant
to Mills Management II, Inc. and his duties to the Company in
the event that investment opportunities arise that meet both
companies' investment criteria.
o Risks associated with the dependence of the Company on the
Lessee's ability to generate revenue and to control operating
costs at the Hotels and to make payments under the Leases, as
the principal source of the Company's revenues, in amounts
sufficient to permit the Company to make the anticipated
distributions to shareholders.
o Risks associated with distributing substantially all Cash
Available for Distribution to Shareholders (as defined
herein), including the risk that future Cash Available for
Distribution to Shareholders will be insufficient to permit
the Company to maintain its current distribution rate.
o Tax risks, including taxation of the Company as a regular
corporation if it fails to qualify as a REIT, taxation of the
Partnership as a corporation if it were deemed not to be a
partnership, and the Company's liability for federal and state
taxes on its income as a result of either such event, which
would materially adversely affect Cash Available for
Distribution to Shareholders.
o Mr. Humphrey personally guarantees, jointly and severally with
the Company, a portion of the Remaining Indebtedness, and his
personal bankruptcy would constitute a default under the
related loan documents.
o Risks associated with the Company's (and the Company's
shareholders') lack of control over the daily operation of the
Hotels due to federal income tax law prohibitions on a REIT
operating hotels.
o Risks that the Company's growth through acquisitions and
development will be constrained (i) because a REIT generally
cannot retain earnings for acquisitions and development and
(ii) by the limitation on the amount of indebtedness that the
Company can incur under its Debt Policy (as defined herein).
Consequently, the Company's ability to grow through additional
acquisitions and development of hotels will likely depend on
its ability to obtain additional equity financing.
o The number of the Hotels is limited and, therefore, adverse
changes in the operations of any Hotel could reduce Cash
Available for Distribution to Shareholders.
o Twelve of the Hotels are licensed under one franchise brand
and any adverse developments to that franchise brand could
reduce amounts available for distribution to the holders of
Common Stock.
2
<PAGE>
o Purchasers of the Common Shares sold in the Offering will
experience immediate and substantial dilution of $4.93 or
44.7% of the Offering Price in the net tangible book value per
Common Share.
o Although the Company has adopted policies and has made
covenants to lenders and the Underwriter limiting its level of
indebtedness, there is no provision in the Company's Articles
of Incorporation or Bylaws that limits the amount of debt that
the Company may incur, and consequently, the Company could
become highly leveraged, which in turn could adversely affect
the Company's ability to make distributions to its
shareholders and increase the risk of default under its
indebtedness.
o Risks associated with the Company's potential development of
hotels, including the risk of abandonment of development,
unexpected construction costs or delays, newly developed
hotels' failure to perform as expected, and failure to obtain,
or delays in obtaining, governmental permits and
authorizations.
Recent Developments
Acquisitions
The following table shows Hotels that have been acquired by the Company
since its most recent public offering of Common Stock, which was completed in
December 1996. Each Hotel, with the exception of the Comfort Suites-Dover,
Delaware Hotel, is leased pursuant to a Percentage Lease. The Comfort
Suites-Dover, Delaware Hotel is leased pursuant to a Fixed Lease.
<TABLE>
<CAPTION> Contract
Date Number of Purchase
Acquired Rooms Price
-------- -------- --------
<S> <C>
Comfort Inns:
Chambersburg, Pennsylvania............ May 29, 1997 65 $ 2,600,000
Culpeper, Virginia.................... February 26, 1997 49 1,900,000
Gettysburg, Pennsylvania(1)........... May 23, 1997 81 4,325,000
Murphy, North Carolina................ April 25, 1997 56 1,975,000
New Castle, Pennsylvania.............. March 17, 1997 79 3,000,000
Comfort Suites:
Dover, Delaware....................... January 22, 1997 64 2,795,210
Best Western and Best Western Suites:
Harlan, Kentucky(1)................... April 17, 1997 63 2,625,000
Key Largo, Florida.................... September 2, 1997 40 2,960,000(2)
Holiday Inn Express:
Allentown, Pennsylvania............... June 10, 1997 83 3,750,000
Danville, Kentucky.................... April 23, 1997 62 2,716,000
Gettysburg, Pennsylvania.............. May 23, 1997 51 2,725,000
---- ----------
Totals............................ 693 $31,371,210
=== ===========
</TABLE>
- -------------------------
(1) The Company is the lessee under land leases on the parcels underlying the
Comfort Inn-Gettysburg, Pennsylvania and the Best Western-Harlan, Kentucky
Hotels that expire in 2096 and 2091, respectively. The rent on the
Gettysburg land lease is $35,000 per year, payable in equal monthly
installments, and the rent on the Harlan land lease is $2,000 per month or
5% of room sales, whichever is greater.
(2) Purchased at a contract purchase price of $2,590,000 from an unaffiliated
seller pursuant to a purchase agreement that was assigned to the
Partnership by Humphrey-Key Largo Associates, L.P. ("Humphrey-Key Largo"),
a partnership substantially owned by Mr. Humphrey. Pursuant to the
assignment of the purchase agreement, Humphrey-Key Largo received as
compensation 34,023 Units of limited partnership interest in the
Partnership, valued at $370,000 based on an average price of $10.875 per
share of Common Stock for the ten trading days prior to September 2, 1997.
The acquisition of the Hotel has been recorded by the Company at the
contract purchase price of $2,590,000, which excludes the value of the
Units issued to Humphrey-Key Largo.
3
<PAGE>
Resignation of Executive Officer and Director of the Company
Effective March 17, 1998, Charles A. Mills, III, resigned from his
positions as Vice President, Treasurer and Director of the Company. Mr. Mills is
the Senior Vice President, Chairman and largest shareholder of the Underwriter
and has served on the Company's Board of Directors since its IPO on November 29,
1994. Simultaneously with the completion of the Offering, the Company will enter
into a Capital Consulting Agreement with Mr. Mills, who will continue to provide
the Company with advice as to future equity offerings and access to capital
markets generally. Under the terms of the Capital Consulting Agreement, which
has a one year term, the Company will pay Mr. Mills $20,000 plus .25% of the net
proceeds from public equity offerings over the next twelve months.
Directors Fees
On May 22, 1997, the Board of Directors unanimously voted to increase
the annual fees paid to them by the Company for serving on the Board of
Directors from $10,000 per year to $15,000 per year. On September 9, 1997, the
Board of Directors voted to utilize their full annual fees, with the exception
of the fees received by Mr. Humphrey, to purchase Common Stock on the open
market, and to exercise their reasonable best efforts to do so within ten days
of the receipt of such fees.
Credit Facility and Debt Policy
Since February 1997, the Company has increased the maximum amount that
it may borrow pursuant to its credit agreement with Mercantile Safe Deposit and
Trust Company ("Mercantile") from $6.5 million to $25.5 million (the "Credit
Facility"), primarily in order to acquire additional hotels. The Credit Facility
is secured by 17 of the Hotels. The interest rate under the Credit Facility is
equal to the prime rate as published in the "Money Rates" section of The Wall
Street Journal plus .25%, which, as of March 20, 1998, was equal to 8.75%. The
Credit Facility matures on April 10, 1999 and is subject to 2 one year
extensions, which are exercisable at Mercantile's option. Upon completion of the
Offering, the Company expects to increase the maximum amount that it may borrow
pursuant to the Credit Facility to $40 million at an interest rate equal to the
30 day London Interbank Offered Rate (which was 5.68% as of March 20, 1998),
plus 250 basis points.
As of May 22, 1997, the Board of Directors voted to increase the amount
of consolidated indebtedness that the Company may incur from 50% to 55% of the
aggregate purchase price of the hotels in which it has invested.
Capital Expenditure Reserves Policy
Although the Company believes that 4% of room revenue is generally an
appropriate capital reserve to maintain the condition and viability of its
Hotels, the Company will increase its capital reserves set-aside from 4% to 6%
of room revenue upon completion of the Offering. The additional 2% of room
revenue will be held in a special reserve fund (the "Additional Reserve Fund")
that will be deployed at the Hotels primarily to enhance their competitive
position. To ensure that the Company receives additional annual income that is
at least equal to 12% of the amount of funds invested by the Company from the
Additional Reserve Fund, the Company and the Lessee have agreed to amend the
Leases for the Hotels that receive capital from the Additional Reserve Fund to
provide that each such Hotel will increase its annual Base Rent payment by 7%
per annum of the capital received from the Additional Reserve Fund. The Company
expects that it will receive additional amounts under the terms of the
Percentage Leases equal to at least 5% per annum of the amount invested from the
Additional Reserve Fund through its participation in increased room revenue
resulting from such additional investments.
4
<PAGE>
The Hotels
The following table sets forth certain information with respect to the
Hotels for the twelve months ended December 31, 1997 (or such shorter period
commencing on the date of acquisition, if applicable):
<TABLE>
<CAPTION>
Average
Year Number of Average Daily Lease
HOTELS Opened Rooms Occupancy Rate REVPAR(1) Payments
------ ----- --------- ---- --------- --------
<S> <C>
Comfort Inns & Suites:
Chambersburg, Pennsylvania(2)...... 1993 65 68.0% $55.24 $37.57 $228,806
Culpeper, Virginia(3).............. 1986 49 83.8% 50.71 42.48 254,646
Dahlgren, Virginia................. 1989 59 82.5% 49.53 40.85 388,044
Dover, Delaware(4)................. 1997 64 67.8% 64.42 43.68 357,649
Dublin, Virginia................... 1986 100 73.4% 52.95 38.87 689,691
Elizabethton, Tennessee............ 1987 58 57.8% 44.94 25.98 219,273
Farmville, Virginia................ 1985 51 79.5% 49.80 39.57 347,681
Gettysburg, Pennsylvania(5)........ 1996 81 74.1% 74.37 55.11 424,239
Morgantown, West Virginia.......... 1986 80 79.6% 55.12 43.85 644,049
Murphy, North Carolina(6).......... 1989 56 73.7% 56.10 41.32 219,165
New Castle, Pennsylvania(7)........ 1987 79 71.9% 56.40 40.57 381,810
Princeton, West Virginia........... 1985 51 80.0% 50.06 40.05 411,982
Beacon Marina,
Solomons, Maryland............... 1986 60 79.3% 65.07 51.57 851,070
Best Western and Best Western Suites:
Harlan, Kentucky(8)................ 1993 63 72.5% 51.93 37.66 304,284
Key Largo, Florida(9).............. 1987 40 71.4% 88.30 63.06 147,017
Days Inn:
Farmville, Virginia................ 1989 60 62.5% 47.55 29.73 292,875
Holiday Inn Express:
Allentown, Pennsylvania(10)........ 1978 83 65.5% 65.13 42.68 311,753
Danville, Kentucky(11)............. 1994 62 80.1% 55.89 44.77 295,851
Gettysburg, Pennsylvania(5)........ 1990 51 73.3% 77.01 56.43 267,764
Rodeway Inn:
Wytheville, Virginia............... 1985 100 32.8% 48.23 15.83 288,544
---- --------
Consolidated Total/Weighted
Average for all Hotels............ 1,312 $7,326,193
===== ==========
</TABLE>
- -------------------------
(1) "REVPAR" means room revenue per available room, and is determined by
dividing room revenue by available rooms for the applicable period.
(2) Acquired May 29, 1997.
(3) Acquired February 26, 1997.
(4) Opened January 22, 1997.
(5) Acquired May 23, 1997.
(6) Acquired April 25, 1997.
(7) Acquired March 17, 1997.
(8) Acquired April 17, 1997.
(9) Acquired September 2, 1997.
(10) Acquired June 10, 1997.
(11) Acquired April 23, 1997.
5
<PAGE>
For further information regarding the Hotels, see "Business and Properties - The
Hotels." For further information regarding the Lessee, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
Growth Strategy
The Company seeks to enhance shareholder value by increasing Cash
Available for Distribution to Shareholders by acquiring and developing
additional hotels that meet the Company's investment criteria and by
participating in increased revenue from the Hotels through Percentage Leases.
"Cash Available for Distribution to Shareholders" means net income, or loss, of
the Company plus depreciation and amortization minus capital expenditures or
reserves and scheduled principal payments on indebtedness.
Acquisition Strategy
The Company intends to acquire equity interests in additional operating
hotels that meet its investment criteria as described below. The Company will
emphasize limited service hotels with strong, national franchise affiliations in
the upper economy and mid-scale market segments, or hotels with the potential to
obtain such franchises. In particular, the Company will consider acquiring
limited service hotels such as Comfort Inn, Comfort Suites, Best Western, Best
Western Suites, Days Inn, Fairfield Inn(R), Hampton Inn(R), Holiday Inn Express
and Rodeway Inn hotels, limited service extended-stay hotels such as Hampton Inn
and Suites(R), Homewood Suites(R) and Residence Inn(R) hotels and full service
hotels such as Holiday Inns(R). Under the Company's Bylaws, any transaction to
acquire any additional properties must be approved by a majority of the members
of the Company's Board of Directors, including a majority of the Independent
Directors. As defined in the Company's Articles of Incorporation, "Independent
Directors" means Directors of the Company who within the last two years have not
(i) owned an interest in any Humphrey Affiliates or certain other entities, (ii)
been employed by Mr. Humphrey or any Humphrey Affiliates or certain other
entities, (iii) been an officer or director of any Humphrey Affiliates or
certain other entities, (iv) performed services for the Company, (v) been a
director for more than three REITs organized by Mr. Humphrey or any of his
Affiliates or certain other entities or (vi) had any material business or
professional relationship with Mr. Humphrey or any of his Affiliates or certain
other entities. See "Certain Provisions of Virginia Law and of the Company's
Articles of Incorporation and Bylaws -- Board of Directors."
Under the Investment Policy, the Company will only acquire an operating
hotel for which it expects to receive, based on prior operating history, annual
rental income in an amount greater than or equal to 12% of the total purchase
price paid by the Company for such hotel, net of (i) insurance premiums paid by
the Company, (ii) the FFE Reserves of 4% of room revenue ("FFE Reserves") and
(iii) real estate and personal property taxes. See "Risk Factors -- No Assurance
of Return on Property Investments." The Company's additional investments in
hotels may be financed, in whole or in part, with undistributed cash, net
proceeds from subsequent issuances of capital stock or other securities or
borrowings. The Company's policy is to limit consolidated indebtedness to less
than 55% of the aggregate purchase price paid by the Company for the Hotels in
which it has invested (the "Debt Policy"). The aggregate purchase price paid by
the Company for the Hotels is currently approximately $58.4 million. After the
Company has applied the Net Proceeds as set forth herein, the Remaining
Indebtedness (approximately $21 million) will represent approximately 36% of the
aggregate purchase price paid by the Company for the Hotels. See "- Recent
Developments," "Risk Factors - Risks of Leverage" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." The Company has an option to acquire additional hotels
acquired or developed by Mr. Humphrey or his Affiliates. See "Policies and
Objectives with Respect to Certain Activities - Conflict of Interest Policies --
The Non-Competition Agreement and Option Agreement."
Development Strategy
The Company intends to grow through the development of new hotels as
well as from the acquisition of existing hotels. The Company intends to develop
limited-service hotels in secondary and tertiary markets, typically with under
150 rooms, that are similar to the Company's present Hotels. The Company is
interested in sites that offer the potential to attract a diverse mix of
potential market segments.
6
<PAGE>
The Company's development site selection criteria is expected to
include some or all of the following characteristics:
o Relatively low land costs, particularly as compared with major
metropolitan areas.
o Sites that exist on or near major highways.
o Areas that have strong industrial bases with the potential for
future growth.
o Communities with state or federal installations, colleges or
universities.
o Areas with older existing hotel properties.
These criteria describe the basic characteristics that the Company
looks for prior to committing to the development of a new hotel. Sites that are
selected may have some or all of the market characteristics as described above,
as well as characteristics that are not specifically described herein. It is not
anticipated that all sites selected by the Company will possess all of the
characteristics described herein.
Because a development project has no prior revenues on which the
Company's Investment Policy can be tested, the Company intends to invest only in
developments where it reasonably believes it will receive Rent (as defined
herein) payments from the Lessee that are consistent with the Investment Policy.
See "Risk Factors - No Assurance of Return on Property Investments."
Internal Growth Strategy
The Percentage Leases relating to the Hotels are designed to allow the
Company to participate in growth in revenues at the Hotels. The Company intends
to use Percentage Leases substantially similar to those applicable to the Hotels
with respect to any additional existing hotels it may acquire and Fixed Leases
substantially similar to the lease on the Comfort Suites-Dover, Delaware Hotel
with respect to hotels the Company may develop on its own. The Company believes
that there is less startup risk associated with acquisitions of existing hotels
than with the Company's development of new hotels. See "Business and Properties
- - The Percentage Leases." The Percentage Leases provide for the Lessee to pay
monthly base rent ("Base Rent") plus percentage rent ("Percentage Rent"). The
Percentage Rent for each Hotel consists of (i) a set percentage of quarterly and
semi-annual room revenues, which is payable quarterly and semi-annually,
respectively, (ii) a set percentage of annual room revenues in excess of a
threshold amount ("Threshold"), which is payable annually, and (iii) 8% of
monthly revenues other than room revenues (including, but not limited to,
telephone charges, movie rental fees and rental payments under any third-party
leases), which is payable monthly. The portion of Percentage Rent that is based
on annual room revenues does not apply to amounts under the Threshold and is
designed to allow the Company to participate in any increases in room revenues
occurring after the acquisition of a Hotel. See "Business and Properties - The
Hotels" and "The Percentage Leases - Amounts Payable Under the Percentage
Leases." The Base Rent, Percentage Rents and rent payments pursuant to the Fixed
Lease are hereinafter referred to collectively as "Rent."
7
<PAGE>
Following the Closing of the Offering, the structure and relationships
of the Company, the Partnership, the Hotels and the Lessee will be as follows:
<TABLE>
<S> <C>
Holders of
Common Stock
|
Humphrey Hospitality Mr. Humphrey
---------------------------- Trust, Inc. and
| The "Company" Affiliates
| | |
| 100% |
1% | |
Limited Partnership Humphrey Hospitality 12.79%
Interest REIT Trust Partnership Interest
| | and limited partners
| | |
| 87.21% |
| Partnership Interest |
| | _____________________|
| | |
Solomons Humphrey Hospitality
Beacon Inn Limited 99% Limited Humphrey Hospitality
Partnership ----- General ----- Partnership ---- Leases ---- Management, Inc.
The "Subsidiary" Partnership The "Partnership" (solely owned by
| | | Mr. Humphrey)
| | | |
| | | |
| |________________________________|________________________________________|
100% |
Equity 100%
Interest Equity Interest
| |
| |
| |
One Nineteen
Hotel Hotels
</TABLE>
8
<PAGE>
Distribution Policy
The following table sets forth the cash distributions declared per
share for each of the periods indicated.
1995
First Quarter....................................................... .15
Second Quarter...................................................... .15
Third Quarter....................................................... .181(1)
Fourth Quarter...................................................... .19
1996
First Quarter....................................................... .19
Second Quarter...................................................... .19
Third Quarter....................................................... .19
Fourth Quarter...................................................... .19
1997
First Quarter....................................................... .19
Second Quarter...................................................... .19
Third Quarter....................................................... .19
Fourth Quarter...................................................... .2025(2)
1998
First Quarter (through February 28, 1998)........................... .135(2)
- ----------------------------
(1) Pro rata distribution for the period July 21, 1995, the closing of the
Company's second public offering of Common Stock, through September 30,
1995 based on a quarterly distribution of $.19 per share.
(2) Although presented on a quarterly basis, the Company began making monthly
distributions to its Common Shareholders commencing with the Company's
distribution declared in October 1997.
Future distributions will depend on the Company's actual results of
operations, Cash Available for Distribution to Shareholders, cash flows from
operations, economic conditions and other factors, such as working capital, cash
requirements to fund investing and financing activities such as debt service
requirements, including the repayment or refinancing of indebtedness, capital
expenditure requirements, including improvements to and expansions of existing
properties, and the acquisition or development of additional hotel properties,
as well as the distribution requirements under federal income tax provisions for
qualification as a REIT, which require that a REIT distribute at least 95% of
its annual taxable income. None of the distributions paid to the Common
Shareholders during 1997 represented a return of capital for federal income tax
purposes. There are no assurances that Cash Available for Distribution to
Shareholders will be sufficient for the Company to maintain its current
distribution rate in the future. See "Partnership Agreement."
Tax Status
The Company elected to be taxed as a REIT under Sections 856-860 of the
Internal Revenue Code of 1986, as amended, effective for its short taxable year
ended December 31, 1994. As long as the Company qualifies for taxation as a
REIT, with certain exceptions, the Company will not be subject to federal
corporate income tax on its taxable income that is distributed to its
shareholders. A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute at least 95%
of its annual taxable income, excluding net capital gains. Although the Company
does not intend to request a ruling from the Internal Revenue Service (the
"Service") as to its REIT status, the Company will obtain, at the closing of the
Offering, the opinion of its legal counsel as to its REIT status, which opinion
will be based on certain assumptions and representations and will not be binding
on the Service or any court. Even if the Company qualifies for taxation as a
REIT, the Company, the Partnership or the Subsidiary Partnership may be subject
to certain state and local taxes
9
<PAGE>
on its income and property. In connection with the Company's election to be
taxed as a REIT, the Company's Articles of Incorporation impose restrictions on
the ownership and transfer of shares of Common Stock. The Company has adopted
the calendar year as its taxable year. Failure to qualify as a REIT will render
the Company subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates and distributions
to the Common Shareholders in any such year will not be deductible by the
Company. See "Risk Factors - Tax Risks," "Federal Income Tax Considerations -
Taxation of the Company" and "Description of Capital Stock - Restrictions on
Ownership and Transfer."
The Offering
Common Shares offered by the Company............ 1,000,000
Shares of Common Stock and Units
to be outstanding after the Offering......... 5,139,073(1)
Use of Net Proceeds............................. To repay a portion of the
outstanding borrowings
under the Credit Facility.
Symbol on The Nasdaq National Market............ HUMP
- ---------------
(1) Includes 657,373 Units that are redeemable, at the option of the holder, on
a one-for-one basis for shares of Common Stock at any time or, at the Company's
option, an equivalent amount of cash.
10
<PAGE>
Summary Financial Data
The following table sets forth audited historical financial information
for the Company and the Lessee. Such data should be read in conjunction with the
applicable financial statements and the notes thereto, which are contained
elsewhere in this Prospectus.
HUMPHREY HOSPITALITY TRUST, INC. (THE COMPANY)
Summary Historical
Revenue and Expenses and Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
November 29, 1994
(Date of IPO)
through Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1994 1995 1996 1997
---- ---- ---- ----
<S> <C>
Operating Data:
Revenue:
Lease revenue ...................... $ 273 $ 3,750 $ 3,958 $ 7,326
Other income........................ - 21 47 106
------------ ----------- -------- ---------
Total revenue....................... 273 3,771 4,005 7,432
----------- ---------- ------- ---------
Expenses:
Depreciation and amortization....... 42 680 736 1,633
Interest expense.................... 97 1,011 493 1,764
Real estate and personal
property taxes and insurance...... 18 196 252 476
General and administrative.......... 15 238 411 537
----------- ----------- -------- ---------
Total expenses.................... 172 2,125 1,892 4,410
----------- ---------- -------- ---------
Income before
minority interest................. 101 1,646 2,113 3,022
Minority interest................... 29 396 435 465
----------- ---------- -------- ----------
Net income applicable
to Common Shareholders............ $ 72 $ 1,250 $ 1,678 $ 2,557
=========== ========== ========== ==========
Basic earnings per common share (1) $ 0.05 $ 0.72 $ 0.70 $ 0.73
Diluted earnings per common share (1) $ 0.05 $ 0.70 $ 0.70 $ 0.73
Other Data:
Weighted average shares:
Basic............................. 1,321,800 1,742,533 2,410,252 3,481,700
Diluted........................... 1,849,666 2,365,883 3,033,602 4,139,073
Funds from operations (2)........... $ 139 $ 2,132 $ 2,723 $ 4,548
Net cash provided by operating
activities........................ $ 170 $ 1,334 $ 2,751 $ 3,680
Net cash used in
investing activities.............. $ (4,840) $ (619) $ (1,967) $ (29,406)
Net cash provided by (used in)
financing activities.............. $ 5,223 $ (1,100) $ 6,148 $ 18,829
</TABLE>
HUMPHREY HOSPITALITY TRUST, INC.
Summary Historical Balance Sheet Data
(in thousands)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
(Audited) (Audited)
-------------- -------------
<S> <C>
Balance Sheet Data:
Net investment in hotel properties........................... $21,405 $50,476
Minority interest in Partnership............................. 3,247 3,370
Shareholders' equity......................................... 18,145 17,852
Total assets................................................. 30,221 53,799
Total debt................................................... 8,185 31,755
</TABLE>
11
<PAGE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
Summary Historical Revenue and Expenses
(in thousands)
<TABLE>
<CAPTION>
Period from
November 29, 1994 Year Year Year
(Date of IPO) Ended Ended Ended
through December 31, December 31, December 31, December 31,
1994 1995 1996 1997
(Audited) (Audited) (Audited) (Audited)
-------------- -------------- ----------- -----------
<S> <C>
Room revenue........................... $ 459 $ 7,499 $ 7,942 $ 15,581
Other revenue (3)...................... 38 556 637 871
----- -------- ------- --------
Total revenue........................ 497 8,055 8,579 16,452
Hotel operating expenses............... 314 4,167 4,590 8,716
Percentage Lease payments.............. 273 3,750 3,958 7,326
----- -------- ------- --------
Net income............................. $ (90) $ 138 $ 31 $ 410
======= ======== ======= ========
</TABLE>
(1) Represents basic and diluted earnings per share computed in accordance
with Statement of Financial Accounting Standards No. 128, Earnings Per
Share ("FAS No. 128"), adopted by the Company during 1997. Basic earnings
per share is computed as net income available to common shareholders
divided by the weighted average common shares outstanding and diluted
earnings per share is computed as income before minority interest divided
by the weighted average common shares outstanding plus the assumed
conversion of the units held by minority interests. See Note 6, Earnings
Per Share of the consolidated financial statements of Humphrey Hospitality
Trust, Inc. at page F-19 for a reconciliation of the income (numerator)
and weighted average shares (denominator) used in the calculation of basic
and diluted earnings per share. The adoption of FAS No. 128 did not have
a material effect on prior years.
(2) Management considers Funds From Operations ("FFO") to be a market accepted
measure of an equity REIT's cash flow, which management believes reflects
on the value of real estate companies such as the Company, in connection
with the evaluation of other measures of operating performances. All
REITs do not calculate FFO in the same manner, therefore, the Company's
calculation may not be the same as the calculation of FFO for similar
REITs. Beginning with the year ended December 31, 1997, the Company
changed the way it computes FFO. The Company believes that its new method
of computing FFO is more consistent with the guidelines established by
NAREIT for calculating FFO. FFO, as defined under the NAREIT standard,
consists of net income, computed in accordance with generally accepted
accounting principles ("GAAP"), excluding gains or losses from debt
restructuring and sales of properties, plus depreciation and amortization
and after adjustments for unconsolidated partnerships and joint ventures.
The following table computes FFO under both the new method and the method
formerly utilized by the Company:
12
<PAGE>
The computation of historical FFO is as follows (in thousands):
<TABLE>
<CAPTION>
Period from
November 29, 1994
(Date of IPO) Year Year Year
through Ended Ended Ended
December 31, December 31, December 31, December 31,
1994 1995 1996 1997
(Audited) (Audited) (Audited) (Audited)
------------- ------------- ------------- ------------
<S> <C>
Net income before minority
interests $ 101 $ 1,646 $ 2,113 $ 3,022
Depreciation 38 486 610 1,502
Amortization of initial
franchise costs - - - 24
--------- ---------- --------- ---------
Funds From Operations 139 2,132 2,723 4,548
(new method)
Amortization of loan costs 4 194 126 107
----------- ---------- --------- ---------
Funds From Operations
(former method) $ 143 $ 2,326 $ 2,849 $ 4,655
=========== =========== =========== ===========
</TABLE>
Industry analysts generally consider FFO to be an appropriate measure of
the performance of an equity REIT. FFO should not be considered as an
alternative to net income or other measurements under GAAP as an indicator
of operating performance or to cash flows from operating, investing or
financing activities as a measure of liquidity. FFO does not reflect
working capital changes, cash expenditures for capital improvements or
debt service with respect to the Hotels.
(3) Represents marina revenue (for the Comfort Inn-Beacon Marina, Solomons,
Maryland and the Best Western Suites-Key Largo, Florida Hotels only),
telephone revenue, restaurant revenue and other revenue.
13
<PAGE>
RISK FACTORS
In evaluating the Company's business, prospective investors should
carefully consider the following risk factors in addition to the other
information contained in this Prospectus.
Conflicts of Interest
Because of Mr. Humphrey's ownership in and/or positions with the
Company, the Partnership, and the Lessee, there are inherent conflicts of
interest in the disposition and operation of the Hotels. Consequently, the
interests of shareholders may not have been, and in the future may not be,
reflected fully in all decisions made or actions taken by officers and the Board
of Directors of the Company. See "Policies and Objectives with Respect to
Certain Activities - Conflict of Interest Policies."
Conflicts Relating to Sales or Refinancing of Hotels
Certain of the Limited Partners, which are Humphrey Affiliates, have
unrealized gain in their interests in the Partnership. A sale of certain of the
Hotels or refinancing or prepayment of principal on the Remaining Indebtedness
by the Company may cause adverse tax consequences to certain of the Limited
Partners. Therefore, the interests of the Company and certain of the Limited
Partners could be different in connection with the disposition or refinancing of
a Hotel. Decisions with respect to the disposition of any Hotel or refinancing
or prepayment of principal on the Remaining Indebtedness will be made by a
majority of the Directors, including a majority of the Independent Directors.
See "Certain Relationships and Transactions - Acquisition of Certain Hotels from
Humphrey Affiliates."
No Arm's-Length Bargaining on the Percentage Leases, the Fixed Lease, the
Development Agreement, the Services Agreement, the Hotel Purchase Agreements,
the Non-Competition Agreement and the Option Agreement
The terms of the Percentage Leases, the Fixed Lease, the Development
Agreement, the Services Agreement, the agreements pursuant to which the
Partnership acquired certain of the Hotels, the Non-Competition Agreement and
the Option Agreement were not negotiated on an arm's-length basis. See "Business
and Properties The Percentage Leases," and "- The Fixed Lease and "Certain
Relationships and Transactions." The Company does not own any interest in the
Lessee. Mr. Humphrey is a Director and officer of the Company and the sole
shareholder of the Lessee. Consequently, he has a conflict of interest regarding
the enforcement of the Leases, the Services Agreement, the Non-Competition
Agreement and the Option Agreement. See "The Lessee."
Competing Hotels to be Acquired by Affiliates of Mr. Humphrey
The Humphrey Affiliates may develop or acquire new hotels, subject to
certain limitations, which may materially affect the amount of time Mr. Humphrey
has to devote to the affairs of the Company. The Humphrey Affiliates, including
the Lessee, may operate hotels that are not owned by the Company, subject to
certain restrictions, which may materially affect the amount of time that Mr.
Humphrey or the Lessee has to devote to managing the Hotels. See "Policies and
Objectives with Respect to Certain Activities - Conflict of Interest Policies --
The Non-Competition Agreement and Option Agreement."
Competing Companies to be Advised by an Affiliate of the Company
George R. Whittemore, a Director of the Company, is a consultant to
Mills Management II, Inc., which is the manager and a member of a privately-held
limited liability company that was formed to, among other things, acquire hotels
that are substantially similar to the Hotels. Mr. Whittemore may experience
conflicts between his obligations as a consultant to Mills Management II, Inc.
and his duties to the Company in the event that investment opportunities arise
that meet both companies' investment criteria.
14
<PAGE>
Risk of High Distribution Payout Percentage
The Company's distribution rate to stockholders was approximately
84.43% of the Company's Cash Available for Distribution to Shareholders for the
fiscal year ended December 31, 1997. See "Price Range of Common Stock and
Distributions." Should the Company's Cash Available for Distribution to
Shareholders decrease, the Company may not be able to maintain its current level
of distributions.
Risks of Leverage
Upon completion of the Offering and the application of the Net Proceeds
as set forth herein, the Company will have Remaining Indebtedness of
approximately $21 million. All of the Remaining Indebtedness will be secured by
one or more of the Hotels. Approximately 70.2% ($14.8 million) of the Remaining
Indebtedness will be due or callable by the lender in April 1999, and
approximately 8.1% ($1.7 million) of the Remaining Indebtedness will be due or
callable by the lender in November 1999. Because there is no assurance that the
Company will be able to repay or refinance its debt when due or called, one or
more of the Hotels may be lost to foreclosure. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Although the Company has adopted the Debt Policy and has made covenants
to lenders and the Underwriter limiting its level of indebtedness, there is no
limit on the Company's ability to incur debt contained in the Articles of
Incorporation or Bylaws. The Company may borrow additional amounts from the same
or other lenders in the future, or may issue corporate debt securities in public
or private offerings. Certain of such additional borrowings may be secured by
the Hotels. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and "Policies and
Objectives with Respect to Certain Activities - Financing."
There can be no assurance that the Company will be able to meet its
debt service obligations and, to the extent that it cannot, the Company risks
the loss of some or all of its assets, including the Hotels, to foreclosure.
There also can be no assurance that the Company will be able to adhere to its
Debt Policy and such policy may be changed by the Board of Directors without
shareholder approval. The aggregate purchase price paid by the Company for the
Hotels is currently approximately $58.4 million. After the Company has applied
the Net Proceeds as set forth herein, the Company's total outstanding
indebtedness will represent approximately 36% of the aggregate purchase price
paid by the Company for the Hotels, thereby giving the Company additional
borrowing capacity of up to approximately $11.1 million under the Debt Policy.
The amount of the Company's outstanding indebtedness could limit the Company's
ability to acquire additional hotels without issuing equity securities. See
"Risk Factors - Growth Strategy - Constraints on Acquisitions."
Dependence on the Lessee
In order to generate revenues to enable it to make distributions to
shareholders, the Company relies on the Lessee to make Rent payments. Reductions
in revenues from the Hotels or in the net operating income of the Lessee may
adversely affect the ability of the Lessee to make such Rent payments and thus
the Company's ability to make anticipated distributions to its shareholders.
Although failure on the part of the Lessee to comply materially with the terms
of a Lease would give the Company the right to terminate any or all of the
Leases, to repossess the applicable properties and to enforce the payment
obligations under the Leases, the Company would then be required to find another
lessee. There can be no assurance that the Company would be able to find another
lessee or that, if another lessee were found, the Company would be able to enter
into a lease on terms as favorable as the Leases.
See "Business and Properties - The Percentage Leases" and "- The Fixed Lease."
The Lessee has only nominal assets (other than its leasehold interests
in the Hotels and the working capital necessary to operate the Hotels) and,
therefore, is dependent on the operation of the Hotels to fund its Rent payments
to the Partnership under the Leases. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of Operations."
15
<PAGE>
Tax Risks
Failure to Qualify as a REIT
The Company has operated and intends to continue to operate so as to
qualify as a REIT for federal income tax purposes. Although the Company has not
requested, and does not expect to request, a ruling from the Service that it
qualifies as a REIT, the Company will receive at the Closing an opinion of its
counsel that, based on certain assumptions and representations, it so qualifies.
Investors should be aware, however, that opinions of counsel are not binding on
the Service or any court. The REIT qualification opinion only represents the
view of counsel to the Company based on counsel's review and analysis of
existing law, which includes no controlling precedent. Furthermore, both the
validity of the opinion and the continued qualification of the Company as a REIT
will depend on the Company's continuing ability to meet various requirements
concerning, among other things, the ownership of its outstanding shares, the
nature of its assets, the sources of its income, and the amount of its
distributions to its shareholders. See "Federal Income Tax Considerations -
Taxation of the Company."
If the Company were to fail to qualify as a REIT in any taxable year,
the Company would not be allowed a deduction for distributions to its
shareholders in computing its taxable income and would be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Unless entitled to relief under certain Code
provisions, the Company also would be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.
As a result, Cash Available for Distribution to Shareholders would be reduced
for each of the years involved. Although the Company currently conducts its
operations in a manner designed to qualify as a REIT, it is possible that future
economic, market, legal, tax or other considerations may cause the Board of
Directors, with the consent of two-thirds of the shareholders, to revoke the
REIT election. See "Federal Income Tax Considerations."
REIT Minimum Distribution Requirements
In order to qualify as a REIT, the Company generally is required each
year to distribute to its shareholders at least 95% of its net taxable income
(excluding any net capital gain). In addition, the Company will be subject to a
4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
of (i) 85% of its ordinary income for that year, (ii) 95% of its capital gain
net income for that year, and (iii) 100% of its undistributed taxable income
from prior years. To the extent that the Company elects to retain and pay income
tax on its net capital gain, such retained amounts will be treated as having
been distributed for purposes of the 4% excise tax.
The Company has made and will continue to make distributions to its
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. The Company's income consists primarily of its share
of the income of the Partnership and the Subsidiary Partnership, and the
Company's Cash Available for Distribution to Shareholders consists primarily of
its share of cash distributions from the Partnership and the Subsidiary
Partnership. Differences in timing between the recognition of taxable income and
the receipt of Cash Available for Distribution to Shareholders due to the
seasonality of the hotel industry could require the Company, through the
Partnership, to borrow funds on a short-term basis to meet the 95% distribution
requirement and to avoid the nondeductible excise tax. See "Risk Factors -- Risk
of Leverage." For federal income tax purposes, distributions paid to
shareholders may consist of ordinary income, capital gains, nontaxable return of
capital, or a combination thereof. The Company will provide its shareholders
with an annual statement as to its designation of the taxability of
distributions.
Distributions by the Partnership will be determined by the Company's
Board of Directors and will be dependent on a number of factors, including the
amount of the Partnership's distributable cash, the Partnership's financial
condition, any decision by the Board of Directors to reinvest funds rather than
to distribute such funds, the Partnership's capital expenditures, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant. See "Federal Income Tax
Considerations - Requirements for Qualification - Distribution Requirements."
16
<PAGE>
Failure of the Partnership or the Subsidiary Partnership to be Classified as a
Partnership for Federal Income Tax Purposes; Impact on REIT Status
Although the Company has not requested, and does not expect to request,
a ruling from the Service that the Partnership and the Subsidiary Partnership
will be classified as partnerships for federal income tax purposes, the Company
will receive at the Closing an opinion of its counsel stating that the
Partnership and the Subsidiary Partnership will be classified as partnerships
and not as corporations or associations taxable as corporations for federal
income tax purposes. If the Service were to challenge successfully the tax
status of the Partnership and the Subsidiary Partnership as a partnership for
federal income tax purposes, the Partnership or the Subsidiary Partnership, as
applicable, would be taxable as a corporation. In such event, the Company likely
would cease to qualify as a REIT for a variety of reasons. Furthermore, the
imposition of corporate income tax on the Partnership or the Subsidiary
Partnership would substantially reduce the amount of Cash Available for
Distribution to Shareholders. See "Federal Income Tax Considerations - Tax
Aspects of the Partnership and the Subsidiary Partnership."
Risks of Mr. Humphrey's Personal Bankruptcy
Mr. Humphrey currently personally guarantees, jointly and severally
with the Company, 18.7% ($5.9 million) of the Company's indebtedness. In the
event of his personal bankruptcy, the lenders would have the right to call all
such indebtedness due. Because there is no assurance that the Company would be
able to repay or refinance such debt if called, one or more of the Hotels could
be lost to foreclosure.
Risks Associated with Development
The Company developed one of its Hotels and may develop other hotel
properties in the future. Risks associated with hotel development include:
abandonment of development opportunities; construction costs exceeding estimates
and possibly making the hotel uneconomical; occupancy and room rates at newly
completed hotels may not be sufficient to make the hotel profitable; financing
may not be available on favorable terms to replace a short-term construction
loan; and construction may not be completed on time resulting in increased debt
service expenses and/or a longer time before income is produced. Development
projects are also subject to risks relating to the inability to obtain, or
delays in obtaining, all necessary land-use, building, occupancy and other
required governmental permits and authorizations.
Inability to Operate the Properties
In order to qualify as a REIT, the Company cannot operate any hotels.
As a result, the Company is unable to make and implement strategic business
decisions with respect to its properties, such as decisions with respect to the
choice of franchise affiliation, redevelopment of food and beverage operations
and other similar decisions. Although the Company consults with the Lessee on
such matters, the Lessee is under no obligation to implement any recommendations
of the Company. Accordingly, there can be no assurance that the Lessee will
operate the Hotels in a manner that is in the best interests of the Company. See
"The Lessee."
Growth Strategy
Constraints on Acquisitions
The Company's growth strategy includes acquiring existing hotel
properties, which will be dependent on its access to cash. The Company generally
cannot retain cash from operating activities because in order to qualify as a
REIT, the Company must distribute at least 95% of its annual taxable income. See
"Federal Income Tax Considerations -- Requirements for Qualification --
Distribution Requirements." In addition, the Company's ability to borrow funds
is limited by covenants made to lenders and its Debt Policy. Because the Company
cannot retain earnings, to the extent that covenants made to lenders and its
Debt Policy limit its ability to incur additional indebtedness, the Company's
ability to continue to make acquisitions may depend on its ability to obtain
additional
17
<PAGE>
equity financings. See "Growth Strategy - Acquisition Strategy." There is no
assurance that such financing will be available.
Competition for Acquisitions
There will be competition for investment opportunities in upper-economy
and mid-scale hotels from entities organized for purposes substantially similar
to the Company's objectives, as well as other purchasers of hotels. The Company
will be competing for such investment opportunities with entities that have
substantially greater financial resources than the Company, including access to
capital or better relationships with franchisors, sellers or lenders. The
Company's competitors may generally be able to accept more risk than the Company
can manage prudently and may be able to borrow the funds needed to acquire
hotels. Competition may generally reduce the number of suitable investment
opportunities offered to the Company and increase the bargaining power of
property owners seeking to sell. See "Business and Properties - Competition."
Acquisition Risks
The Company intends to pursue acquisitions of additional hotel
properties. Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that estimates of the cost of improvements
necessary to market and acquire properties will prove inaccurate, as well as
general investment risks associated with any new real estate investment. The
fact that the Company must distribute 95% of its annual net taxable income in
order to maintain its qualification as a REIT may limit the ability of the
Company to rely upon rental income from the Leases or subsequently acquired
properties to finance acquisitions. As a result, if debt or equity financing is
not available on acceptable terms, further acquisition activities might be
curtailed or Cash Available for Distribution to Shareholders might be adversely
affected. See "Growth Strategy - Acquisition Strategy."
Limited Number of Hotels
The Company currently owns only twenty Hotels, twelve of which are
operated as Comfort Inn hotels, three of which are operated as Holiday Inn
Express hotels, one of which is operated as a Best Western hotel, one of which
is operated as a Best Western Suites hotel, one of which is operated as a
Comfort Suites hotel, one of which is operated as a Days Inn hotel and one of
which is operated as a Rodeway Inn hotel. Significant adverse changes in the
operations of any Hotel could have a material adverse effect on the Lessee's
ability to make Rent payments and, accordingly, on the Company's ability to make
expected distributions to its shareholders. See "Business and Properties."
Emphasis on Comfort Inn Hotels
The Company's acquisition and development strategies emphasize hotels
with franchise affiliations similar to those of the Hotels. The Company is
subject to risks inherent in concentrating investments in any franchise brand,
in particular the Comfort Inn brand, which could have an adverse effect on the
Company's lease revenues and Cash Available for Distribution to Shareholders.
These risks include, among others, the risk of a reduction in hotel revenues
following any adverse publicity related to the Comfort Inn brand. See "Business
and Properties - Comfort Inn and Comfort Suites Hotels and Rodeway Inn Hotels"
and "- Franchise Licenses."
Dilution
Purchasers of the Common Shares sold in the Offering will experience
immediate and substantial dilution of $4.93 or 44.7% of the Offering Price in
the net tangible book value per Common Share. See "Dilution."
Cross-Collateralized Debt
Approximately $3.9 million of the Remaining Indebtedness is secured by
liens on the Comfort Inn- Morgantown, West Virginia and the Rodeway
Inn-Wytheville, Virginia Hotels and the notes related to such debt are
cross-collateralized and cross-defaulted so that the Company will be subject to
a risk of loss to foreclosure of
18
<PAGE>
one or both of such Hotels upon a default on either of such notes. Approximately
$14.8 million of the Remaining Indebtedness, consisting of borrowings under the
Credit Facility, is secured by and cross-collateralized and cross- defaulted on
17 Hotels. Therefore, the Company will be subject to a risk of loss to
foreclosure of all 17 Hotels upon an event of default under the Credit Facility.
The remainder of the Remaining Indebtedness is secured by a lien on the Comfort
Inn-Dublin, Virginia Hotel.
No Assurance of Return on Property Investments
The Company's Investment Policy will be applied to a hotel property
prior to its acquisition or development by the Company, and therefore, there can
be no assurance that increases in insurance rates, real estate or personal
property tax rates or FFE Reserves, which are based on room revenues, will not
decrease the Company's annual return on its investments in any hotel property to
a level below that set out in the Investment Policy. See "Business and
Properties - the Percentage Leases - Maintenance and Modifications."
Effect of Market Interest Rates on Price of the Common Stock
One of the factors that may influence the price of the Common Stock in
public trading markets will be the annual yield from distributions by the
Company on the Common Stock as compared to yields on other financial
instruments. Thus, an increase in market interest rates will result in higher
yields on other financial instruments, which could adversely affect the market
price of the Common Stock.
Reliance on Board of Directors and Management
Common Shareholders have no right or power to take part in the
management of the Company except through the exercise of voting rights on
certain specified matters and the annual election of Directors. See "Description
of Capital Stock - Common Stock" and "Certain Provisions of Virginia Law and of
the Company's Articles of Incorporation and Bylaws." The Board of Directors is
responsible for managing the Company. The Company relies upon the services and
expertise of its Directors for strategic business direction. An Acquisition
Committee, consisting of three Directors, including Mr. Humphrey, reviews
potential hotel acquisitions and developments, visits proposed hotel sites,
reviews the terms of proposed leases for proposed hotel acquisitions and
development, and makes recommendations to the full Board of Directors with
respect to proposed hotel acquisitions.
See "Management."
In addition, there may be conflicting demands on Mr. Humphrey caused by
his overlapping management of the Company and Humphrey Associates, Inc.
("Humphrey Associates"), a Maryland corporation that is wholly- owned by Mr.
Humphrey. Humphrey Associates is one of the Limited Partners. Because Humphrey
Associates owns and operates properties other than the Hotels, and Mr. Humphrey
serves as President of the Company and Humphrey Associates, Mr. Humphrey may
experience a conflict in allocating his time between such entities. See
"Policies and Objectives with Respect to Certain Activities - Conflict of
Interest Policies."
Limitation on Liability of Officers and Directors
The Articles of Incorporation of the Company contain a provision which,
subject to certain exceptions, eliminates the liability of a Director or officer
to the Company or its shareholders for monetary damages for any breach of duty
as a Director or officer. This provision does not eliminate such liability to
the extent that it is proved that the Director or officer engaged in willful
misconduct or a knowing violation of criminal law or of any federal or state
securities law. See "Management - Exculpation and Indemnification."
Limitation on Acquisition and Change in Control
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 capital stock may be owned,
directly or indirectly, by five or fewer individuals (as defined
19
<PAGE>
in the Code to include certain entities) during the last half of any taxable
year. Furthermore, if the Company owns, actually or constructively, 10% or more
of the ownership interests in the Lessee, the Rents received from the Lessee
will not qualify as rents from real property, which would result in loss of REIT
status for the Company. For the purpose of preserving the Company's REIT
qualification, the Articles of Incorporation generally prohibit direct or
indirect ownership of more than 9.9% of the number of outstanding shares of
Common Stock or 9.9% of the number of outstanding shares of preferred stock of
any class or series by any person (the "Ownership Limitation"). The Ownership
Limitation could have the effect of discouraging a takeover or other transaction
in which holders of some, or a majority, of the shares of Common Stock might
receive a premium for their shares of Common Stock over the then prevailing
market price or which such holders might believe to be otherwise in their best
interests. See "Description of Capital Stock - Restrictions on Ownership and
Transfer" and "Federal Income Tax Considerations - Requirements for
Qualification."
Authority to Issue Preferred Stock
The Articles of Incorporation authorize the Board of Directors to issue
up to 10,000,000 shares of preferred stock and to establish the preferences and
rights of any shares of preferred stock issued. Although the Company has no
current intention to issue any series of preferred stock in the foreseeable
future, the issuance of any series of preferred stock could have the effect of
delaying or preventing a change in control of the Company even if a change in
control were in the interests of the Common Shareholders. See "Description of
Capital Stock - Preferred Stock."
Virginia Anti-Takeover Statutes
As a Virginia corporation, the Company is subject to various provisions
of the Virginia Stock Corporation Act, which impose certain restrictions and
require certain procedures with respect to certain takeover offers and business
combinations, including, but not limited to, combinations with interested
holders and share repurchases from certain holders. See "Certain Provisions of
Virginia Law and the Company's Articles of Incorporation and Bylaws - Business
Combinations" and "- Control Share Acquisitions."
Ability of Board of Directors to Change Certain Policies
The major policies of the Company, including its Investment Policy,
Debt Policy and other policies with respect to acquisitions, financing, growth,
operations, debt and distributions, are determined by its Board of Directors.
The Board of Directors may amend or revise, and has, in the past, amended and
revised, these and other policies from time to time without a vote of the Common
Shareholders. The effect of any such changes may be positive or negative. Under
the Company's Bylaws, the Company cannot acquire any property, sell any of the
Hotels, prepay or refinance the Remaining Indebtedness, or decrease the expected
distributions to shareholders (assuming the Company has sufficient revenues),
without the approval of a majority of the Directors, including a majority of the
Independent Directors. The Company cannot change these provisions of its Bylaws
without the approval of either 80% of the entire Board of Directors, including a
majority of the Independent Directors, or the holders of two-thirds of the
outstanding shares of Common Stock. The Company cannot change its policy of
seeking to maintain its qualification as a REIT without the approval of the
holders of two-thirds of the outstanding shares of Common Stock. See "Policies
and Objectives with Respect to Certain Activities" and "Certain Provisions of
Virginia Law and of the Company's Articles of Incorporation and Bylaws."
Hotel Industry Risks
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, competition from other hotels,
over-building in the hotel industry that could adversely affect hotel revenues,
increases in operating costs due to inflation and other factors, which increases
may not be offset by increased room rates, dependence on business and commercial
20
<PAGE>
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 reduce revenues of
the Hotels and adversely affect the Lessee's ability to make Rent payments, and
therefore, the Company's ability to make expected distributions to its
shareholders.
Competition for Guests
The hotel industry is highly competitive. The Hotels will compete with
other existing and new hotels in their geographic markets. Many of the Company's
competitors have substantially greater marketing and financial resources than
the Company and the Lessee. See "Business and Properties - Competition."
Investment Concentration in Single Industry
The Company's current growth strategy is to acquire and develop hotels.
The Company will not seek to invest in assets outside the hotel industry, and
will therefore be subject to the risks created by concentrating its investments
in a single industry. Therefore, the adverse effect on Rent and Cash Available
for Distribution to Shareholders resulting from a downturn in the hotel industry
will be more pronounced than if the Company had diversified its investments
outside of the hotel industry.
Seasonality of Hotel Business and the Hotels
The hotel industry is seasonal in nature. Generally, hotel revenues for
hotels operating in the geographic areas in which the Hotels operate are greater
in the second and third quarters than in the first and fourth quarters. The
Hotels' operations historically reflect this trend. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Seasonality of
Hotel Business and the Hotels."
Risks of Operating Hotels under Franchise Licenses
The continuation of the franchise licenses applicable to the Hotels
(the "Franchise Licenses") is subject to specified operating standards and other
terms and conditions. Choice Hotels International, Inc. ("Choice Hotels"), the
franchisor of Comfort Inns, Comfort Suites and Rodeway Inns; Best Western
International, Inc. ("Best Western"); Days Inns of America, Inc. ("Days Inn")
and Holiday Hospitality Corporation ("Holiday Hospitality"), the franchisor of
Holiday Inn Express, periodically inspect their licensed properties to confirm
adherence to their operating standards. The failure of the Partnership or the
Lessee to maintain such standards respecting the Hotels or to adhere to such
other terms and conditions could result in the loss or cancellation of the
applicable Franchise License. It is possible that a franchisor could condition
the continuation of a Franchise License on the completion of capital
improvements that the Board of Directors 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, the
Board of Directors may elect to allow the Franchise License to lapse or be
terminated. Under the Franchise License with Choice Hotels, the franchisor may
terminate the Franchise License without cause for the Comfort Inn-Dahlgren,
Virginia on April 1, 1999. Under the Franchise Licenses with Best Western, the
franchisee and franchisor each has the option to terminate each Franchise
License every year. There can be no assurance that a franchisor will not
exercise a termination right or renew a Franchise License at the expiration of
the current terms. If a Franchise License is terminated, the Partnership and the
Lessee may seek to obtain a suitable replacement franchise, or to operate the
Hotel without a franchise affiliation. The loss of a Franchise License could
have a material adverse effect upon the operations or the underlying value of
the related Hotel because of the loss of associated name recognition, marketing
support and centralized reservation systems provided by the franchisor. Although
the Leases require the Lessee to maintain the Franchise Licenses for each Hotel,
the Lessee's loss of a Franchise License for one or more of the Hotels could
have a material adverse effect on the Partnership's revenues under the Leases
and the Company's Cash Available for Distribution to Shareholders. See "Business
and Properties - Franchise Licenses."
21
<PAGE>
Operating Costs and Capital Expenditures; Hotel Renovation
Hotels generally have an ongoing need for renovations and other capital
improvements, particularly in older structures, including periodic replacement
of furniture, fixtures and equipment. Under the terms of the Leases, the
Partnership is obligated to pay the cost of (i) expenditures for items that are
classified as capital items under generally accepted accounting principles and
which are necessary for the continued operation of the Hotels and (ii)
replacement or refurbishment of furniture, fixtures and equipment in the Hotels,
to the extent such costs do not exceed the allowance for such costs provided by
the Partnership under each Lease. If these expenses exceed the Company's
estimate, the additional cost could have an adverse effect on Cash Available for
Distribution to Shareholders. In addition, the Company may acquire hotels in the
future that require significant renovation. Renovation of hotels involves
certain risks, including the possibility of environmental problems, 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 from hotels. See "Business and the Properties - The
Percentage Leases" and - "The Fixed Lease."
Real Estate Investment Risks
General Risks of Investing in Real Estate
The Hotels are subject to varying degrees of risk generally incident to
the ownership of real property. The underlying value of the Hotels and the
Company's income and ability to make distributions to its shareholders are
dependent upon the ability of the Lessee to operate the Hotels in a manner
sufficient to maintain or increase revenues in excess of operating expenses to
enable the Lessee to make Rent payments. Hotel revenues 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 earthquakes, hurricanes and other natural
disasters (which may result in uninsured losses), acts of war, adverse changes
in zoning laws, and other factors that are beyond the control of the Company.
See "Business and Properties."
Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions will be limited. No assurance can be given that the fair market value
of any of the Hotels will not decrease in the future.
Uninsured and Underinsured Losses
Each Lease requires that comprehensive insurance be maintained on each
of the Hotels, including liability and fire and extended coverage, in amounts
sufficient to permit the replacement of the Hotels in the event of a total loss,
subject to applicable deductibles. Management believes that such specified
coverage is of the type and amount customarily obtained by owners of hotels
similar to the Hotels. Leases for hotels acquired or developed by the Company in
the future may 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. Inflation,
changes in building codes and ordinances, environmental considerations and other
factors also might make it infeasible to use insurance proceeds to replace a
Hotel if it is 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 the affected Hotel. See "Business and Properties - The
Percentage Leases" and - "The Fixed Lease."
22
<PAGE>
Property Taxes
Each Hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which the Company invests may
increase or decrease as property tax rates change and as the properties are
assessed or reassessed by taxing authorities. If property taxes increase, the
Company's ability to make expected distributions to its shareholders could be
adversely affected.
Environmental Matters
Operating costs and the value of the Hotels may be affected by the
obligation to pay for the cost of complying with existing environmental laws,
ordinances and regulations, as well as the cost of future legislation. Under
various federal, state, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Therefore, an environmental liability could have
a material adverse effect on the underlying value of the Hotels, the Company's
income and Cash Available for Distribution to Shareholders. Phase I
environmental assessments were obtained on all of the Hotels prior to their
acquisition or development by the Company. The purpose of Phase I environmental
assessments is to identify potential environmental contamination that is made
apparent from historical reviews of the Hotels, reviews of certain public
records, preliminary investigations of the sites and surrounding properties, and
screening for the presence of hazardous substances, toxic substances and
underground storage tanks. The Phase I environmental assessment reports have not
revealed any environmental contamination 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 reports do not reveal all environmental liabilities or
that there are material environmental liabilities of which the Company is
unaware. Because the Comfort Inn-Beacon Marina Solomons, Maryland Hotel is
located on a tributary of the Chesapeake Bay, the Company's ability to expand
any facilities at this Hotel will be limited by state and federal environmental
regulations. See "Business and Properties - Environmental Matters."
Compliance with Americans with Disabilities Act
and other Changes in Governmental Rules and Regulations
Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. While the Company believes that the
Hotels are substantially in compliance with these requirements, a determination
that the Company is not in compliance with the ADA could result in imposition of
fines or an award of damages to private litigants. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use and
operation of the Hotels, including changes to building codes and fire and
life-safety codes, may occur. If the Company were required to make substantial
modifications at the Hotels to comply with the ADA or other changes in
governmental rules and regulations, the Company's ability to make expected
distributions to its shareholders could be adversely affected.
THE COMPANY
The Company is a self-administered REIT that, through the Partnership,
owns interests in twenty existing limited-service Hotels with an aggregate of
1,312 rooms and an average age of approximately nine years as of December 31,
1997. The Hotels include twelve Hotels operated as Comfort Inns, three Hotels
operated as Holiday Inn Express hotels, one Hotel operated as a Best Western,
one Hotel operated as a Best Western Suites, one Hotel operated as a Comfort
Suites, one Hotel operated as a Days Inn and one Hotel operated as a Rodeway
Inn. The Hotels are located in nine states in the eastern United States. The
Company is a corporation that was incorporated under the laws of Virginia on
August 23, 1994.
The Partnership will use the Net Proceeds to repay approximately $10
million of outstanding debt on the Credit Facility, which is secured by 17 of
the Hotels. Upon the application of the Net Proceeds, the Company will
23
<PAGE>
have the Remaining Indebtedness (approximately $21 million) outstanding, all of
which debt shall be secured by one or more of the Hotels.
In order to qualify as a REIT, the Company cannot operate hotels.
Therefore, the Hotels are leased to and operated by the Lessee. The Percentage
Leases, which relate to each Hotel with the exception of the Comfort
Suites-Dover, Delaware Hotel, are designed to allow the Company to participate
in growth in revenues of the Hotels by providing that percentages of such
revenues are paid by the Lessee as Rent. The Comfort Suites-Dover, Delaware
Hotel is leased pursuant to a Fixed Lease. Mr. Humphrey is the sole shareholder
of the Lessee.
The Company's executive offices are located at 12301 Old Columbia Pike,
Silver Spring, Maryland 20904 and its telephone number is (301) 680-4343.
GROWTH STRATEGY
The Company seeks to enhance shareholder value by increasing Cash
Available for Distribution to Shareholders by acquiring additional operating
hotels and developing hotels that meet the Company's investment criteria and by
participating in increased revenues from the Hotels through the Percentage Rents
provided under the Percentage Leases. Therefore, the Company has developed a
growth strategy that management of the Company believes will capitalize on
attractive acquisition and development opportunities.
Acquisition Strategy
The Company intends to acquire equity interests in additional operating
hotels that meet its investment criteria as described below. The Company will
place particular emphasis on limited service hotels with strong, national
franchise affiliations in the upper economy and mid-scale market segments, or
hotels with potential to obtain such franchises. In particular, the Company will
consider acquiring limited service hotels such as Best Western, Best Western
Suites, Comfort Inn, Comfort Suites, Days Inn, Hampton Inn, Fairfield Inn,
Holiday Inn Express and Rodeway Inn hotels, limited service extended-stay hotels
such as Hampton Inn and Suites, Homewood Suites and Residence Inn hotels and
full service hotels such as Holiday Inns. Under the Company's Bylaws, any
transaction to acquire any additional properties must be approved by a majority
of the Directors, including a majority of the Independent Directors.
The Company believes that there are existing hotels that meet its
investment criteria because of the adverse impact of high leverage on the
profitability and operations of many hotels, and the over-building of hotels
from 1980 through 1991. The Company also believes that the management,
development and construction experience of Mr. Humphrey will enable the Company
to identify underperforming hotels that would benefit substantially from
renovation, implementation of quality management and, in some instances, a new
Franchise License. The Company has an option to acquire any hotel acquired or
developed by Mr. Humphrey or his Affiliates within 12 months after the
acquisition or opening of such hotel. See "Policies and Objectives with Respect
to Certain Activities - Conflict of Interest Policies - The Non-Competition
Agreement and Option Agreement."
Investment Criteria and Financing
The Company considers investments in operating hotels, primarily
limited service hotels, that meet one or more of the following criteria:
o nationally franchised hotels in locations with relatively high
demand for rooms, relatively low supply of competing hotels and
significant barriers to entry into the hotel business, such as a
scarcity of suitable hotel sites or zoning restrictions;
o poorly managed hotels, which could benefit from new management,
new marketing strategy and/or association with a national
franchisor;
o hotels in a deteriorated physical condition, which could benefit
significantly from renovations; and
24
<PAGE>
o hotels in attractive locations that the Company believes could
benefit significantly by changing franchises to a brand the
Company believes is superior.
Under the Investment Policy, the Company will only acquire those hotels
for which it reasonably believes that it will receive annual Rent (net of
insurance paid by the Company, real estate and personal property taxes and the
FFE Reserves of 4% of room revenues) in an amount greater than or equal to 12%
of the total purchase price to be paid by the Company for such hotels. Under the
Bylaws, the approval of a majority of the Board of Directors, including a
majority of the Independent Directors, is required for the Company to acquire
any property. Such hotel investments may be financed, in whole or in part, with
undistributed cash, subsequent issuances of shares of Common Stock or other
securities or borrowings. The Company's Debt Policy limits its consolidated
indebtedness to less than 55% of the aggregate purchase price of the hotels in
which it has invested. The aggregate purchase price paid by the Company for the
Hotels is approximately $58.4 million. After the Company has applied the Net
Proceeds (approximately $10 million) as set forth herein, the Company's total
outstanding indebtedness will represent approximately 36% of the aggregate
amount paid by the Company for the Hotels. To the extent that the Company's Debt
Policy or covenants it has made to lenders limit its ability to incur additional
indebtedness, the success of the Company's acquisition strategy will likely
depend on its ability to access additional capital through issuances of equity
securities. See "Risk Factors - Risks of Leverage" and "-- Growth Strategy,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources," "Policies and Objectives with
Respect to Certain Activities - Investment Policies" and "- Financing."
Development Strategy
The Company intends to grow through the development of new hotels as
well as from the acquisition of existing hotels. The Company intends to develop
limited-service hotels in secondary and tertiary markets, typically with under
150 rooms, that are similar to the Company's present hotels. The Company is
interested in sites that offer the potential to attract a diverse mix of
potential market segments.
The Company's development site selection criteria is expected to
include some or all of the following characteristics:
o Relatively low land costs, particularly as compared with major
metropolitan areas.
o Sites that exist on or near major highways.
o Areas that have strong industrial bases with the potential for
future growth.
o Communities with state or federal installations, colleges or
universities.
o Areas that currently have an aging hotel presence.
These criteria describe the basic characteristics that the Company
looks for prior to committing to the development of a new hotel. Sites that are
selected may have some or all of the market characteristics as described above,
as well as characteristics that are not specifically described herein. It is not
anticipated that all sites selected by the Company will possess all of the
characteristics described herein.
Because a development project has no prior revenues on which the
Company's Investment Policy can be tested, the Company intends to invest only in
developments where it reasonably believes it will receive Rent payments that are
consistent with the Investment Policy.
Internal Growth Strategy
The Percentage Leases are designed to allow the Company to participate
in growth in room revenues at the Hotels because it mitigates the risks
associated with the initial startup of a hotel such as low occupancy rates or
low room rates. The Company intends to use Percentage Leases substantially
similar to those applicable to the Hotels with respect to any additional
existing hotels it may acquire because the Company believes that there are
25
<PAGE>
fewer startup risks associated with acquiring an existing operating hotel than
with hotel developments. Under each Percentage Lease, the Partnership receives
Percentage Rents. The Percentage Rent for each Hotel is comprised of (i) a set
percentage of quarterly and semi-annual room revenues, which is payable
quarterly and semi-annually, respectively, (ii) a set percentage of annual room
revenues in excess of the Threshold, which is payable annually, and (iii) 8% of
monthly revenues other than room revenues (including, but not limited to,
telephone charges, movie rental fees and rental payments under any third party
leases), which is payable monthly. The portion of Percentage Rent that is based
on annual room revenues does not apply to amounts under the Threshold and is
designed to allow the Company to participate in any future increases in room
revenues. See "Business and Properties - The Hotels" and "- The Percentage
Leases - Amounts Payable Under the Percentage Leases."
26
<PAGE>
USE OF PROCEEDS
The Net Proceeds (after deducting underwriting discounts and offering
expenses of approximately $210,000) will be approximately $10 million based on
the Offering Price ($11.5 million if the over-allotment option is fully
exercised). The Company will contribute all of the Net Proceeds to the
Partnership and after such contribution will own an 87.21% interest in the
Partnership (87.57% if the over-allotment option is fully exercised). The
Partnership will use the Net Proceeds of the Offering to repay certain amounts
under the Credit Facility, which amounts have been borrowed over the past year
principally to purchase certain of the Hotels. See "Prospectus Summary--Recent
Developments--Acquisitions."
The following describes the amounts under the Credit Facility to be
repaid with the Net Proceeds:
Amount Interest Rate Maturity Date
------ -------------- -------------
Amounts Payable to Mercantile
under the Credit Facility..........$10,000,000 8.75%(1) April 10, 1999
- ----------------------
(1) The interest rate is equal to the prime rate as published in the "Money
Rates" section of The Wall Street Journal (8.5% as of March 20, 1998) plus
.25%.
After the application of the Net Proceeds, the Company's total
outstanding indebtedness will represent approximately 36% of the aggregate
purchase price of the Hotels, thereby giving the Company additional borrowing
capacity pursuant to the Debt Policy of up to approximately $11.1 million, which
will be available for future acquisitions or development.
To the extent that the Underwriter's over-allotment option to purchase
up to 150,000 Common Shares is exercised in full, the Company expects to use the
additional net proceeds to repay $1.5 million under the Credit Facility.
27
<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock currently trades on The Nasdaq National Market under
the symbol "HUMP." The following table sets forth for the indicated periods the
high and low bid prices, and the cash distributions declared, per share for the
Common Stock. Prior to October 30, 1996, the Common Stock traded through the
facilities of The Nasdaq SmallCap Market. Beginning October 30, 1996, the Common
Stock began trading on The Nasdaq National Market.
Price Range Cash Distributions
High Low Declared Per Share
---- --- ------------------
1995
First Quarter............................ $7.75 $6.25 $.15
Second Quarter........................... $7.75 $7.50 $.15
Third Quarter ........................... $8.75 $7.50 $.181(1)
Fourth Quarter........................... $8.375 $7.75 $.19
1996
First Quarter............................ $9.125 $8.00 $.19
Second Quarter........................... $9.375 $8.4375 $.19
Third Quarter............................ $9.25 $8.25 $.19
Fourth Quarter .......................... $8.25 $8.25 $.19
1997
First Quarter............................ $10.50 $8.00 $.19
Second Quarter........................... $11.125 $8.75 $.19
Third Quarter............................ $11.875 $10.50 $.19(2)
Fourth Quarter........................... $13.00 $10.4375 $.2025(2)
1998
First Quarter (through March 20, 1998)... $12.375 $11.00 $ .135(3)
- ------------------
(1) Pro rata distribution for the period July 21, 1995, the closing of the
Company's second public offering of Common Stock, through September 30,
1995 based on a quarterly distribution of $.19 per share.
(2) Although presented on a quarterly basis, the Company began making monthly
distributions to its Common Shareholders commencing with the Company's
distribution declared in October 1997.
(3) Based on monthly distributions for January and February of .0675 per share
per month and not including any portion of any potential March
distribution.
On March 24, 1998, the last reported bid price of the Common Stock on
The Nasdaq National Market was $11.00 per share, the Company had approximately
110 shareholders of record, and there were approximately 1,097 beneficial owners
of the Common Stock.
Although the declaration of distributions is within the discretion of
the Board of Directors and depends on the Company's results of operations, Cash
Available for Distribution to Shareholders, the financial condition of the
Company, tax considerations (including those related to REITs) and other factors
considered important by the Board of Directors, the Company's policy is to make
regular monthly distributions to its shareholders. The Company's ability to make
distributions will depend on the receipt of distributions from the Partnership.
The Company has caused and intends to cause the Partnership to distribute to its
partners substantially all of its Cash Available for Distribution to
Shareholders. The Company's distributions to holders of Common Stock represented
approximately 84.43% of the Company's Cash Available for Distribution to
Shareholders in the fiscal year ended December 31, 1997. The Partnership's
primary source of revenue is Rent payments from the Lessee under the Leases for
the Hotels. The Company must rely on the operation of the Hotels to generate
sufficient cash flow from the operation
28
<PAGE>
of the Hotels to permit the Lessee to meet its Rent obligations under the
Leases. The Lessee has nominal assets and its obligations under the Leases are
unsecured. See "The Lessee."
Under the federal income tax provisions affecting REITs, the Company
must distribute at least 95% of its annual taxable income in order to avoid
taxation as a regular corporation. Moreover, the Company must distribute at
least 85% of its ordinary income and 95% of its capital gain net income (plus
any undistributed income from the prior year) to avoid certain excise taxes
applicable to REITs. Under certain circumstances, the Company may be required to
make distributions in excess of Cash Available for Distribution to Shareholders
in order to meet such distribution requirements. In such event, the Company
would seek to borrow the amount of the deficiency or sell assets to obtain the
cash necessary to make distributions to retain its qualification as a REIT. The
Company expects that a portion of its future distributions to Common
Shareholders may constitute a return of capital. A return of capital generally
is not subject to federal income tax under current law. There can be no
assurance that the portion of the distributions estimated to be a return of
capital based on pro forma results is indicative of the actual return of capital
for any future period.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, as adjusted to give effect to the Offering and the use of the
Net Proceeds as described under "Use of Proceeds."
<TABLE>
<CAPTION>
December 31, 1997
Actual As Adjusted
------ -----------
(In thousands)
<S> <C>
Short-term debt............................................. $ 822 $ 822
Long-term debt.............................................. 31,755 21,802
Minority interest........................................... 3,370 3,987
Shareholders' Equity:
Preferred Stock, $.01 par value,
10,000,000 shares authorized,
no shares issued and outstanding ........................ - -
Common Stock, $.01 par value,
25,000,000 shares authorized, 3,481,700 shares
issued and outstanding(1) and 4,481,700, as adjusted(1).. 35 45
Additional paid-in capital................................. 18,042 27,368
Distributions in excess of net earnings.................... (225) (225)
-------- --------
Total shareholders' equity.................................. 17,852 27,188
------- -------
Total capitalization........................................ $ 53,799 $ 53,799
======== ========
</TABLE>
- ---------------------
(1) Excludes 657,373 shares of Common Stock issuable upon redemption of Units.
29
<PAGE>
DILUTION
The Offering Price per share to the public of the Common Shares offered
hereby exceeds the pro forma net tangible book value per share of Common Stock
or Unit after the Offering. Therefore, the holders of Units will realize an
immediate increase in the net tangible book value of their Units of $.94, while
purchasers of Common Shares in the Offering will realize an immediate and
substantial dilution of $4.93 or 44.7% of the Offering Price in the net tangible
book value of their shares. Pro forma net tangible book value per share is
determined by subtracting total liabilities from total tangible assets and
dividing the remainder by the number of shares of Common Stock and Units that
will be outstanding after the Offering. The following table illustrates the
dilution to purchasers of Common Shares in the Offering, based on the assumed
Offering Price.
<TABLE>
<S> <C>
Offering Price per Common Share(1)..................................... $11.00
Pro forma net tangible book value per Unit (which may be redeemed for Common
Stock on a one-for-one basis in certain circumstances) as of December 31,
1997, prior to the Offering, applicable to the minority interest in the
Partnership(2)....................................................... $ 5.13
Reduction in minority interest prior to the
Offering(3).......................................................... (1.00)
Increase in net tangible book value per share
attributable to payments by purchasers of
shares in the Offering(4)............................................ 1.94
Pro forma net tangible book value per share or Unit
after the Offering................................................... $ 6.07
------
Dilution per share to purchasers of Common Shares...................... $ 4.93
======
</TABLE>
- ---------------------
(1) Before deducting underwriting discounts and estimated expenses of
the Offering.
(2) Represents the minority interest at December 31, 1997, before the
Offering, divided by the Units outstanding (657,373 Units).
(3) Represents the percentage reduction in minority Unit holders' interest
from 15.88% prior to the Offering to 12.79% after the Offering or 3.1%
times shareholders' equity at December 31, 1997 ($17.9 million), plus
minority interest ($3.4 million) divided by the Units outstanding (657,373
Units).
(4) Net proceeds of the Offering (approximately $10 million) divided by
5,139,073 shares of Common Stock and Units.
30
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth (i) audited historical revenue and
expenses and financial data for the Company and the Lessee for the period from
November 29, 1994 (date of IPO) through December 31, 1994 and for each of the
years in the three year period ended December 31, 1997, (ii) audited selected
historical balance sheet data for the Company as of December 31, 1996 and 1997,
and (iii) selected combined historical operating and financial data for the
Combined Selling Partnerships-Initial Hotels (the "Initial Hotels") purchased by
the Company in connection with the Company's IPO for the year ended December 31,
1993 and the eleven month period ended November 29, 1994, and pro forma
operating and financial data for the year ended December 31, 1994. The selected
historical balance sheet data of the Company as of December 31, 1996 and 1997,
the selected historical operating and financial data of the Company and the
Lessee for the period from November 29, 1994 through December 31, 1994 and for
each of the years in the three year period ended December 31, 1997, and the
selected combined historical operating and financial data for the Initial Hotels
for the year ended December 31, 1993 and the period from January 1, 1994 through
November 29, 1994 have been derived from the historical financial statements of
the Company, the Lessee and the Initial Hotels audited by Reznick Fedder &
Silverman, independent public accountants.
The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this Prospectus.
31
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC. (THE COMPANY)
Selected Historical
Revenue and Expenses and Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
November 29, 1994
(Date of IPO) Year Year Year
through Ended Ended Ended
December 31, December 31, December 31, December 31,
1994 1995 1996 1997
(Audited) (Audited) (Audited) (Audited)
<S> <C>
Operating Data:
Revenue:
Lease revenue .............................. $ 273 $ 3,750 $ 3,958 $ 7,326
Other income................................ - 21 47 106
----- --------- --------- --------
Total revenue............................... 273 3,771 4,005 7,432
----- -------- -------- -------
Expenses:
Depreciation and amortization............... 42 680 736 1,633
Interest expense............................ 97 1,011 493 1,764
Real estate and personal
property taxes and insurance.............. 18 196 252 476
General and administrative.................. 15 238 411 537
----- --------- --------- --------
Total expenses............................ 172 2,125 1,892 4,410
----- -------- -------- -------
Income before
minority interest......................... 101 1,646 2,113 3,022
Minority interest........................... 29 396 435 465
----- --------- -------- --------
Net income applicable
to Common Shareholders.................... $ 72 $ 1,250 $ 1,678 $ 2,557
====== ======= ======= =======
Basic earnings per common share (1)......... $.05 $.72 $.70 $.73
Diluted earnings per common share (1)....... $.05 $.70 $.70 $.73
Other Data:
Weighted average shares:
Basic..................................... 1,321,800 1,742,533 2,410,252 3,481,700
Diluted................................... 1,849,666 2,365,883 3,033,602 4,139,073
Funds from operations (2)................... $ 139 $ 2,132 $ 2,723 $ 4,548
Net cash provided by operating
activities................................ $ 170 $ 1,334 $ 2,751 $ 3,680
Net cash used in
investing activities...................... $(4,840) $ (619)$(1,967)$(29,406)
Net cash provided by (used in)
financing activities...................... $ 5,223 $ (1,100)$ 6,148 $ 18,829
</TABLE>
32
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
Selected Historical Balance Sheet Data
(in thousands)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
(Audited) (Audited)
<S> <C>
Balance Sheet Data:
Net investment in hotel properties........................... $21,405 $50,476
Minority interest in Partnership............................. 3,247 3,370
Shareholders' equity......................................... 18,145 17,852
Total assets................................................. 30,221 53,799
Total debt................................................... 8,185 31,755
</TABLE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
Selected Historical Revenue and Expenses
(in thousands)
<TABLE>
<CAPTION>
Period from
November 29, 1994 Year Year Year
(Date of IPO) Ended Ended Ended
through December 31, December 31, December 31, December 31,
1994 1995 1996 1997
(Audited) (Audited) (Audited) (Audited)
<S> <C>
Room revenue.................................... $459 $ 7,499 $ 7,942 $15,581
Other revenue (3)............................... 38 556 637 871
----- -------- ------- -------
Total revenue................................. 497 8,055 8,579 16,452
Hotel operating expenses........................ 314 4,167 4,590 8,716
Percentage Lease payments....................... 273 3,750 3,958 7,326
------ -------- ------- -------
Net income (loss)............................... $ (90) $ 138 $ 31 $ 410
======== ======== ======= =======
</TABLE>
33
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
Selected Combined Historical Operating and Financial Data
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
Historical Pro Forma
1993 1994(4) 1994(4)
------ ------- -------
<S> <C>
Statement of Operations Data:
Room revenue............................. $6,627 $6,583 $7,042
Other revenue ........................... 704 715 752
------- ------- -------
Total revenue............................ 7,331 7,298 7,794
Hotel operating expenses ................ 4,603 4,513 4,827
------ ------ ------
Operating income before interest,
depreciation, and amortization........... 2,728 2,785 2,967
Interest................................. 1,272 1,062 1,159
Depreciation and amortization............ 776 690 732
------- ------- -------
Net income............................... $ 680 $ 1,033 $ 1,076
======= ======= =======
Other Data
Net cash provided by
operating activities................. $1,503 $1,698 $1,896
Net cash used in
investing activities................. $(40) $(373) $(373)
Net cash used in
financing activities................. $(1,275) $(985) $(985)
</TABLE>
- -----------------------
(1) Represents basic and diluted earnings per share computed in accordance
with FAS No. 128, adopted by the Company during 1997. Basic earnings per
share is computed as net income available to common shareholders divided
by the weighted average common shares outstanding and diluted earnings per
share is computed as income before minority interest divided by the
weighted average common shares outstanding plus the assumed conversion of
the Units held by minority interests. See Note 6, Earnings Per Share of
the consolidated financial statements of Humphrey Hospitality Trust, Inc.
at page F-19 for a reconciliation of the income (numerator) and weighted
average shares (denominator) used in the calculation of basic and diluted
earnings per share. The adoption of FAS No. 128 did not have a material
effect on prior years.
(2) Management considers FFO to be a market accepted measure of an equity
REIT's cash flow, which management believes reflects on the value of real
estate companies such as the Company, in connection with the evaluation of
other measures of operating performances. All REITs do not calculate FFO
in the same manner, therefore, the Company's calculation may not be the
same as the calculation of FFO for similar REITs. Beginning with the year
ended December 31, 1997, the Company changed the way it computes FFO. The
Company believes that its new method of computing FFO is more consistent
with the guidelines established by NAREIT for calculating FFO. FFO, as
defined under the NAREIT standard, consists of net income, computed in
accordance with generally accepted accounting principles, excluding gains
or losses from debt restructuring and sales of properties, plus
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures.
34
<PAGE>
The following table computes FFO under both the new method and the method
formerly utilized by the Company (in thousands):
<TABLE>
<CAPTION>
Period from
November 29, 1994
(Date of IPO) Year Year Year
through Ended Ended Ended
December 31, December 31, December 31, December 31,
1994 1995 1996 1997
(Audited) (Audited) (Audited) (Audited)
<S> <C>
Net income before minority interests......... $ 101 $ 1,646 $ 2,113 $ 3,022
Depreciation................................. 38 486 610 1,502
Amortization of initial franchise costs...... - - - 24
--------- --------- --------- ---------
Funds From Operations (new method)........... 139 2,132 2,723 4,548
Amortization of loan costs................... 4 194 126 107
Funds From Operations (former method)........ $ 143 $ 2,326 $ 2,849 $ 4,655
</TABLE>
Industry analysts generally consider FFO to be an appropriate measure of
the performance of an equity REIT. FFO should not be considered as an
alternative to net income or other measures under GAAP as an indicator of
operating performance or to cash flows from operating, investing or
financing activities as a measure of liquidity. FFO does not reflect
working capital changes, cash expenditures for capital improvements or
debt service with respect to the Hotels.
(3) Represents marina revenue (for the Comfort Inn-Beacon Marina, Solomons,
Maryland and the Best Western Suites -Key Largo, Florida Hotels only),
telephone revenue, restaurant revenue and other revenue.
(4) The historical 1994 operating data of the Combined Selling Partnerships -
Initial Hotels is for the period January 1, 1994 through November 29,
1994. The pro forma 1994 operating data for the Combined Selling
Partnerships - Initial Hotels represents the historical operating data of
the Initial Hotels for the period January 1, 1994 through November 29,
1994 and the Lessee for the period November 29, 1994 through December 31,
1994.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCI
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company currently owns, through the General Partner, an 84.12%
interest in the Partnership. After the Closing, the Company will own, through
the General Partner, an 87.21% partnership interest in the Partnership. In order
for the Company to qualify as a REIT, neither the Company nor the Partnership
may operate hotels. Therefore, the Partnership leases the Hotels to the Lessee.
The Company's principal source of revenue is derived from payments by the Lessee
under the Leases. The principal determinants of Percentage Rent are the Hotels'
room revenue, and to a lesser extent, other revenue. The Lessee's ability to
make payments to the Partnership under the Leases is dependent on the operations
of the Hotels.
Results of Operations
The following is a discussion of the results of operations for the Company, the
Lessee and the Hotels.
Comparison of year ended December 31, 1997 to year ended December 31, 1996
The Company
The Company's total revenues for the twelve month period ended December
31, 1997 consisted substantially of Percentage Lease revenue recognized pursuant
to the Percentage Leases, as well as Fixed Lease revenue related to the Comfort
Suites-Dover, Delaware Hotel. The Company's revenue was approximately
$7,432,000, an increase of 85.6% compared to revenue of $4,005,000 for the year
ended December 31, 1996. Net income for the period was approximately $2,557,000,
an increase of 52.4% compared to 1996 net income of approximately $1,678,000.
The increase in both revenue and net income is attributable to the acquisition
of ten hotels and the completion of the Comfort Suites-Dover, Delaware Hotel.
Interest expense increased as a result of increased borrowings under the Credit
Facility. These funds were utilized to acquire and develop the above noted
Hotels in 1997. General and administrative expenses increased as the result of
fees incurred from auditing the financial performance of the Hotels acquired and
from the land leases associated with the purchase of the Comfort Inn-Gettysburg,
Pennsylvania and the Best Western-Harlan, Kentucky Hotels.
The Lessee
The Lessee's revenues increased by $7,874,000, or 92%, to $16,452,000
for the year ended December 31, 1997, as compared to $8,579,000 of revenue for
the year ended 1996. The Lessee's net income for the year ended December 31,
1997 increased approximately $379,000 to $410,000 compared to net income of
approximately $31,000 for the year ended December 31, 1996. Average occupancy
for the Hotels remained at 70% for the year ended December 31, 1997, unchanged
from the year ended December 31, 1996. The average daily rate at the Hotels
increased to $56.21 for the year ended December 31, 1997 or 12% compared to
$50.27 for the same period in 1996. The increases in revenue and net income are
the result of the addition of eleven new Hotels to the portfolio in 1997. The
increase in average daily rate resulted from the addition of the Comfort
Suites-Dover, Delaware Hotel and the Best Western Suites-Key Largo, Florida
Hotel during 1997. These Hotels generated a greater average daily rate than the
remainder of the Hotels.
Comparison of year ended December 31, 1996 to year ended December 31, 1995
The Company
The Company's total revenues for the twelve month period ended December
31, 1996 substantially consisted of Percentage Lease revenue recognized pursuant
to the Percentage Leases. The Company's revenue was approximately $4,005,000, up
6.2% as compared to revenue of $3,771,000 for the period ended December 31,
1995. Net income for the period was approximately $1,678,000, improving 34.2% as
compared to net income of $1,250,000 for the period ended December 31, 1995. The
improvement in revenue is attributed to the addition of
36
<PAGE>
the Days Inn-Farmville, Virginia Hotel, which substantially strengthened the
Company's market position for the Hotels located in Farmville, Virginia. The
improvement in net income is attributed to the additional revenue from the Days
Inn-Farmville, Virginia Hotel and the refinancing and/or retirement of Company
debt on the Hotels located in Solomons, Maryland; Dahlgren, Virginia;
Elizabethton, Tennessee; Princeton, West Virginia and Farmville, Virginia in
connection with the acquisition of the Credit Facility.
The Lessee
The Lessee's net income for the period ended December 31, 1996 was
approximately $31,000. The Lessee's revenues increased by approximately
$524,000, or 6.5%, to $8,579,000 for the twelve months ended December 31, 1996,
as compared to $8,055,000 of revenue for the same period of 1995. Occupancy for
the Hotels decreased from 71.6% for the year ended 1995, to 70% for the year
ended 1996. The decrease in occupancy is attributed to decreased business
activity near the Hotels located in Dublin, Virginia and Elizabethton, Tennessee
and to record snowfall in the first quarter of 1996. In 1995, the Company's
Hotels in Dublin, Virginia and Elizabethton, Tennessee received business from
nearby industrial construction projects. The construction projects were
substantially completed during 1995. The Days Inn-Farmville, Virginia Hotel has
an annual occupancy below the average for the Company; accordingly, its
inclusion for 1996's occupancy lowers the average occupancy for all the Hotels.
The average daily rate at the Hotels increased to $50.27 for the year ended
December 31, 1996, or 3.6%, as compared to $48.53 for the same period of 1995.
Revenue per available room ("REVPAR") increased to $35.17 for 1996, from $34.74
for the same period in 1995. Lessee operating expenses increased by
approximately $424,000, or 10.2%, for the twelve months ended December 31, 1996
as compared to operating expenses for the same period in 1995. Operating
expenses increased in 1996 due to the consolidation of the Lessee and the
Operator, and the addition of management personnel, which were hired to
accommodate anticipated additional hotel acquisitions.
Liquidity and Capital Resources
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders, is its share of the Partnership's cash
flow. The Partnership's principal source of revenue is Rent payments received
from the Lessee. The Lessee's obligations under the Leases are unsecured. The
Lessee's ability to make Rent payments, and the Company's liquidity, including
its ability to make distributions to Common Shareholders, is dependent on the
Lessee's ability to generate sufficient cash flow from the operation of the
Hotels.
The hotel business is seasonal, with hotel revenue generally greater in
the second and third quarters than in the first and fourth quarters, with the
exception of the Best Western Suites-Key Largo, Florida. The Best Western
Suites-Key Largo Hotel is busiest in the first and fourth quarters of the year.
To the extent that cash flow from operating activities is insufficient to
provide all of the estimated monthly distributions (particularly in the first
quarter), the Company anticipates that it will be able to fund any such deficit
from future working capital. As of December 31, 1997, the Company's cash and
current accounts receivable balances exceed the current obligations by $1,239.
The Company's FFO was $4,548,000 in the year ended December 31, 1997,
which is an increase of $1,825,000, or 67%, over FFO in the comparable period in
1996, which was $2,723,000. Most of the improvements in FFO can be attributed to
the completion and opening of the Comfort Suites-Dover, Delaware Hotel and the
acquisition of ten Hotels between February 1997 and September 1997. The Company
considers FFO to be a market-accepted measure of an equity REIT's cash flow,
which the Company believes reflects on the value of real estate companies such
as the Company in connection with the evaluation of other measures of operating
performances. Beginning with the year ended December 31, 1997, the Company
changed the way it computes FFO. The Company believes that its new method of
computing FFO is more consistent with the guidelines established by the National
Association of Real Estate Investment Trusts ("NAREIT") for calculating FFO.
FFO, as defined under the NAREIT standard, consists of net income, computed in
accordance with GAAP, excluding gains or losses from debt restructuring and
sales of properties, plus depreciation and amortization of real estate assets
and after adjustments for unconsolidated partnerships and joint ventures. For
the periods presented, depreciation and amortization and minority interest were
the only non-cash adjustments. FFO should not be considered as an
37
<PAGE>
alternative to net income or other measurements under GAAP as an indicator of
operating performance or to cash flows from operating, investing or financing
activities as a measure of liquidity. FFO does not reflect working capital
changes, cash expenditures for capital improvements or debt service with respect
to the hotel properties. FFO may not be comparable to similarly titled measures
of operating performance disclosed by other REITs.
The computation of historical FFO is as follows (in thousands):
<TABLE>
<CAPTION>
Historical Twelve Historical Twelve
Month Period Ended Month Period Ended
December 31, 1996 December 31, 1997
----------------- -----------------
<S> <C>
Net income before minority interests..................... $ 2,113 $ 3,022
Depreciation............................................. 610 1,502
Amortization of initial franchise costs.................. - 24
--------- ---------
Funds From Operations (new method)....................... 2,723 4,548
Amortization of loan costs............................... 126 107
-------- --------
Funds From Operations (former method).................... $ 2,849 $ 4,655
========== ==========
</TABLE>
The aggregate annual principal payments and payments to bond sinking
funds for the three years following December 31, 1997 are approximately as
follows:
1998 $ 195,000
1999 $ 25,661,000
2000 $ 225,000
Long-term debt as of December 31, 1997 of approximately $31.7 million consisted
of:
Approximately $25.5 million from the Credit Facility, which is secured
by and cross-collateralized and cross-defaulted on the Hotels located
in Solomons, Maryland; Farmville, Virginia (2 Hotels); Elizabethton,
Tennessee; Dahlgren, Virginia; Princeton, West Virginia; Dover,
Delaware; Culpeper, Virginia; New Castle, Pennsylvania; Harlan,
Kentucky; Danville, Kentucky; Murphy, North Carolina; Chambersburg,
Pennsylvania; Allentown, Pennsylvania; Gettysburg, Pennsylvania (2
Hotels) and Key Largo, Florida. The interest rate on the Credit
Facility is variable at 25 basis points above the prime rate, presently
at a rate of 8.75% per annum.
Approximately $3.9 million, secured by first deeds of trust on the
Hotels located in Wytheville, Virginia, and Morgantown, West Virginia.
Interest accrues at the rate necessary to remarket bonds at a price
equal to 100% of the outstanding principal balance. The interest rate
is approximately half of the prime rate, which is adjusted weekly and
is not to exceed 15% and 11.3636% for Wytheville and Morgantown,
respectively. At December 31, 1997, the interest rate was approximately
4.15% for both. In addition, letter of credit fees, trustee fees and
financing fees increased the effective rate on the bonds.
Approximately $2.3 million, secured by a first deed of trust on the
Comfort Inn-Dublin, Virginia. The outstanding balance bears interest at
a rate equal to 7.75% per annum with additional underwriters' fees
increasing the interest rate to 8%. The loan matures in November 2005.
Upon completion of the Offering and the application of the Net
Proceeds, the Company will have Remaining Indebtedness in the aggregate
principal amount of approximately $21 million outstanding. All of the Remaining
Indebtedness is secured by one or more Hotels.
Effective April 3, 1997, the Company's Board of Directors adopted a
resolution increasing the Company's limit on consolidated indebtedness from 50%
to 55% of the aggregate purchase price of the Hotels in which it has invested.
The aggregate purchase price paid by the Company for the Hotels as of December
31, 1997 is
38
<PAGE>
approximately $58.4 million. As of December 31, 1997, the Company's total
outstanding indebtedness represents approximately 54.8% of the aggregate amount
paid by the Company for the Hotels.
The Board of Directors has adopted the Investment Policy, which governs
all of the Company's investments in hotel properties, including the acquisition
of existing hotels and the development of hotels until such time as the Board
amends such policy. Under the Investment Policy, the Company will only acquire
an operating hotel for which it expects to receive, based on prior operating
history, annual rental income in an amount greater than or equal to 12% of the
total purchase price paid by the Company for such hotel, net of (i) insurance
premiums paid by the Company, (ii) the FFE Reserves of 4% of room revenue and
(iii) real estate and personal property taxes. Under the Bylaws, the approval of
a majority of the Board of Directors, including a majority of the Independent
Directors, is required for the Company to acquire any property. In addition, the
Investment Policy will be applied to a hotel property prior to its acquisition
or development by the Company, and therefore, there can be no assurances that
increases in insurance rates, real estate or personal property tax rates or FFE
Reserves, which are based on room revenues, will not decrease the Company's
annual return on its investments in any hotel property to a level below that set
out in the Investment Policy. Because a development project has no prior
revenues on which the Company's Investment Policy can be tested, the Company
intends to invest only in developments where it reasonably believes it will
receive an annual return on its investment that is consistent with the
Investment Policy.
Pursuant to the Leases, the Partnership is required to make available
to the Lessee 4% of room revenue per quarter, on a cumulative basis, for capital
improvements and periodic replacement or refurbishment of furniture, fixtures
and equipment at each of the Hotels. Although the Company believes that 4% of
room revenue is generally an appropriate capital reserve to maintain the
condition and viability of its Hotels, the Company will increase its capital
reserves set-aside from 4% to 6% of room revenue upon completion of the
Offering. The additional 2% of room revenue will be held in the Additional
Reserve Fund that will be deployed at the Hotels primarily to enhance their
competitive position. To ensure that the Company receives additional annual
income that is at least equal to 12% of the amount of funds invested by the
Company from the Additional Reserve Fund, the Company and the Lessee have agreed
to amend the Leases for the Hotels that receive capital from the Additional
Reserve Fund to provide that each such Hotel will increase its annual Base Rent
payment by 7% per annum of the capital received from the Additional Reserve
Fund. The Company expects that it will receive additional amounts under the
terms of the Percentage Leases equal to at least 5% per annum of the amount
invested from the Additional Reserve Fund through its participation in increased
room revenue resulting from such additional investments. The Company intends to
cause the Partnership to spend amounts in excess of the obligated amounts if
necessary to comply with the reasonable requirements of any Franchise License
and otherwise to the extent that the Company deems such expenditures to be in
the best interests of the Company. The Partnership is obligated to fund the cost
of certain capital improvements to the operations and any furniture, fixture and
equipment requirements in excess of the above. See "Business and Properties --
The Percentage Leases" and " -- The Fixed Lease."
The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its initial taxable year ended December
31, 1994, and, as such, the Company generally is not subject to federal income
tax on its net income. REITs are subject to a number of organizational and
operational requirements. See "Risk Factors - Tax Risks." For example, a REIT,
and therefore the Company, is required to distribute to its shareholders at
least 95% of its annual taxable income. The Company intends to make those
distributions from operating cash flows. The Company intends to retain as a
reserve such amounts as it considers necessary for the acquisition, expansion
and renovation of hotel properties consistent with continuing to distribute to
its shareholders amounts sufficient to maintain the Company's qualification as a
REIT.
The Company expects to meet its short-term liquidity requirements
generally through net cash provided by operations and existing cash balances.
The Company believes that its net cash provided by operations will be adequate
to fund both operating requirements and payments of dividends by the Company in
accordance with REIT requirements.
The Company expects to meet its long-term liquidity requirements, such
as scheduled debt maturities and property acquisitions, through long-term
secured and unsecured borrowings, the issuance of additional equity securities
of the Company, or, in connection with acquisitions of hotel properties, the
issuance of Units.
39
<PAGE>
Inflation
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures have limited and may, in the future,
limit the Lessee's ability to raise room rates in the face of inflation.
Seasonality of Hotel Business and the Hotels
The hotel industry is seasonal in nature. Generally, hotel revenues for
hotels operating in the geographic areas in which the Hotels operate are greater
in the second and third quarters than in the first and fourth quarters, with the
exception of the Best Western Suites-Key Largo, Florida, which is busiest in the
first and fourth quarters of the year. The Hotels' operations historically
reflect this trend. Although the hotel business is seasonal in nature, the
Company believes that it generally will be able to make its expected
distributions by using undistributed cash from the second and third quarters to
fund any shortfall in cash flow from operating activities from the Hotels in the
first and fourth quarters.
Year 2000
In response to the year 2000 issue, the Company modified its existing
information systems in order to make them year 2000 compliant. The Company
believes that it has made all necessary modifications to its existing systems
and does not expect that additional costs associated with year 2000 compliance,
if any, will be material to the Company's results of operations or financial
position.
BUSINESS AND PROPERTIES
Comfort Inn and Comfort Suites Hotels and Rodeway Inn Hotels
Twelve of the Hotels operate as Comfort Inn hotels, one Hotel operates
as a Comfort Suites hotel and one Hotel operates as a Rodeway Inn hotel. Since
the inception of the Comfort Inn brand in 1981, the number of hotels licensed
under that brand has grown to approximately 1,500 inns, hotels, and suites
worldwide. Comfort Inn, Comfort Suites and Rodeway Inns are part of the
worldwide Choice Hotels System of over 3,200 Sleep Inns, Comfort Inn, Comfort
Suites, Mainstay, Quality, Clarion, Econo Lodge, Rodeway and Friendship Inns,
hotels, suites and resorts.
Best Western Hotels and Best Western Suites
One of the Hotels operates as a Best Western hotel and one of the
Hotels operates as a Best Western Suites hotel. Best Western was established in
1946 as a reservation referral system by hoteliers and has developed into the
world's largest hotel chain. As of December 31, 1997, Best Western had 3,614
properties worldwide, with hotels located in 68 countries and 2,150 member
properties located in North America.
Days Inn Hotels
One of the Hotels operates as a Days Inn hotel. Days Inn has been
operating for more than 20 years and presently has more than 150,000 rooms and
1,600 properties worldwide. Days Inn is part of HFS Incorporated's blend of
hotel brands which includes Ramada, Howard Johnson, Super 8, Park Inns, Villager
and Travelodge.
Holiday Inn Express Hotels
Three of the Hotels operate as Holiday Inn Express hotels. Since the
inception of the Holiday Inn Express brand in 1990, the number of hotels
licensed under that brand has grown to over 650 hotels worldwide. Holiday Inn
Express is part of the worldwide Holiday Inn system of over 2,500 Holiday Inns,
Holiday Inn Garden Court, Holiday Inn Crowne Plaza, Holiday Inn Express, Holiday
Inn Select, Holiday Inn Sunspree and Resort Crowne Plaza Hotels, Suites and
Resorts.
40
<PAGE>
The Hotels
Set forth below is certain information regarding the Hotels for the
twelve months ended December 31, 1997 (or such shorter period commencing on the
date of acquisition, if applicable).
<TABLE>
<CAPTION>
Year Number of Room Other Lease Average
HOTELS Opened Rooms Revenue Revenue(1) Payment Occupancy ADR REVPAR
------ ----- ------- ------- ------- --------- --- ------
<S><C>
Comfort Inn:
Chambersburg, Pennsylvania(2) 1993 65 $ 529,983 $10,470 $228,806 68.0% $55.24 $37.57
Culpeper, Virginia(3)........ 1986 49 643,124 15,401 254,646 83.8% 50.71 42.48
Dahlgren, Virginia........... 1989 59 879,714 27,406 388,044 82.5% 49.53 40.85
Dublin, Virginia............. 1986 100 1,418,609 39,257 689,691 73.4% 52.95 38.87
Elizabethton, Tennessee...... 1987 58 549,938 16,709 219,273 57.8% 44.94 25.98
Farmville, Virginia.......... 1985 51 736,511 18,570 347,681 79.5% 49.80 39.57
Gettysburg, Pennsylvania(5).. 1990 81 995,498 15,625 424,239 74.1% 74.37 55.11
Morgantown, West Virginia.... 1986 80 1,280,380 68,673 644,049 79.6% 55.12 43.85
Murphy, North Carolina(6).... 1989 56 585,372 13,006 219,165 73.7% 56.10 41.32
New Castle, Pennsylvania(7).. 1987 79 926,194 21,902 381,810 71.9% 56.40 40.57
Princeton, West Virginia..... 1985 51 745,468 16,872 411,982 80.0% 50.06 40.05
Beacon Marina,
Solomons, Maryland......... 1986 60 1,129,361 299,947 851,070 79.3% 65.07 51.57
Comfort Suites
Dover, Delaware(4)........... 1997 64 945,723 14,156 357,649 67.8% 64.42 43.68
Best Western and Best
Western Suites:
Harlan, Kentucky(8).......... 1993 63 604,703 29,947 304,284 72.5% 51.93 37.66
Key Largo, Florida(9)........ 1987 40 302,690 14,846 147,017 71.4% 88.30 63.06
Days Inn:
Farmville, Virginia.......... 1989 60 651,155 18,184 292,875 62.5% 47.55 29.73
Holiday Inn Express:
Allentown, Pennsylvania(10) 1978 83 723,662 14,113 311,753 65.5% 65.13 42.68
Danville, Kentucky(11)....... 1994 62 713,659 31,285 295,851 80.1% 55.89 44.77
Gettysburg, Pennsylvania(5).. 1990 51 641,741 12,255 267,764 73.3% 77.01 56.43
Rodeway Inn:
Wytheville, Virginia........ 1985 100 577,813 6,750 288,544 32.8% 48.23 15.83
----- ----------- -------- ---------- ----- -------- -------
Consolidated Total/Weighted
Average for all Hotels...... 1,312 $15,581,298 $705,374 $7,326,193
===== =========== ======== ==========
</TABLE>
- -------------------------
(1) Represents recurring marina rental revenue (for the Comfort Inn-Beacon
Marina, Solomons, Maryland and the Best Western Suites-Key Largo, Florida
Hotels only), telephone revenue, restaurant revenue and other
miscellaneous service revenue.
(2) Acquired May 29, 1997.
(3) Acquired February 26, 1997.
(4) Opened January 22, 1997.
(5) Acquired May 23, 1997.
(6) Acquired April 25, 1997.
(7) Acquired March 17, 1997.
(8) Acquired April 17, 1997.
(9) Acquired September 2, 1997.
(10) Acquired June 10, 1997.
(11) Acquired April 23, 1997.
41
<PAGE>
The following table sets forth certain information with respect to each
Hotel:
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
The Hotels 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C>
Comfort Inn-Chambersburg, Pennsylvania
Occupancy N/A N/A 80.9% 75.5% 65.8%
ADR $54.28 $54.61 $54.62
REVPAR $43.92 $40.13 $35.94
Comfort Inn-Culpeper, Virginia
Occupancy 73.1% 80.3% 80.4% 80.1% 80.6%
ADR $44.01 $45.37 $46.44 $47.51 $50.24
REVPAR $32.18 $36.42 $37.34 $38.07 $40.52
Comfort Inn-Dahlgren, Virginia
Occupancy 74.4% 70.3% 76.2% 76.4% 82.5%
ADR $42.66 $43.55 $42.89 $43.23 $49.53
REVPAR $31.76 $30.70 $32.68 $33.02 $40.85
Comfort Inn-Dublin, Virginia
Occupancy 74.6% 80.7% 80.1% 72.9% 73.4%
ADR $42.80 $45.97 $49.51 $52.32 $52.95
REVPAR $31.94 $37.08 $39.65 $38.16 $38.87
Comfort Inn-Elizabethton, Tennessee
Occupancy 74.6% 68.8% 74.2% 60.4% 57.8%
ADR $39.43 $39.98 $40.17 $44.44 $44.94
REVPAR $26.82 $27.52 $29.80 $26.83 $25.98
Comfort Inn-Farmville, Virginia
Occupancy 80.7% 84.3% 75.9% 81.0% 79.5%
ADR $40.10 $41.81 $47.22 $48.43 $49.80
REVPAR $32.38 $35.24 $35.83 $39.22 $39.57
Comfort Inn-Gettysburg, Pennsylvania
Occupancy N/A N/A 72.9% 69.2% 65.0%
ADR $64.69 $66.66 $69.37
REVPAR $47.18 $46.12 $45.07
Comfort Inn-Morgantown, West Virginia
Occupancy 81.9% 81.8% 77.3% 77.7% 79.6%
ADR $46.28 $49.00 $50.78 $52.44 $55.12
REVPAR $37.88 $40.10 $39.26 $40.76 $43.85
Comfort Inn-Murphy, North Carolina
Occupancy 71.1% 71.4% 74.7% 66.6% 68.1%
ADR $45.43 $46.21 $46.22 $53.51 $53.87
REVPAR $32.29 $32.98 $34.51 $35.61 $36.70
Comfort Inn-New Castle, Pennsylvania
Occupancy N/A 64.4% 66.4% 66.8% 67.0%
ADR $47.90 $48.70 $53.09 $55.59
REVPAR $30.84 $32.32 $35.46 $37.29
Comfort Inn-Princeton, West Virginia
Occupancy 93.9% 95.8% 95.5% 88.5% 80.0%
ADR $48.08 $50.37 $53.78 $54.73 $50.06
REVPAR $45.16 $48.31 $51.35 $48.45 $40.05
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
The Hotels 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C>
Comfort Inn-Beacon Marina,
Solomons, Maryland
Occupancy 72.5% 78.6% 67.1% 76.6% 79.3%
ADR $53.49 $55.37 $58.86 $58.55 $65.07
REVPAR $38.79 $43.50 $39.48 $44.16 $51.57
Comfort Suites-Dover, Delaware
Occupancy N/A N/A N/A N/A 67.8%
ADR $64.42
REVPAR $43.68
Best Western-Harlan, Kentucky
Occupancy N/A 72.0% 74.8% 70.4% 68.0%
ADR $44.45 $47.10 $48.97 $51.50
REVPAR $32.00 $35.20 $34.47 $35.00
Best Western Suites-Key Largo, Florida
Occupancy 80.8% 73.3% 79.7% 84.2% 79.9%
ADR $102.56 $93.59 $93.91 $96.68 $101.78
REVPAR $82.82 $68.55 $74.85 $81.39 $81.31
Days Inn-Farmville, Virginia
Occupancy 64.2% 60.1% 62.7% 69.1% 62.5%
ADR $38.10 $42.55 $44.27 $45.53 $47.55
REVPAR $24.48 $24.68 $27.78 $31.47 $29.73
Holiday Inn Express-Allentown, Pennsylvania
Occupancy N/A N/A 60.3% 67.0% 65.2%
ADR $59.61 $62.05 $65.59
REVPAR $35.96 $41.54 $41.43
Holiday Inn Express-Danville, Kentucky
Occupancy N/A 69.5% 72.2% 72.0% 75.3%
ADR $49.17 $49.74 $52.04 $55.23
REVPAR $34.16 $35.92 $37.47 $41.62
Holiday Inn Express-Gettysburg, Pennsylvania
Occupancy N/A N/A 72.1% 66.6% 65.1%
ADR $69.76 $72.24 $70.69
REVPAR $50.29 $48.13 $45.99
Rodeway Inn-Wytheville, Virginia
Occupancy 61.4% 48.8% 47.9% 44.7% 32.8%
ADR $38.08 $45.12 $47.23 $48.85 $48.23
REVPAR $23.39 $22.07 $22.64 $21.85 $15.83
</TABLE>
Occupancy and REVPAR for the Rodeway Inn-Wytheville, Virginia declined
from 1993 to 1994. The Company believes that the decline in occupancy and REVPAR
is a result of the loss of a year-to-year contract pursuant to which a trucking
firm reserved at least ten rooms daily at rates significantly below quoted
market rates. In 1993, the contract was awarded to another hotel that submitted
a lower bid. The Company believes that the effects of the loss of such contract
have been partially offset by increases in ADR, as shown in the table above.
There can be no assurance, however, that the increase in ADR can return REVPAR
at this Hotel to the historical levels achieved prior to the termination of the
contract. The decrease in occupancy in 1994 compared to 1993 at the Comfort
Inn-Dahlgren, Virginia was primarily due to a higher than normal occupancy in
1993 that was attributable to an increase in construction at the adjacent Naval
Surface Warfare Center during that year. The occupancy of many of the Hotels
decreased in 1996 as compared to 1995 due to the record snowfall in the first
quarter of 1996. Occupancy and REVPAR at the Comfort Inn-Morgantown, West
Virginia, declined in 1994 from 1993 due to the bankruptcy of the lessee of the
restaurant at that hotel. The Company executed a new lease for this restaurant
in early 1996. The decrease in occupancy and REVPAR at the Comfort Inn-Beacon
Marina, Solomons, Maryland, was primarily attributable to the fact that in 1995
a nearby nuclear power station dramatically curtailed
43
<PAGE>
the amount of specialized maintenance work it historically had performed in the
first quarter of each year. During 1996, the unusual weather was great enough to
negatively impact REVPAR at the Comfort Inn-Dahlgren, Virginia and the Rodeway
Inn-Wytheville, Virginia. In addition, the Comfort Inn-Dublin, Virginia and the
Comfort Inn- Elizabethton, Tennessee both experienced a slowdown in
construction-related business in 1996 which had a negative impact on occupancy
and REVPAR. The Comfort Inn-Chambersburg, Pennsylvania and the Comfort Inn-
Gettysburg, Pennsylvania Hotels experienced a drop in occupancy in each of 1996
and 1997 due to increased competition in their respective markets. The Company
took into account the new competition in these markets prior to their purchase
and adjusted its purchase price to accommodate the anticipated impact of the
competition. The Comfort Inn-Princeton, West Virginia and the Rodeway
Inn-Wytheville, Virginia Hotels both experienced new competition in 1997 with
the addition of two new hotels in each respective market. During 1996, the
Comfort Inn- Farmville, Virginia and Days Inn-Farmville Hotels' market area
experienced an unusual level of occupancy due to significant construction
activity in the area. During 1997, the construction activity abated
significantly, which resulted in a reduction in occupancy.
The Fixed Lease
Because development projects have no prior income to which the Company
can apply the Investment Policy, the Company intends to invest in developments
only where it reasonably believes it will receive rent payments from the Lessee
consistent with the Investment Policy. The lease for the Comfort Suites-Dover,
Delaware is a Fixed Lease pursuant to which the Lessee leases the Hotel for a
fixed rent payment, which is payable in equal monthly installments. So long as
the Investment Policy remains in effect, the Company intends to enter into
similar Fixed Leases on any new hotel developments because the Company believes
that this type of lease mitigates the risks associated with the initial startup
of a hotel, such as low occupancy rates or low room rates. All material terms of
the Fixed Leases, except for the payment terms, are substantially similar to the
terms of the Percentage Leases described below.
The Percentage Leases
The Percentage Leases provide for both Base Rent and Percentage Rents.
The Company intends to use similar leases with respect to additional existing
hotels it may acquire because the Company believes that there are fewer startup
risks associated with acquiring an existing operating hotel than with hotel
developments. The Board of Directors may, however, in its discretion, alter any
of these provisions with respect to any proposed Percentage Lease, depending on
the purchase price paid, economic conditions and other factors deemed relevant
at the time. The following summary is qualified in its entirety by the
Percentage Leases, which have been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
Percentage Lease Terms. Each Percentage Lease has a non-cancelable term
of ten years, which may be renewed for an additional term of five years at the
Lessee's option, subject to earlier termination upon the occurrence of defaults
thereunder and certain other events described therein (including, particularly,
the provisions described herein under "Damage to Hotels," "Condemnation of
Hotels" and "Termination of Percentage Leases on Disposition of the Hotels").
Amounts Payable Under the Percentage Leases. During the term of each
Percentage Lease, the Lessee is obligated to pay (i) the Base Rent and
Percentage Rents and (ii) certain other amounts, including interest accrued on
any late payments or charges (the "Additional Charges"). Base Rent accrues and
is required to be paid monthly. The Percentage Rent for each Hotel is comprised
of (i) a set percentage of quarterly and semi-annual room revenues, which is
payable quarterly and semi-annually, respectively, (ii) a set percentage of
annual room revenues in excess of the Threshold, which is payable annually, and
(iii) 8% of monthly revenues other than room revenues (including, but not
limited to, telephone charges, movie rental fees and rental payments under any
third-party leases), which is payable monthly. Annual Percentage Rent does not
apply to amounts under the Threshold. The portion of Percentage Rent that is
based on annual room revenues is designed to allow the Company to participate in
any future increases in room revenues. All Percentage Rents are due 30 days
after the end of the applicable calendar period.
44
<PAGE>
The following table sets forth (i) the annual Base Rent, (ii)
Percentage Rents formulas and (iii) the Rent that was paid for each Hotel
pursuant to the terms of the Percentage Leases in 1997. With respect to the
Hotels acquired in 1997, the information presented relates to the period from
the date of acquisition to December 31, 1997.
<TABLE>
<CAPTION>
Aggregate
Aggregate Percentage
Annual Percentage Hotel Percentage Rent Plus
Hotels Base Rent Rent Formula Revenues Rent Base Rent
------ --------- ------------ -------- ---- ---------
<S> <C>
Comfort Inns $107,663 14.2% of quarterly room revenues Rooms - $ 529,983 $120,306 $228,806
Chambersburg, up to $960,000 per year, plus 8.5% Other - $ 10,470 837
Pennsylvania of semi-annual room revenues up to -------
$960,000 per year plus 35% of annual $121,143
room revenues in excess of $960,000, -------
plus 8% of monthly other revenue
Culpeper, Virginia 111,926 11% of quarterly room revenue up Rooms - $ 643,124 $141,487 $254,646
to $675,000 per year, plus 11% of Other - $ 15,401 1,233
semi-annual revenues up to -------
$675,000 per year, plus 35% of $142,720
annual room revenues in excess of -------
$675,000, plus 8% of monthly other
revenues
Dahlgren, Virginia 153,096 14.0% of quarterly room revenues, Rooms - $ 879,714 $232,756 $388,044
plus 6.5% of semi-annual room Other - $ 27,406 2,192
revenues, plus 30% of annual room -------
revenues in excess of $705,000, $234,948
plus 8% of monthly other revenues -------
Dublin, Virginia 253,350 17.5% of quarterly room revenues, Rooms - $1,418,609 $433,200 $689,691
plus 10.0% of semi-annual room Other - $ 39,257 3,141
revenues, plus 30% of annual room -------
revenues in excess of $1,275,000, $436,341
plus 8% of monthly other revenueks -------
Elizabethton, 96,950 14.5% of quarterly room revenues, Rooms - $ 549,938 $120,986 $219,273
Tennessee plus 7.5% of semi-annual room Other - $ 16,709 1,337
revenues, plus 30% of annual room -------
revenues in excess of $560,000, $122,323
plus 8% of monthly other revenues -------
Farmville, Virginia 132,432 16.0% of quarterly room revenues, Rooms - $ 736,511 $213,763 $347,681
plus 9.5% of semi-annual room Other - $ 18,750 1,486
-------
revenues, plus 30% of annual room $215,249
-------
revenues in excess of $650,000 plus
8% of monthly other revenues
Gettysburg, 184,069 14.5% of quarterly room revenues Rooms - $ 995,498 $238,920 $424,239
Pennsylvania up to $1,400,000 per year, plus Other - $ 15,625 1,250
9.5% of semi-annual room revenues -------
up to $1,400,000 per year plus 35% $240,170
of room revenues in excess of -------
$1,400,000, plus 8% of total other
revenues
Morgantown, 210,136 6.5% of quarterly room revenues, Rooms - $1,280,380 $428,420 $644,049
West Virginia plus 24.0% of semi-annual room Other - $ 68,673 5,493
revenues, plus 33% of annual room -------
$433,913
-------
revenues in excess of $1,150,000,
plus 8% of monthly other revenues
Murphy, 95,197 11% of quarterly room revenues up, Rooms - $ 585,372 $122,928 $219,165
North Carolina to $740,000 per year plus 10% of Other - $ 13,006 1,040
semi annual room revenues up to -------
$740,000 per year, plus 35% of annual $123,968
room revenues in excess of $740,000, -------
plus 8% of monthly other revenues
45
<PAGE>
New Castle, 171,665 7.5% of quarterly room revenues up Rooms - $ 926,164 $208,394 $381,810
Pennsylvania to $1,000,000 per year, plus 15% Other - $ 21,902 1,751
of semi-annual room revenues up to -------
$1,000,000 per year, plus 35% of $210,145
annual room revenues in excess of -------
$1,000,000 plus 8% of monthly
other revenues
Princeton, 208,610 11.1% of quarterly room revenues, Rooms $ 745,468 $202,022 $411,982
West Virginia plus 16.0% of semi-annual room - $ 16,872 1,350
revenues, plus 33% of annual room -------
revenues in excess of $875,000, Other - $203,372
plus 8% of monthly other revenues -------
Beacon Marina, 288,397 17.6% of quarterly room revenues, Rooms - $1,129,361 $538,677 $851,070
Solomons, plus 25.0% of semi-annual room Other - $299,947 23,996
Maryland revenues, plus 25.1% of annual -------
room revenues in excess of $562,673
$900,000, plus 8% of monthly other -------
revenues
Comfort Suites 357,649 Fixed Lease - Not Applicable Not Not $357,649
Dover, Delaware Applic- Applicable
able
Best Western 129,548 14.5% of quarterly room revenues, Rooms - $ 604,703 $172,340 $304,284
Harlan, Kentucky up to $800,000 per year, plus 14% Other - $ 29,947 2,396
of semi-annual room revenues up to -------
$800,000 per year, plus 35% of $174,736
room revenues in excess of -------
$800,000, plus 8% of monthly other
revenues
Best Western Suites 73,184 14% of quarterly room revenues up Rooms - $ 302,690 $ 72,646 $147,017
Key Largo, Florida to $1,225,000 per year, plus 10% Other - $ 14,846 1,187
of semi-annual revenues up to -------
$1,225,000 per year, plus 35% of $ 73,833
annual room revenues in excess of -------
$1,225,000, plus 8% of monthly
other revenues
Days Inn 125,376 16% of quarterly room revenues, Rooms - $ 651,155 $166,044 $292,875
Farmville, Virginia plus 9.5% of semi-annual room Other - $ 18,184 1,455
revenues plus 30.0% annual room -------
revenues in excess of $760,000, $167,499
plus 8% of other revenue -------
Holiday Inn Express
Allentown, PA 146,353 14.2% of quarterly room revenues Rooms - $ 723,662 $164,271 $311,753
up to $1,250,000 per year, plus Other - $ 14,113 1,129
8.5% of semi-annual room revenues -------
up to $1,250,000 per year, plus $165,400
35% of annual room revenues in -------
excess of $1,250,000, plus 8% of
monthly other revenues.
Danville, Kentucky 131,347 14.2% of quarterly room revenues Rooms $ 713,659 $162,001 $295,851
up to $900,000 per year, plus
- $ 31,285 2,503
------
8.5% of semi-annual room revenues Other - $164,504
up to $900,000 per year, plus 35% -------
of annual room revenues in excess
of $900,000, plus 8% of monthly
other revenues
46
<PAGE>
Gettysburg, 115,974 14.5% of quarterly room revenues Rooms - $ 641,741 $150,809 $267,764
Pennsylvania up to $940,000 per year, plus 9% Other - $ 12,255 981
of semi-annual room revenues up to -------
$940,000 per year, plus 35% of annual $151,790
room revenues in excess of $940,000, -------
plus 8% of monthly other revenues
6.5% of quarterly room revenues,
Rodeway Inn 210,000 Rooms - $ 577,813 $ 78,004 $ 288,544
--------
Wytheville, Virginia plus 7.0% of semi-annual room Other - $ 6,750 540
revenues, plus 30.0% of annual -------
room revenues in excess of $ 78,544
$815,000, plus 8% of monthly other -------
revenues
Total $3,302,922 $4,023,271 $7,326,193
========= ========== ==========
</TABLE>
Other than real estate and personal property taxes, ground lease rent
(where applicable), the cost of certain furniture, fixtures and equipment,
expenditures for items that are classified as capital items under GAAP which are
necessary for the continued operation of the Hotels, and property and casualty
insurance premiums, which are obligations of the Partnership, the Percentage
Leases require the Lessee to pay Base Rent, Percentage Rents, Additional Charges
and the operating expenses of the Hotels (including insurance, other than
property and casualty insurance, all costs and expenses and all utility and
other charges incurred in the operation of the Hotels) during the term of the
Percentage Leases. The Percentage Leases also provide for rent reductions and
abatements in the event of damage to or destruction or a partial taking of any
Hotel as described under "Damage to Hotels" and "Condemnation of Hotels."
Maintenance and Modifications. Under the Percentage Leases, the
Partnership is required to maintain structural elements and underground
utilities and to pay for certain expenditures for items that are classified as
capital items under GAAP and which are necessary for the continued operation of
the Hotels. In addition, the Partnership will make available to the Lessee for
the repair, replacement and refurbishment of furniture, fixtures and equipment
in the Hotels, when and as deemed necessary by the Lessee, the FFE Reserves,
which is an amount equal to 4% of room revenues per quarter on a cumulative
basis. Although the Company believes that 4% of room revenue is generally an
appropriate capital reserve to maintain the condition and viability of its
Hotels, the Company will increase its capital reserves set-aside from 4% to 6%
of room revenue upon completion of the Offering. The additional 2% of room
revenue will be held in the Additional Reserve Fund, which will be deployed at
the Hotels primarily to enhance their competitive position. To ensure that the
Company receives additional annual income that is at least equal to 12% of the
amount of funds invested by the Company from the Additional Reserve Fund, the
Company and the Lessee have agreed to amend the Leases for the Hotels that
receive capital from the Additional Reserve Fund to provide that each such Hotel
will increase its annual Base Rent payment by 7% per annum of the capital
received from the Additional Reserve Fund. The Company expects that it will
receive additional amounts under the terms of the Percentages Leases equal to at
least 5% per annum of the amount invested from the Additional Reserve Fund
through its participation in increased room revenue resulting from such
additional investments. The Partnership's obligation will be carried forward to
the extent that the Lessee has not expended such amount, and any unexpended
amounts will remain the property of the Partnership upon termination of the
Percentage Leases. Other than as described above, the Lessee is responsible for
all repair and maintenance of the Hotels.
The Lessee, at its expense, may make non-capital and capital additions,
modifications or improvements to the Hotels, provided that such action does not
significantly alter the character or purposes of the Hotels or significantly
detract from the value or operating efficiencies of the Hotels. All such
alterations, replacements and improvements shall be subject to all the terms and
provisions of the Percentage Leases and will become the property of the
Partnership upon termination of the Percentage Leases. The Partnership owns
substantially all personal
47
<PAGE>
property (other than inventory, linens, and other nondepreciable personal
property) not affixed to, or deemed a part of, the real estate or improvements
on the Hotels, except to the extent that ownership of such personal property
would cause the Rent under a Percentage Lease not to qualify as "rents from real
property" for REIT income test purposes. See "Federal Income Tax Considerations
- - Requirements for Qualification - Income Tests."
Insurance and Property Taxes. The Partnership is responsible for paying
real estate and personal property taxes on the Hotels (except to the extent that
personal property associated with the Hotels is owned by the Lessee), and all
premiums for property and casualty insurance. The Lessee is required to pay or
reimburse the Partnership for all other insurance on the Hotels, including
comprehensive general public liability, workers' compensation and other
insurance appropriate and customary for properties similar to the Hotels and
naming the Partnership as an additional named insured.
Assignment and Subleasing. The Lessee is not permitted to sublet all or
any part of the Hotels or assign its interest under any of the Percentage Leases
without the prior written consent of the Partnership. No assignment or
subletting will release the Lessee from any of its obligations under the
Percentage Leases.
Damage to Hotels. In the event of damage to or destruction of any Hotel
covered by insurance which renders the Hotel unsuitable for the Lessee's use and
occupancy, the Lessee is obligated to repair, rebuild, or restore the Hotel,
except as to structural elements of such hotel and underground utilities, or
offer to acquire the Hotel on the terms set forth in the applicable Percentage
Lease. If the Lessee rebuilds the Hotel, the Partnership is obligated to
disburse to the Lessee, from time to time and upon satisfaction of certain
conditions, any insurance proceeds actually received by the Partnership as a
result of such damage or destruction, and any excess costs of repair or
restoration will be paid by the Lessee. If the Lessee decides not to rebuild and
the Partnership exercises its right to reject the Lessee's mandatory offer to
purchase the Hotel on the terms set forth in the Percentage Lease, the
Percentage Lease will terminate and the insurance proceeds will be retained by
the Partnership. If the Partnership accepts the Lessee's offer to purchase the
Hotel, the Percentage Lease will terminate and the Lessee will be entitled to
the insurance proceeds. In the event that damage to or destruction of a Hotel
that is covered by insurance does not render the Hotel wholly unsuitable for the
Lessee's use and occupancy, the Lessee generally will be obligated to repair or
restore the Hotel. The Percentage Lease shall remain in full force and effect
during any period required for repair or restoration of any damaged or destroyed
Hotel except that if damage to the Hotel renders the Hotel wholly unsuitable for
Lessee's use and occupancy within the final 24 months of the term of the
Percentage Lease, either the Partnership or the Lessee may terminate the
Percentage Lease on the terms set forth therein.
Condemnation of Hotel. In the event of a total condemnation of any
Hotel, the relevant Percentage Lease will terminate with respect to such Hotel
as of the date of taking, and the Partnership and the Lessee will be entitled to
their shares of the condemnation award in accordance with the provisions of the
Percentage Lease. In the event of a partial taking that does not render the
Hotel unsuitable for the Lessee's use, the Lessee will restore the untaken
portion of the Hotel to a complete architectural unit and the Partnership shall
contribute the cost of such restoration in accordance with the provisions of the
Percentage Lease.
Events of Default. Events of Default under the Percentage Leases
include, among others, the following:
(i) the occurrence of an Event of Default under any other
Percentage Lease between the Partnership and the Lessee;
(ii) the failure by the Lessee to pay Base Rent when due and
the continuation of such failure for a period of ten days thereafter;
(iii) the failure by the Lessee to pay Percentage Rent when
due and the continuation of such failure for a period of 20 days
thereafter;
(iv) the failure by the Lessee to observe or perform any other
term of a Percentage Lease and the continuation of such failure for a
period of 30 days after receipt by the Lessee of notice from the
Partnership thereof, unless such failure cannot be cured within such
period and the Lessee commences
48
<PAGE>
appropriate action to cure such failure within such 30 day period and
thereafter acts, with diligence, to correct such failure within such
time as is necessary, provided in no event shall such period exceed 90
days;
(v) if the Lessee shall file a petition in bankruptcy or
reorganization pursuant to any federal or state bankruptcy law or any
similar federal or state law, or shall be adjudicated a bankrupt or
shall make an assignment for the benefit of creditors or shall admit in
writing its inability to pay its debts generally as they become due, or
if a petition or answer proposing the adjudication of the Lessee as a
bankrupt or its reorganization pursuant to any federal or state
bankruptcy law or any similar federal or state law shall be filed in
any court and the Lessee shall be adjudicated a bankrupt and such
adjudication shall not be vacated or set aside or stayed within 60 days
after the entry of an order in respect thereof, or if a receiver of the
Lessee or of the whole or substantially all of the assets of the Lessee
shall be appointed in any proceeding brought by the Lessee or if any
such receiver, trustee or liquidator shall be appointed in any
proceeding brought against the Lessee and shall not be vacated or set
aside or stayed within 60 days after such appointment;
(vi) if the Lessee voluntarily discontinues operations of any
Hotel except as a result of damage, destruction, or condemnation; or
(vii) if the Franchise License with respect to a Hotel is
terminated by the franchisor as a result of any action or failure to
act by the Lessee or its agents, other than the failure to complete
improvements required by a franchisor because the Partnership fails to
pay the costs of such improvements.
If an Event of Default occurs and continues beyond any curative period,
the Partnership has the option of terminating the Percentage Lease or any or all
other Percentage Leases by giving the Lessee ten days' written notice of the
date for termination of the Percentage Leases and, unless such Event of Default
is cured prior to the termination date set forth in such notice, the Percentage
Leases shall terminate on the date specified in the Partnership's notice and the
Lessee shall be required to surrender possession of the affected Hotel.
Termination of Percentage Leases on Disposition of the Hotels. In the
event the Partnership enters into an agreement to sell or otherwise transfer a
Hotel, the Partnership has the right to terminate the Percentage Lease with
respect to such Hotel if within six months of the termination the Partnership
either (i) pays the Lessee the fair market value of the Lessee's leasehold
interest in the remaining term of the Percentage Lease to be terminated, or (ii)
offers to lease to the Lessee one or more substitute hotels on terms that would
create a leasehold interest in such hotels with a fair market value equal to or
exceeding the fair market value of the Lessee's remaining leasehold interest
under the Percentage Lease to be terminated.
Franchise License. The Lessee is the licensee under the Franchise
Licenses on the Hotels. See "Business and Properties - Franchise Licenses."
Other Lease Covenants. The Lessee has agreed that during the term of
the Percentage Leases it will maintain a ratio of total debt to consolidated net
worth (as defined in the Percentage Leases) of less than or equal to 25%,
exclusive of capitalized leases.
Breach by Partnership. Upon notice from the Lessee that the Partnership
has breached the Lease, the Partnership will have 30 days to cure the breach or
proceed to cure the breach, which period may be extended in the event of certain
specified, unavoidable delays.
Inventory. All inventory required in the operation of the Hotels is
owned by the Lessee at its expense. The Partnership has the option to purchase
all inventory related to a particular Hotel at fair market value upon
termination of the Percentage Lease for that Hotel.
49
<PAGE>
Franchise Licenses
Comfort Inn,(R) Comfort Suites(R) and Rodeway Inn(R) are registered
trademarks of Choice Hotels. Best Western(R) and Best Western Suites(R) are
registered trademarks of Best Western. Days Inn(R) is a registered trademark of
Days Inn. Holiday Inn Express(R) is a registered trademark of Holiday
Hospitality.
The Company anticipates that most of the additional hotels in which it
invests will be operated under similar franchise licenses. The Company believes
that the public's perception of quality associated with a franchisor is an
important feature in the operation of a hotel. Franchisors provide a variety of
benefits for franchisees which include national advertising, publicity and other
marketing programs designed to increase brand awareness, training of personnel,
continuous review of quality standards and centralized reservation systems.
The Franchise Licenses generally specify certain management,
operational, recordkeeping, accounting, reporting and marketing standards and
procedures with which the franchisee must comply. The Franchise Licenses
obligate the Lessee to comply with the franchisors' standards and requirements
with respect to training of operational personnel, safety, maintaining specified
insurance, the types of services and products ancillary to guest room services
that may be provided by the Lessee, display of signage, and the type, quality
and age of furniture, fixtures and equipment included in guest rooms, lobbies
and other common areas.
With the exception of the Franchise Licenses noted below, all Franchise
Licenses from Choice Hotels will terminate on November 29, 2014. The Franchise
License for the Comfort Suites-Dover, Delaware will terminate in early 2017. The
Franchise Licenses for the Comfort Inns located in Culpeper, Virginia; New
Castle, Pennsylvania; Murphy, North Carolina; Gettysburg, Pennsylvania and
Chambersburg, Pennsylvania will terminate in 2017. Further, the Franchise
License from Choice Hotels for the Comfort Inn-Dahlgren, Virginia may be
terminated without cause by the franchisor on April 1, 1999 upon three months
written notice. The Franchise License from Choice Hotels for the Rodeway
Inn-Wytheville, Virginia will terminate in 2017; however, the Company has the
option to terminate this Franchise License in July 1998 and July 1999.
Otherwise, these Franchise Licenses may be terminated by the franchisor only
upon a violation of their terms.
The Franchise Licenses from Best Western may be terminated by the
franchisor or franchisee on each annual anniversary upon 90 days notice to the
other party.
The Franchise License from Days Inn expires on October 31, 2009. During
the term of that Franchise License, Days Inn may terminate the license only for
a violation of its terms.
The Franchise Licenses from Holiday Hospitality for the Holiday Inn
Express Hotels will terminate in 2007.
Under the Franchise Licenses from Choice Hotels relating to the Comfort
Inn Hotels located in Dahlgren, Virginia; Dublin, Virginia; Elizabethton,
Tennessee; Farmville, Virginia; Morgantown, West Virginia; Princeton, West
Virginia and Solomons, Maryland, the Lessee currently pays fees of approximately
6% of monthly room revenue. Under the Franchise Licenses from Choice Hotels
relating to the Comfort Inn Hotels located in Chambersburg, Pennsylvania;
Culpeper, Virginia; Gettysburg, Pennsylvania; Murphy, North Carolina and New
Castle, Pennsylvania, the Lessee currently pays fees of approximately 8.85% of
monthly room revenue. Under the Franchise License from Choice Hotels relating to
the Comfort Suites-Dover, Delaware, the Lessee pays a franchise fee of 8.05% of
monthly room revenue. Under the Best Western-Harlan, Kentucky Franchise License,
the Lessee currently pays a franchise fee of $1,935 per month and annual dues of
$2,654. Under the Best Western Suites-Key Largo, Florida Franchise License, the
Lessee currently pays a franchise fee of $2,012 per month and annual dues of
$2,050. Under the Rodeway Inn Franchise License, the Lessee pays franchise and
reservation fees equal to 8.8% of monthly room revenue. Under the Franchise
Licenses from Holiday Hospitality relating to the Holiday Inn Express Hotels,
the Lessee currently pays fees of approximately 8% of monthly room revenue plus
$6.43 per room per month. In addition, the Days Inn Franchise License requires
the Lessee to pay to any travel agent arranging a reservation for a room, 10% of
the gross room revenues generated by such reservation.
50
<PAGE>
Although management of the Company believes that each of the Hotels is
currently in compliance with the terms of the related Franchise License, there
can be no assurance that a franchisor will not exercise its option to terminate
a Franchise License at the designated anniversary. The Franchise Licenses also
provide for termination at the franchisor's option upon the occurrence of
certain events, including the Lessee's failure to pay royalties and fees or
perform its other covenants under the Franchise License, bankruptcy, abandonment
of the franchise or material breach of any term of a mortgage or lease relating
to the related Hotel. The Lessee is responsible for making all payments under
the Franchise Licenses to the franchisors.
COMFORT INN(R), COMFORT SUITES(R) AND RODEWAY INN(R) ARE REGISTERED
TRADEMARKS OF CHOICE HOTELS. CHOICE HOTELS HAS NOT ENDORSED OR APPROVED THE
OFFERING. A GRANT OF A COMFORT INN, COMFORT SUITES OR RODEWAY INN FRANCHISE
LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE
INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY CHOICE HOTELS
(OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE
PARTNERSHIP OR THE COMMON SHARES OFFERED HEREBY.
BEST WESTERN(R) AND BEST WESTERN SUITES(R) ARE REGISTERED TRADEMARKS OF
BEST WESTERN. BEST WESTERN HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT OF
A BEST WESTERN FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS,
AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT
BY BEST WESTERN (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE
COMPANY, THE PARTNERSHIP OR THE COMMON SHARES OFFERED HEREBY.
DAYS INN(R) IS A REGISTERED TRADEMARK OF DAYS INN. DAYS INN HAS NOT
ENDORSED OR APPROVED THE OFFERING. A GRANT OF A DAYS INN FRANCHISE LICENSE FOR A
HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY DAYS INN HOTELS (OR ANY OF ITS AFFILIATES,
SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE PARTNERSHIP OR THE COMMON SHARES
OFFERED HEREBY.
HOLIDAY INN EXPRESS(R) IS A REGISTERED TRADEMARK OF HOLIDAY HOSPITALITY
CORPORATION. HOLIDAY HOSPITALITY CORPORATION HAS NOT ENDORSED OR APPROVED THE
OFFERING. A GRANT OF A HOLIDAY INN EXPRESS FRANCHISE LICENSE FOR CERTAIN OF THE
HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY HOLIDAY HOSPITALITY CORPORATION (OR ANY OF
ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE PARTNERSHIP OR
THE COMMON SHARES OFFERED HEREBY.
Operating Practices
The Company's management recognizes the need for aggressive, market
driven, creative management given the competition in the hospitality industry.
Each of the Hotels is managed by the Lessee. The Lessee intends to continue the
management systems developed by it and its Affiliates. The Lessee currently
manages the Hotels and has experience satisfying the requirements imposed by the
Choice Hotels, Best Western, Days Inn and Holiday Hospitality Franchise
Licenses.
Employees
The Company is self-advised and thus utilizes the services of its
officers and Directors rather than retaining an advisor. See "Management -
Directors and Executive Officers." In addition, the Lessee provides the Company
with accounting and securities reporting services pursuant to the terms of the
amended Services Agreement. The Lessee employs approximately 400 people in
operating the Hotels and has advised the Company that its relationship with its
employees is good.
51
<PAGE>
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 a
hazardous substance at a property owned by another party 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 such 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 Lessee, as the case may be, may be potentially
liable for any such costs.
Phase I environmental assessments were obtained on all of the Hotels
prior to their acquisition or development by the Company. The Phase I
environmental assessments were intended to identify potential environmental
contamination for which the Hotels may be responsible. The Phase I environmental
assessments 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 Phase I environmental assessments did not include invasive procedures, such
as soil sampling or ground water analysis.
The Phase I environmental assessments have not revealed any
environmental liability 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 environmental assessments do not reveal all environmental liabilities
or that there are material environmental liabilities of which the Company is
unaware. Moreover, no assurance can be given that (i) future laws, ordinances or
regulations will not impose any material environmental liability or (ii) the
current environmental condition of the Hotels will not be affected by the
condition of the properties in the vicinity of the Hotels (such as the presence
of leaking underground storage tanks) or by third parties unrelated to the
Company, the Partnership, or the Lessee.
The Company believes that the Hotels are in compliance in all material
respects with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances and other environmental matters. Neither the
Company nor, to the knowledge of the Company, the Selling Partnerships, the LLC
or the LLC's predecessor in interest with regard to any of the former owners of
the Hotels, have been notified by any governmental authority of any material
noncompliance, liability or claim relating to hazardous or toxic substances or
other environmental matters in connection with any of the Hotels.
Competition
The hotel industry is highly competitive. 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 revenues of the Hotels
or hotels acquired in the future. See "Business and Properties - The Hotels."
There will be competition for investment opportunities in upper-economy
and mid-scale hotels from entities organized for purposes substantially similar
to the Company's objectives as well as other purchasers of hotels, including the
entity managed by Mills Management II, Inc., to which George R. Whittemore, a
Director of the Company, is a consultant. The Company will be competing for such
investment opportunities with entities that have substantially greater financial
resources than the Company, including access to capital or better relationships
with franchisors, lenders and sellers. The Company's Debt Policy limits its
consolidated indebtedness to less than 55% of the aggregate purchase price of
the hotels in which it has invested. The aggregate amount paid by the Company
for the Hotels is currently approximately $58.4 million. After the Company has
applied the Net Proceeds as set forth herein, the Company's Remaining
Indebtedness ($21 million) will represent approximately 36% of the aggregate
amount paid by the Company for the Hotels. To the extent that the Company's Debt
Policy limits its
52
<PAGE>
access to debt financing, the success of the Company's acquisition strategy will
likely depend on its ability to access additional capital through issuances of
equity securities. The Company's competitors may generally be able to accept
more risk than the Company can manage prudently and may be able to borrow the
funds needed to acquire hotels. Competition may generally reduce the number of
suitable investment opportunities offered to the Company and increase the
bargaining power of property owners seeking to sell. See "Risk Factors -
Conflicts of Interest - Competing Hotels to be Acquired by Affiliates of Mr.
Humphrey" and "-- Growth Strategy."
Depreciation
To the extent that the Partnership has acquired, or will acquire,
equity interests in the Hotels for cash, the Partnership's initial basis in the
Hotels for federal income tax purposes generally equals, or will equal, the
purchase price paid by the Partnership. The Partnership plans to depreciate such
depreciable hotel property for federal income tax purposes under either the
modified accelerated cost recovery system of depreciation ("MACRS") or the
alternative depreciation system of depreciation ("ADS"). The Partnership uses
MACRS for furnishings and equipment. Under MACRS, the Partnership generally
depreciates such furnishings and equipment over a five-year recovery period
using a 200% declining balance method and a half-year convention. If, however,
the Partnership places more than 40% of its furnishings and equipment in service
during the last three months of a taxable year, a mid-quarter depreciation
convention must be used for the furnishings and equipment placed in service
during that year. The Partnership uses ADS for buildings and improvements. Under
ADS, the Partnership generally depreciates 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, or will acquire,
equity interests in the Hotels in exchange for Units, the Partnership's initial
basis in each Hotel for federal income tax purposes should be the same as the
transferor's basis in such Hotel on the date of acquisition. Although the law is
not entirely clear, the Partnership intends to depreciate such depreciable hotel
property for federal income tax purposes under MACRS with respect to furnishings
and equipment and under ADS with respect to buildings and improvements. The
Partnership's tax depreciation deductions will be allocated among the partners
in accordance with their respective interests in the Partnership (except to the
extent that the Partnership is required under Code Section 704(c) to use a
method for allocating depreciation deductions attributable to the Hotels or
other contributed properties that results in the Company receiving a
disproportionately larger share of such deductions). The Partnership generally
has elected to use the "traditional method" for allocating Code Section 704(c)
items with respect to Hotels that it acquires in exchange for Units. Because the
Partnership's initial basis in the Initial Hotels acquired in exchange for Units
was less than the fair market value of those hotels on the date of acquisition,
the Company's depreciation deductions may be less than they otherwise would have
been if the Partnership had purchased the partnership interests in the
partnerships that sold the Company the Initial Hotels ("Selling Partnerships")
entirely for cash.
Legal Proceedings
The Company is not currently involved in any material litigation nor,
to the Company's knowledge, is any material litigation currently threatened
against the Company or any of the Hotels. The Lessee has advised the Company
that it currently is not involved in any material litigation.
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect to
investment, financing, conflicts of interest and certain other activities that
have not been discussed elsewhere. The policies with respect to these activities
have been determined by the Board of Directors of the Company and may be amended
or revised from time to time at the discretion of the Board of Directors without
a vote of the shareholders of the Company, except that (i) changes in certain
policies with respect to conflicts of interest must be consistent with legal
requirements, (ii) certain policies with respect to competition are imposed
pursuant to contracts that cannot be amended without the consent of all parties
thereto, and (iii) the Company cannot take any action intended to terminate its
qualification as a REIT without the approval of the holders of two-thirds of the
outstanding shares of Common Stock.
53
<PAGE>
Investment Policies
The Company's investment objective is to acquire and develop hotels
that meet its investment criteria. The Company's business is focused solely on
hotels. See "Growth Strategy" and "Risk Factors - Growth Strategy." Under the
Investment Policy, the Company intends to acquire only those hotels for which it
expects to receive annual Rent (net of insurance paid by the Company, the FFE
Reserves of 4% of room revenue and real estate and personal property taxes) in
an amount greater than or equal to 12% of the total purchase price paid by the
Company for such hotels. Under the Bylaws, the approval of a majority of the
Board of Directors, including a majority of the Independent Directors, is
required for the Company to acquire any property. Although the Company intends
primarily to acquire hotels, it also may participate with other entities in
property ownership, through joint ventures or other types of co-ownership.
Equity investments may be subject to existing mortgage financing and other
indebtedness that may have priority over the equity interest of the Company.
While the Company will emphasize equity investments in hotels, it may,
in its discretion, invest in mortgages and other real estate interests,
including securities of other REITs. The Company may invest in participating,
convertible or other types of mortgages if it concludes that by doing so it may
benefit from the cash flow or any appreciation in the value of the subject
property. Such mortgages are similar to equity participation, because they
permit the lender to either participate in increasing revenues from the property
or convert some or all of that mortgage to equity ownership interest. The
Company does not presently intend to invest in mortgages or real estate
interests other than hotels.
Financing
The Company intends to make additional investments in operating hotels
and may incur additional indebtedness to make such investments or to meet the
distribution requirements imposed by the REIT provisions of the Code, to the
extent that cash flow from the Company's investments and working capital is
insufficient. The proceeds of any borrowing by the Partnership may be used for
the payment of distributions or dividends, working capital or to finance
acquisitions, expansions, additions or renovations of operating hotels. Under
the Bylaws, any refinancing of or prepayment of principal on the Remaining
Indebtedness must be approved by a majority of the Directors, including a
majority of the Independent Directors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" and "Federal Income Tax Considerations - Requirements for
Qualification - Distribution Requirements."
The Company's Debt Policy presently limits its consolidated
indebtedness to less than 55% of the aggregate purchase price of the hotels in
which it has invested. The aggregate purchase price of the Hotels is currently
approximately $58.4 million. After the Company has applied the Net Proceeds, as
set forth herein, the Company's total outstanding indebtedness will represent
approximately 36% of the aggregate purchase price of the Hotels.
The Company will invest in additional hotels only as suitable
opportunities arise. The Company will not undertake investments in such hotels
unless adequate sources of financing are available. The Bylaws require the
approval of a majority of the Directors, including a majority of the Independent
Directors, to acquire any additional hotel. It is expected that future
investments in hotels will be dependent on and financed by the proceeds from
additional issuances of Common Stock or other securities or borrowings. If the
Board of Directors determines to raise additional equity capital, the Board has
the authority, without shareholder approval, to issue additional Common Stock or
other capital shares of the Company in any manner (and on such terms and for
such consideration) as it deems appropriate, including in exchange for property.
Common Shareholders have no preemptive right to purchase shares issued in any
offering, and any such offering might cause a dilution of a shareholder's
investment in the Company.
Conflict of Interest Policies
The Company has adopted certain policies and entered into certain
agreements designed to minimize the effects of potential conflicts of interest.
The Company's Board of Directors is subject to certain provisions of Virginia
law, which are designed to eliminate or minimize certain potential conflicts of
interest. However, there
54
<PAGE>
can be no assurance that these policies always will be successful in eliminating
the influence of such conflicts, and if they are not successful, decisions could
be made that might fail to reflect fully the interests of all shareholders.
Articles of Incorporation and Bylaw Provisions
The Company's Articles of Incorporation, with limited exceptions,
require that a majority of the Company's Board of Directors be comprised of
Independent Directors, persons who, within the last two years, have not (i)
owned an interest in any Humphrey Affiliates, (ii) been employed by Mr. Humphrey
or any of Humphrey Affiliates, (iii) been an officer or director of any of
Humphrey Affiliates, (iv) performed services for the Company, (v) been a
director for more than three REITs organized by Mr. Humphrey or any of his
Affiliates or (vi) had any material business or professional relationship with
Mr. Humphrey or any of his Affiliates. Currently, four of the seven Directors of
the Company are Independent Directors. The Articles of Incorporation provide
that the Independent Director requirement may not be amended, altered, changed
or repealed without the affirmative vote of at least 80% of the members of the
Board of Directors or the affirmative vote of the holders of not less than
two-thirds of the outstanding shares of Common Stock (and other shares of
capital stock of the Company entitled to vote, if any exist). In addition, the
Company's Bylaws provide that any action pertaining to any transaction in which
the Company is purchasing, selling, leasing or mortgaging any real estate asset
or engaging in any other transaction in which an advisor, director or officer of
the Company, any lessee or contract manager of any property of the Company or
any Affiliate of the foregoing, has any direct or indirect interest, must be
approved by a majority of the Directors, including a majority of the Independent
Directors. This provision of the Bylaws may not be amended, altered, changed or
repealed without the affirmative vote of at least 80% of the members of the
Board of Directors including a majority of the Independent Directors or the
affirmative vote of the holders of not less than two-thirds of the outstanding
shares of Common Stock (and other shares of capital stock of the Company
entitled to vote, if any exist).
The Non-Competition Agreement and Option Agreement
Pursuant to the Non-Competition Agreement among Mr. Humphrey, Humphrey
Associates, a Maryland corporation wholly-owned by Mr. Humphrey, and the
Company, while Mr. Humphrey is an officer or Director of the Company or owns any
ownership interest in the Company, and for five years thereafter, neither Mr.
Humphrey nor any Humphrey Affiliate, will acquire, develop, own, operate, manage
or have any interest in any hotel that is within 20 miles of a hotel in which
the Company or the Partnership has invested. The 20-mile prohibition may be
waived by the Independent Directors if they determine that such development,
ownership, management, or operation will not have a material adverse affect on
the operations of one or more of the Hotels. In addition, Mr. Humphrey has
agreed that neither he nor any of his Affiliates will receive any brokerage
commissions or other fees with respect to hotels purchased by the Company. The
Non-Competition Agreement was executed by the parties in connection with the
IPO.
Pursuant to the Option Agreement among Mr. Humphrey, Humphrey
Associates and the Company, the Company has an option to acquire any hotels
acquired or developed by Mr. Humphrey or any of his Affiliates. At any time
during twelve months after a hotel is acquired, or after the opening of a hotel
developed, by Mr. Humphrey or any of his Affiliates, the Company may purchase
the applicable hotel under the option for a price equal to the fair market value
of the hotel, as determined by independent third-party appraisal, but in no
event less than the sum of the following: (i) acquisition or development costs
paid to unaffiliated third parties, (ii) capitalized interest expense, (iii) the
amount of equity investment in the hotel, including the cash investment or
advances of Mr. Humphrey and his Affiliates, if any (to the extent not covered
in sections (i) and (ii)), and (iv) a cumulative, non-compounded return on the
equity investment not to exceed the prime rate, as reported by The Wall Street
Journal, Eastern Edition, plus five percent (less any net cash flow received by
Mr. Humphrey or any of his Affiliates with respect to such equity investment).
All transactions to acquire additional properties and all and any transactions
between the Company or the Partnership and Mr. Humphrey or his Affiliates must
be approved by a majority of the Directors, including a majority of the
Independent Directors. In addition, the Option Agreement provides that in the
event the Company acquires a hotel from Mr. Humphrey or any of his Affiliates in
connection with the Company's issuance of additional securities, Mr. Humphrey or
any of his Affiliates may receive consideration for such property in additional
Units, provided that his and his Affiliates' interests in the Partnership
55
<PAGE>
shall not exceed 28.54% of the total partnership interests in the Partnership.
The Option Agreement was executed by the parties in connection with the IPO.
The Partnership
Because some of the Limited Partners have unrealized taxable gain
associated with their interests in the Hotels that were contributed to the
Partnership, the Limited Partners may suffer different and more adverse tax
consequences than the Company upon the sale of such a Hotel or refinancing or
prepayment of principal on any of the Remaining Indebtedness. Consequently, a
conflict of interest may arise between the Company, as General Partner of the
Partnership, and certain of the Limited Partners. The Company's Bylaws provide
that the Company's decisions with respect to the sale of a Hotel must be
approved by a majority of the Directors, including a majority of the Independent
Directors. This provision of the Bylaws may not be amended, altered, changed or
repealed without the affirmative vote of at least 80% of the members of the
Board of Directors, including the Independent Directors, or the affirmative vote
of the holders of not less than two-thirds of the outstanding shares of Common
Stock (and other shares of capital stock of the Company entitled to vote, if any
exist). The Partnership Agreement gives the Company, as General Partner of the
Partnership, full, complete and exclusive discretion in managing and controlling
the business of the Partnership and in making all decisions affecting the
business and assets of the Partnership.
Provisions of Virginia Law
Pursuant to the Virginia Stock Corporation Act, each Director is
required to discharge his or her duties in accordance with his or her good faith
business judgment of the best interest of the Company. In addition, Virginia law
provides that a transaction with the Company in which a Director or officer of
the Company has a direct or indirect interest is not voidable by the Company
solely because of any Director's or officer's interest in the transaction if (i)
the material facts of the transaction and interest are disclosed to or known by
the Directors and the transaction is authorized, approved or ratified by the
disinterested Directors, (ii) the material facts of the transaction and interest
are disclosed to or known by the shareholders and the transaction is authorized,
approved or ratified by the disinterested shareholders, or (iii) the transaction
is established to have been fair to the Company.
Policies with Respect to Other Activities
The Company has authority to offer shares of Common Stock or other
securities and to repurchase or otherwise reacquire its Common Stock or any
other securities and may engage in such activities in the future. As described
under "Shares Available for Future Sale," the Company may issue shares of Common
Stock to holders of Units upon exercise of their Redemption Rights (as defined
herein). The Company has no outstanding loans to other entities or persons,
including its officers and Directors. The Company has not engaged in trading,
underwriting or agency distribution or sale of securities of other issuers, nor
has the Company invested in the securities of other issuers other than the
Partnership for the purpose of exercising control. The Company intends to make
investments in such a way that it will not be treated as an investment company
under the Investment Company Act of 1940.
At all times, the Company intends to make investments in such a manner
consistent with the requirements of the Code for the Company to qualify as a
REIT unless, because of changing circumstances or changes in the Code (or in the
Treasury Regulations), the Company's Board of Directors, with the consent of the
holders of two-thirds of the outstanding shares of Common Stock, determines that
it is no longer in the best interests of the Company to qualify as a REIT.
56
<PAGE>
MANAGEMENT
Directors and Executive Officers
The Board of Directors consists of six members, four of whom are
Independent Directors. All of the Directors are serving one-year terms that will
expire at the Company's 1998 annual meeting of shareholders. Mr. Humphrey is
serving as the Company's Chairman of the Board, President and Secretary.
Certain information regarding the directors and executive officers of
the Company is set forth below.
<TABLE>
<CAPTION>
Name Age Position
<S> <C>
James I. Humphrey, Jr. 56 Chairman of the Board,
President and Secretary
Margaret Allen 52 Director
Andrew A. Mayer, M.D. 63 Director
Dr. Leah T. Robinson 66 Director
George R. Whittemore 48 Director
Jeffrey M. Zwerdling 53 Director
- ------------------------
</TABLE>
James I. Humphrey, Jr. is the President and Chairman of Humphrey
Associates and has held that position since 1978. Humphrey Associates, formerly
Harkins-Humphrey Associates, Inc., is a full service real estate corporation.
Mr. Humphrey also served as President of the Operator from 1989 to 1994. He
currently serves on the Credit Assurance Review Committee of the Maryland
Housing Fund. Mr. Humphrey served on the governor's Housing Task Force in
Maryland, the Maryland Housing Policy Commission and the Maryland International
Division Private Sector Advisory Council. Mr. Humphrey is a graduate of the
University of Maryland and obtained an M.B.A. degree from Loyola College.
Margaret Allen is Chief Executive Officer and 50% owner of AGM
Financial Services, Inc. ("AGM"), which she co-founded in 1990. AGM is a
mortgagee licensed by the Federal Housing Authority (the "FHA"), a division of
the United States Department of Housing and Urban Development. As a licensed
mortgagee, AGM represents borrowers who wish to obtain mortgage insurance from
the FHA for multifamily housing, assisted living facilities and nursing homes.
Prior to 1990, Ms. Allen was a Regional Vice President for ABG Financial
Services, Inc., a FHA licensed mortgagee. Ms. Allen currently serves on the
Credit Assurance Review Committee of the Maryland Department of Housing and
Community Development, the Board of Directors of the Baltimore City Chapter of
the Home Builders Association of Maryland and the Insured Projects Committee of
the Mortgage Bankers Association. She has served on the Maryland Housing Policy
Commission and chaired that commission from 1991-1992. Ms. Allen is a graduate
of the University of California, Berkeley.
Dr. Leah T. Robinson is a clinical psychologist in a part-time private
practice. She was a member of the faculty of Virginia Commonwealth University
until 1973 when she joined Psychiatric Associates of Tidewater, remaining with
this group until it dissolved in 1989.
Andrew A. Mayer, M.D., is presently retired. He was a partner of
Medical Center Radiologists from 1965 to 1992 and served as a Director and
Treasurer until 1991. Dr. Mayer was also Chief of Radiology at Leigh Memorial
Hospital, Norfolk, Virginia. Dr. Mayer served as a Director of Mills Value
Fund, a mutual fund, from July 1988 to December 1991, and has served as managing
partner for partnerships formed to develop and own residential and commercial
property.
57
<PAGE>
George R. Whittemore served as director and President and Managing
Officer of Pioneer Federal Savings Bank and its parent Pioneer Financial
Corporation from September 1982 until these institutions were acquired in a
merger with Signet Banking Corporation in August 1994. Mr. Whittemore joined
Pioneer Federal Savings Bank in 1975 as Treasurer and was made Executive Vice
President in March 1982. Mr. Whittemore was appointed President of Mills Value
Advisor, Inc., a registered investment adviser, in April 1996. In October 1996,
he was named a Senior Vice President of Anderson & Strudwick Incorporated, the
Underwriter of the Common Shares offered by this Prospectus. Mr. Whittemore is
also a consultant to Mills Management II, Inc., which is the manager and a
member of a privately-held limited liability company that was formed to, among
other things, acquire hotels that are substantially similar to the Hotels. Mr.
Whittemore is a graduate of the University of Richmond.
Jeffrey M. Zwerdling, Esq. is Managing Partner at the law firm of
Zwerdling and Oppleman located in Richmond, Virginia. Mr. Zwerdling specializes
in commercial real estate law and general litigation. He is presently Vice
President and Director of The Corporate Center, the owner of a 225,000 square
foot office park complex located in Richmond, Virginia, and serves as a trustee
of three pension plans. Mr. Zwerdling is a graduate of Virginia Commonwealth
University and obtained his J.D. degree from William & Mary Law School.
Acquisition Committee
The Board of Directors has appointed an Acquisition Committee
consisting of Ms. Allen, Mr. Humphrey and Mr. Zwerdling. The Acquisition
Committee reviews potential hotel acquisitions and developments, visits the
sites of proposed hotel acquisitions or developments, reviews the terms of
proposed leases for proposed hotel acquisitions or developments and makes
recommendations to the full Board of Directors with respect to proposed hotel
acquisitions or developments. Under the Bylaws, the approval of a majority of
the Board of Directors, including a majority of the Independent Directors, is
required for the Company to acquire any property. The Company's Independent
Directors consist of Drs. Mayer and Robinson, Ms. Allen and Mr. Zwerdling.
Audit Committee
The Audit Committee consists of three Independent Directors, Ms. Allen,
Dr. Mayer and Mr. Zwerdling. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the plans and results of the audit engagement,
approves professional services provided by the independent public accountants,
reviews the independence of the independent public accountants, considers the
range of audit and non-audit fees and reviews the adequacy of the Company's
internal accounting controls. The Audit Committee, with advice from the
Company's attorneys and independent public accountants, will establish
procedures to monitor compliance with the REIT provisions of the Code and the
Exchange Act, and such other laws and regulations applicable to the Company.
Executive Compensation
The Company does not pay its executives any salary above and beyond the
compensation that they receive as Directors.
Compensation of Directors
On May 22, 1997, the Board of Directors unanimously voted to increase
the annual fees paid to them by the Company for serving on the Board of
Directors from $10,000 per year to $15,000 per year effective for the last two
quarters of 1997. The Board's action was designed to make their fees more
comparable to those of other public companies (including REITs) that are of a
similar size to the Company. On September 9, 1997, the Board of Directors voted
to utilize their full annual fees, with the exception of the fees received by
Mr. Humphrey, to purchase Common Stock on the open market, and to exercise their
reasonable best efforts to do so within ten days of receipt of such fees.
58
<PAGE>
Exculpation and Indemnification
The Articles of Incorporation of the Company contain a provision which,
subject to certain exceptions described below, eliminates the liability of a
Director or officer to the Company or its shareholders for monetary damages for
any breach of duty as a Director or officer. This provision does not eliminate
such liability to the extent that it is proved that the Director or officer
engaged in willful misconduct or a knowing violation of criminal law or of any
federal or state securities law.
The Company's Articles of Incorporation also require the Company to
indemnify any Director or officer who is or was a party to a proceeding,
including a proceeding by or in the right of the Company, by reason of the fact
that he is or was such a Director or officer or is or was serving at the request
of the Company as a director, officer, employee or agent of another entity
provided that the Board of Directors determines that the conduct in question was
in the best interest of the Company and such person was acting on behalf of the
Company. A Director or officer of the Company is entitled to be indemnified
against all liabilities and expenses incurred by the Director or officer in the
proceeding, except such liabilities and expenses as are incurred (i) if such
person is an Independent Director or officer, because of his or her gross
negligence, willful misconduct or knowing violation of the criminal law or (ii)
in the case of the Director other than the Independent Directors, because of his
or her negligence or misconduct. Unless a determination has been made that
indemnification is not permissible, a Director or officer also is entitled to
have the Company make advances and reimbursement for expenses prior to final
disposition of the proceeding upon receipt of a written undertaking from the
Director or officer to repay the amounts advanced or reimbursed if it is
ultimately determined that he or she is not entitled to indemnification. Such
advances shall be permissible when the proceeding has been initiated by a
shareholder of the Company only if such advance is approved by a court of
competent jurisdiction. The Board of Directors of the Company also has the
authority to extend to any person who is an employee or agent of the Company, or
who is or was serving at the request of the Company as a director, officer,
employee or agent of another entity, the same indemnification rights held by
Directors and officers, subject to all of the accompanying conditions and
obligations.
The Virginia Stock Corporation Act permits a court, upon application of
a Director or officer, to review the Company's determination as to a Director's
or officer's request for advances, reimbursement or indemnification. If it
determines that the Director or officer is entitled to such advances,
reimbursement or indemnification, the court may order the Company to make
advances and/or reimbursement for expenses or to provide indemnification.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company and the Partnership have entered into a number of
transactions with Mr. Humphrey and his Affiliates in connection with the
organization of the Company and the acquisition of the Hotels. Mr. Humphrey, the
Chairman of the Board of Directors and the President of the Company, is the sole
shareholder of the Lessee.
Revised Services Agreement
The Company amended the terms of the Services Agreement between it and
the Lessee to provide accounting and securities reporting services for the
Company. The initial Services Agreement provided that these services would be
provided to the Company for a fixed fee of $80,000 notwithstanding the size of
the Company's portfolio. The Company amended the agreement to provide for such
services for an initial annual fee of $30,000 for so long as the Company's
portfolio includes the Initial Hotels, the Days Inn-Farmville, Virginia Hotel
and the the Comfort Suites-Dover, Delaware Hotel. The amended Services Agreement
provides that the fee for such services will increase $10,000 per year (prorated
for the time of acquisition) for each additional hotel added to the Company's
portfolio. Under the terms of the amended Services Agreement, the services fee
cannot exceed $100,000 in any year.
Credit Facility
On April 15, 1996, the Company entered into a credit agreement with
Mercantile for a $6.5 million Credit Facility. Effective as of September 30,
1997, the maximum amount that the Company may borrow under the Credit
59
<PAGE>
Facility was increased to $25.5 million. The amount outstanding under the Credit
Facility as of February 28, 1998 was $24.5 million. Upon completion of the
Offering, the Company expects to increase the maximum amount that it may borrow
pursuant to the Credit Facility to $40 million at an interest rate equal to the
30 day London Interbank Offered Rate (which was 5.68% as of March 20, 1998),
plus 250 basis points. The Credit Facility is secured by 17 Hotels.
Development Agreement
Pursuant to the Development Agreement, Humphrey Development holds the
right to purchase the Comfort Suites-Dover, Delaware Hotel from the Company in
January 2002 for $2,795,910.
Acquisition of Certain Hotels from Humphrey Affiliates
The Initial Hotels were acquired, directly and indirectly, by the
Partnership from limited partnerships in which Mr. Humphrey was a limited
partner and one of his affiliates was the general partner. The Partnership's
interests in the Initial Hotels and the Subsidiary Partnership were acquired in
exchange for (i) the assumption of approximately $13.4 million of outstanding
indebtedness of the sellers of the Initial Hotels, most of which was guaranteed
by Mr. Humphrey and one of his Affiliates and secured by the Initial Hotels,
(ii) the issuance of an aggregate of 527,866 Units to the Humphrey Affiliates,
(iii) the assumption and repayment of approximately $2.1 million of outstanding
indebtedness of the sellers of the Initial Hotels (in addition to the
indebtedness in clause (i) above) of which approximately $1.2 million was repaid
to a Humphrey Affiliate, (iv) the payment of $247,000 in cash to satisfy the
obligations of Humphrey Associates to restore its negative capital account in
one of the limited partnerships selling an Initial Hotel, and (v) the payment of
approximately $4.6 million in cash to persons not affiliated with Mr. Humphrey.
The Partnership acquired the Days Inn-Farmville, Virginia Hotel in
exchange for (i) 95,484 Units, which are redeemable, subject to certain
limitations, for an aggregate of approximately 95,484 shares of Common Stock and
(ii) the assumption of approximately $1.2 million of debt secured by that Hotel,
which was repaid immediately with proceeds from the Company's second public
stock offering.
The Partnership acquired the Best Western Suites-Key Largo, Florida
Hotel pursuant to a purchase agreement that was assigned to the Partnership by
Humphrey Key Largo. Pursuant to the assignment of the purchase agreement,
Humphrey Key Largo received 34,023 Units.
The Humphrey Affiliates own 657,373 Units with a value of approximately
$7.2 million based on the Offering Price. Upon exercise of the Redemption
Rights, which are currently all exercisable, such Units will be redeemed on a
one-for-one basis for shares of Common Stock or for an equivalent amount of
cash, at the sole election of the Company or if the issuance of shares of Common
Stock would result in any person owning more than 9.9% of the outstanding shares
of Common Stock.
Guarantees by Mr. Humphrey and His Affiliates
Mr. Humphrey, jointly and severally with the Company, currently
guarantees the payment of interest and principal on approximately $5.9 million
of the Company's long-term debt. The debt is secured by 19 of the Hotels.
Leases
During 1997, the Partnership and the Lessee were parties to Percentage
Leases with respect to each Hotel, with the exception of the Comfort
Suites-Dover, Delaware, which is subject to a Fixed Lease. Each Lease has or
will have a non-cancelable term of ten years, which may be renewed for an
additional term of five years at the Lessee's option, subject to earlier
termination upon the occurrence of defaults thereunder and certain other events
described therein. Pursuant to the terms of the Leases, the Lessee is required
to pay rent and certain other additional charges and is entitled to all profits
from the operations of the Hotels after the payment of Rent, operating and other
expenses. Payments of Rent under the Percentage Leases and the Fixed Lease have
constituted all of the
60
<PAGE>
Partnership's and the Company's revenue since their respective inceptions. For
the period January 1, 1997 through December 31, 1997, the Lessee paid an
aggregate of $7,326,193 in Rent under the Leases.
Franchise Licenses
The Lessee, which is owned by Mr. Humphrey, holds all of the Franchise
Licenses for the hotels currently owned by the Partnership and is expected to
hold all of the Franchise Licenses for any subsequently acquired hotel
properties. During 1997, the Lessee paid franchise fees in the aggregate amount
of $875,104.
Non-Competition Agreement and Option Agreement
Mr. Humphrey, certain Humphrey Affiliates and the Company entered into
the Non-Competition Agreement and the Option Agreement in connection with the
IPO. See "Risk Factors - Conflicts of Interest" and "Policies and Objectives
with Respect to Certain Activities - Conflict of Interest Policies - The
Non-Competition Agreement and Option Agreement."
Other
Mr. Whittemore, who is a Director of the Company, is Senior Vice
President of the Underwriter. The Underwriter will receive $825,000 in fees in
connection with this Offering. The Underwriter was the underwriter of the
Company's previous three public stock offerings. The Underwriter also served as
underwriter for $2,460,000 principal amount fixed rate first mortgage refunding
revenue bonds, series 1995 issued by the Industrial Development Authority of
Pulaski County, which are secured by the Comfort Inn-Dublin, Virginia Hotel. The
Underwriter and one of its senior officers (who is not affiliated with the
Company) together receive an ongoing annual fee equal to .25% of the outstanding
principal of those bonds.
Simultaneously with the Offering, the Company will enter into a Capital
Consulting Agreement with Charles A. Mills, III, who will provide the Company
with advice as to future equity offerings and access to capital markets
generally. Mr. Mills is the Senior Vice President, Chairman and largest
shareholder of the Underwriter and served on the Company's Board of Directors
from its IPO on November 29, 1994 to March 17, 1998. Under the terms of the
Capital Consulting Agreement, which has a one year term, the Company will pay
Mr. Mills $20,000 plus .25% of the net proceeds from public equity offerings
over the next twelve months.
THE LESSEE
The Lessee is a Maryland corporation. The Lessee currently leases each
Hotel from the Partnership pursuant to individual Leases relating to each Hotel.
The Partnership intends to lease to the Lessee (i) additional existing hotels
acquired by the Partnership on terms and conditions substantially similar to the
Percentage Leases applicable to the Hotels, and (ii) hotels developed by the
Partnership pursuant to Fixed Leases, which will provide for the payment of a
fixed monthly Rent and otherwise have terms and conditions substantially similar
to the Percentage Leases applicable to the Hotels. The Lessee's ability to
perform its obligations, including making Rent payments under the Leases, is
dependent on the Lessee's ability to generate sufficient net cash flow from the
operation of the Hotels and any other hotels leased to the Lessee by the
Partnership. The Lessee's obligations under the Leases are and will be
unsecured. Mr. Humphrey does not guarantee the Lessee's obligations under the
Percentage Leases, but the Percentage Leases currently contain cross-default
provisions. Accordingly, the Lessee's failure to make required payments under
any Percentage Lease will allow the Company to terminate any or all of the
Percentage Leases. See "Risk Factors - Dependence on the Lessee." The Percentage
Leases have terms of ten years and are renewable for an additional term of five
years at the option of the Lessee, but are subject to earlier termination upon
the occurrence of certain events. Under the Percentage Leases, the Partnership
is entitled to receive from the Lessee Base and Percentage Rents. Mr. Humphrey
is the sole shareholder of the Lessee and President and Chairman of the Board of
the Company. Consequently, he has a conflict of interest regarding the
enforcement of the Percentage Leases. See "Risk Factors - Conflicts of Interest
- - No Arm's Length Bargaining on the Percentage Leases, the Development
Agreement, the Services Agreement, the Hotel Purchase Agreements, the Non
- -Competition Agreements and Option Agreement" and "Business and Properties."
61
<PAGE>
The Operator, an affiliate of the Lessee, managed the Initial Hotels
from 1989 to 1996 and managed the Days Inn-Farmville, Virginia Hotel since it
was acquired by a Humphrey Affiliate in November 1994 until the Operator
combined its operations with the Lessee effective January 1, 1996. The Lessee
provides all employees and performs all marketing, accounting and management
functions necessary to operate the Hotels. The Lessee has in-house programs for
accounting and the management and marketing of the Hotels. The Lessee utilizes
its sales management program to coordinate, direct and manage the sales
activities of personnel located at the Hotels.
The Lessee's primary philosophy for each hotel it operates is to
provide the best service and cleanest setting for the most value in the market
that the hotel serves. In 1990, the Operator, an affiliate of the Lessee,
received the first Choice Hotels Gold Award ever presented by Choice Hotels for
its operation of the Comfort Inn-Farmville, Virginia. The Choice Hotels Gold
Award is presented annually to those hotels that have excelled in service,
appearance, housekeeping and employee training. The Operator received three
additional Choice Hotels Gold Awards for its operation of the Comfort
Inn-Elizabethton, Tennessee and two Choice Hotels Gold Awards for its operation
of the Comfort Inn-Beacon Marina, Solomons, Maryland. An affiliate of the
Operator has also received four nominations for Comfort Inn's Inn of the Year
for its operation of the Comfort Inns-Dublin, Virginia, -Elizabethton,
Tennessee, -Farmville, Virginia and -Solomons, Maryland. Choice Hotels awards
the "Inn of the Year" to one hotel, which is chosen from the approximately 35
hotels nominated for that Award. The Operator has received one Choice Hotels
Gold Award and two Choice Hotels Silver Awards for excellence in service and
housekeeping for its operation of the Comfort Inn-Morgantown, West Virginia and
one Choice Hotels Gold Award for its operation of the Comfort Inn-New Castle,
Pennsylvania.
The Lessee believes that in order to carry out its philosophy, it must
allow its managers the flexibility to quickly meet the needs and desires of
customers of an individual hotel. The Lessee monitors the performance of its
managers by conducting frequent on-site reviews and by closely reviewing and
controlling expenditures and cash flows at individual hotels.
The Lessee's President, Randy P. Smith, has been employed in the hotel
business since 1978 and has operated a variety of hotels under many franchise
brands. He joined the Operator in 1989 as Director of Operations and in 1991 he
was appointed Vice President of Operations. He was appointed President of the
Lessee in 1994. He has been appointed to the Comfort Inn Advisory Council, the
International Operators Council for Choice Hotels ("IOC") National Marketing
Committee, the IOC National Operations and Standards Committee, the IOC National
Awards Committee, the Region 4 (Virginia) Regional Advisory Board for Choice
Hotels and numerous boards for the IOC. Mr. Smith received an M.B.A. degree from
Loyola College in 1995.
The Lessee's Chief Financial Officer, William F. Goodrick, joined the
Lessee in January 1998. Mr. Goodrick has over thirty years experience in the
public and private sector of the accounting and financial field. Prior to
joining the Lessee, Mr. Goodrick was Vice President, Asset Management for NHP,
Inc., the nation's second largest manager of multi-family housing. Prior to
that, he owned his own business providing accounting and financial services to
the private sector of the business community, including two medium sized hotel
management and development companies. Prior to that, he was Senior Vice
President of Finance for C.R.I., Inc., a multi-billion dollar real estate
syndication firm. He is a certified public accountant and received his B.S.B.A.
from Georgetown University in 1967.
The Lessee's Vice President, Bethany H. Hooper, joined Humphrey
Associates in 1988 after working for the accounting firm of Reznick Fedder &
Silverman as a certified public accountant. In 1991, she was appointed Vice
President of Accounting and Administration of Humphrey Associates and the
Operator. Ms. Hooper continues to work for both the Lessee and Humphrey
Associates. She received a B.S. degree in Business Administration from Lewis and
Clark College in 1986 and an M.B.A. degree in Finance from Loyola College in
1991.
The Lessee's Senior Director of Operations, Dave Yakes, has been
employed in the hotel business since 1985. He has an extensive background in
hotel operations and joined the Lessee in 1995. Prior to his current position,
Mr. Yakes was a Regional Director of Operations as well as the General Manager
of the Comfort Inn- Beacon Marina, Solomons, Maryland. Before joining the
Lessee, Mr. Yakes worked several years for Winegardner
62
<PAGE>
and Hammons, Inc., a Cincinnati, Ohio based hotel management company. He
received a B.S. degree in Hospitality and Tourism Management from Grand Valley
State University in 1991.
OWNERSHIP OF THE COMPANY'S COMMON STOCK
Security Ownership of Certain Beneficial Owners
The following table sets forth as of December 31, 1997 each person
known by the Company to be a beneficial owner of more than five percent (5%) of
its Common Stock. The Company has no other class of equity securities
outstanding. Unless otherwise indicated, said shares are owned directly and the
indicated person has sole voting and investment power.
<TABLE>
<CAPTION>
Name and Address Amount and Nature
of Beneficial of Beneficial Percent
Owner Ownership of Class
<S> <C>
James I. Humphrey, Jr. 657,373(1) 15.9%(1)
The Humphrey Companies
12301 Old Columbia Pike, Suite 300
Silver Spring, MD 20904
James T. Martin 322,547(2) 9.3%
Odyssey Capital Reg.
6 Front Street
Hamilton, HMII, Bermuda
Equitable Companies, Inc. 321,300(3) 9.2%
787 Seventh Avenue
New York, NY 10019
Smith Barney Mutual 191,300(4) 5.5%
Funds Management Inc.
338 Greenwich Street
New York, NY 10013
- ---------------------
</TABLE>
(1) Assumes that all Units held by James I. Humphrey and his Affiliates are
redeemed for shares of Common Stock.
(2) Based upon information contained in Schedule 13D/A, dated April 28, 1997,
and filed with the Commission on May 1, 1997.
(3) Based upon information contained in Schedule 13G/A, dated February 10,
1998, and filed with the Commission on February 17, 1998.
(4) Based upon information contained in Schedule 13D, dated February 5, 1997,
and filed with the Commission on February 6, 1997.
Security Ownership by Management
The following table sets forth certain information as of February 1,
1998 regarding the beneficial ownership of Common Stock by (i) each Director of
the Company, (ii) each executive officer of the Company, and (iii) by all
Directors and executive officers of the Company as a group. Unless otherwise
indicated, all shares are owned directly and the indicated person has sole
voting and investment power.
63
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Percent of
Name of Beneficial Owner Beneficially Owned Class
Before Offering After Offering(5)
<S> <C>
Margaret Allen 3,846 * *
James I. Humphrey, Jr. 657,373(1) 15.9% 12.8%
Andrew A. Mayer, M.D. 90,552 2.6% 2.0%
Dr. Leah T. Robinson 86,165 2.5% 1.9%
George R. Whittemore 92,652 2.7% 2.2%
Jeffrey M. Zwerdling 59,062(2) 1.7% 1.5%
------ ---- ----
Total 989,650(3) 23.9%(4) 19.6%(4)
</TABLE>
- ---------------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Represents 657,373 shares of Common Stock issuable to Mr. Humphrey,
Humphrey Associates, Farmville Lodging Associates, or Humphrey Key Largo
upon redemption of their Units. Mr. Humphrey is the sole shareholder of
Humphrey Associates and owns a 98% interest in Farmville Lodging
Associates and a 73% interest in Humphrey Key Largo. The redemption rights
are exercisable at any time subject to certain conditions.
(2) Includes 33,087 shares of Common Stock owned by Mr. Zwerdling and 25,975
shares of Common Stock over which Mr. Zwerdling has dispositive power.
(3) Does not include 300 shares acquired by Mr. Whittemore on February 13,
1998. At the Closing, officers and Directors of the Company will acquire a
total of 16,000 Common Shares and thereafter, will own 1,005,950 shares of
Common Stock, assuming that all Units held by Mr. Humphrey, Humphrey
Associates, Farmville Lodging Associates and Humphrey Key Largo are
redeemed for shares of Common Stock.
(4) Assumes that all Units held by Mr. Humphrey, Humphrey Associates,
Farmville Lodging Associates and Humphrey Key Largo are redeemed for
shares of Common Stock.
(5) Includes 300 Common Shares that Mr. Whittemore acquired on February 13,
1998, 5,000 Common Shares that Mr. Whittemore intends to acquire in the
Offering, 1,000 Common Shares that Ms. Allen intends to acquire in the
Offering and 10,000 Common Shares that Mr. Zwerdling intends to acquire in
the Offering.
DESCRIPTION OF CAPITAL STOCK
General
The Articles of Incorporation of the Company provide that the Company
may issue up to 35,000,000 shares of capital stock, consisting of 25,000,000
shares of Common Stock, $0.01 par value per share, and 10,000,000 shares of
preferred stock, $0.01 par value per share ("Preferred Stock"). Upon completion
of the Offering, 4,481,700 shares of Common Stock will be issued and
outstanding, 657,373 shares of Common Stock will be reserved for issuance upon
redemption of Units and no Preferred Stock will be issued and outstanding.
Common Stock
All shares of Common Stock are duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or series
of shares of capital stock, Common Shareholders are entitled to receive
dividends if and when authorized and declared by the Board of Directors of the
Company out of assets legally available therefor and to share ratably in the
assets of the Company legally available for distribution to its shareholders in
the event of its liquidation, dissolution or winding-up after payment of, or
adequate provision for, all known debts and liabilities of the Company.
Commencing with the dividend declared in October 1997, the Company began
64
<PAGE>
paying monthly dividends. For the period beginning November 29, 1994, the
closing date of the IPO, and ending December 31, 1994, the Company made a
distribution of $.044 per share to the Common Shareholders, which is the
equivalent of a $.125 quarterly or a $.50 annual distribution. For each of the
quarters ended March 31, 1995, and June 30, 1995, the Company made a
distribution of $.15 per share, which is the equivalent of a $.60 annual
distribution. For the quarter ended September 30, 1995, the Company made a
distribution of $.181 per share, which represents a pro rata distribution of
$.19 per share from the closing date of the Company's second public stock
offering to the end of the quarter. For each of the quarters ended December 31,
1995; March 31, 1996; June 30, 1996; September 30, 1996; December 31, 1996;
March 31, 1997; June 30, 1997; and September 30, 1997, the Company made a
distribution of $.19 per share, which is the equivalent of a $.76 annual
distribution. During the quarter ended December 31, 1997, the Company made
monthly distributions of $.0675 per share, which is the equivalent of an $.81
annual distribution. See "Price Range of Common Stock and Distributions."
Each outstanding share of Common Stock entitles the holder to one vote
on all matters submitted to a vote of shareholders, including the election of
Directors, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of capital stock, the Common
Shareholders will possess the exclusive voting power. There is no cumulative
voting in the election of Directors, which means in all elections of Directors,
each Common Shareholder has the right to cast one vote for each share of stock
for each candidate.
Preferred Stock
Shares of Preferred Stock may be issued from time to time, in one or
more series, as authorized by the Board of Directors. Because the Board of
Directors has the power to establish the preferences and rights of each class or
series of Preferred Stock, the Board of Directors may afford the holders of any
series or class of Preferred Stock preferences, powers and rights, voting or
otherwise, senior to the rights of Common Shareholders. The Board could
authorize the issuance of Preferred Stock with terms and conditions which could
have the effect of discouraging a takeover or other transaction which holders of
some, or a majority, of the shares of Common Stock might believe to be in their
best interests or in which holders of some, or a majority, of the shares of
Common Stock might receive a premium for their shares of Common Stock over the
then market price of such shares of Common Stock. As of the date hereof, no
shares of Preferred Stock are outstanding and the Company has no present plans
to issue any Preferred Stock.
Restrictions on Ownership and Transfer
For the Company to qualify as a REIT under the Code, it must meet
certain requirements concerning the ownership of its outstanding shares of
capital stock. Specifically, not more than 50% in value of the Company's
outstanding capital stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the last
half of a taxable year, and the Company must be beneficially owned by 100 or
more persons during at least 335 days of a taxable year of twelve months or
during a proportionate part of a shorter taxable year. See "Federal Income Tax
Considerations - Requirements for Qualification." In addition, the Company must
meet certain requirements regarding the nature of its gross income in order to
qualify as a REIT. One such requirement is that at least 75% of the Company's
gross income for each year must consist of rents from real property and income
from certain other real property investments. The rents received by the
Partnership from the Lessee will not qualify as rents from real property, which
likely would result in loss of REIT status for the Company, if the Company were
to own, actually or constructively, 10% or more of the ownership interests in
the Lessee within the meaning of Section 856(d)(2)(B) of the Code. See "Federal
Income Tax Considerations Requirements for Qualification - Income Tests."
Because the Board of Directors believes it is essential for the Company
to continue to qualify as a REIT, the Articles of Incorporation, subject to
certain exceptions described below, provide that no person may own, or be deemed
to own by virtue of the attribution provisions of the Code, more than 9.9% of
(i) the number of outstanding shares of Common Stock or (ii) the number of
outstanding shares of Preferred Stock of any class or series (the "Ownership
Limitation"). Any transfer of shares of Common Stock or Preferred Stock that
would (i) result in any person owning, directly or indirectly, shares of Common
Stock or Preferred Stock in excess of the Ownership Limitation, (ii) result in
the shares of Common Stock and Preferred Stock being owned by fewer than 100
persons (determined without reference to any rules of attribution), (iii) result
in the Company being "closely
65
<PAGE>
held" within the meaning of Section 856(h) of the Code, or (iv) cause the
Company to own, actually or constructively, 10% or more of the ownership
interests in a tenant of the Company's, the Partnership's or the Subsidiary
Partnership's real property, within the meaning of Section 856(d)(2)(B) of the
Code, will be null and void, and the intended transferee will acquire no rights
in such shares of Common Stock or Preferred Stock.
Subject to certain exceptions described below, any purported transfer
of shares of Common Stock or Preferred Stock that would (i) result in any person
owning, directly or indirectly, shares of Common Stock or Preferred Stock in
excess of the Ownership Limitation, (ii) result in the shares of Common Stock
and Preferred Stock being owned by fewer than 100 persons (determined without
reference to any rules of attribution), (iii) result in the Company being
"closely held" within the meaning of Section 856(h) of the Code, or (iv) cause
the Company to own, actually or constructively, 10% or more of the ownership
interests in a tenant of the Company's, the Partnership's or the Subsidiary
Partnership's real property, within the meaning of Section 856(d)(2)(B) of the
Code, will be designated as "Shares-in-Trust" and transferred automatically to a
trust (the "Trust") effective on the day before the purported transfer of such
shares of Common Stock or Preferred Stock. The record holder of the shares of
Common Stock or Preferred Stock that are designated as Shares-in-Trust (the
"Prohibited Owner") will be required to submit such number of shares of Common
Stock or Preferred Stock to the Company for registration in the name of the
Trust (the "Trustee"). The Trustee will be designated by the Company, but will
not be affiliated with the Company. The beneficiary of the Trust (the
"Beneficiary") will be one or more charitable organizations that are named by
the Company.
Shares-in-Trust will remain issued and outstanding shares of Common
Stock or Preferred Stock and will be entitled to the same rights and privileges
as all other shares of the same class or series. The Trustee will receive all
dividends and distributions on the Shares-in-Trust and will hold such dividends
or distributions in trust for the benefit of the Beneficiary. The Trustee will
vote all Shares-in-Trust. The Trustee will designate a permitted transferee of
the Shares-in-Trust, provided that the permitted transferee (i) purchases such
Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required
to repay to the Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Trustee
the lesser of (i) the price per share such Prohibited Owner paid for the shares
of Common Stock or Preferred Stock that were designated as Shares-in-Trust (or,
in the case of a gift or devise, the Market Price (as defined below) per share
on the date of such transfer) or (ii) the price per share received by the
Trustee from the sale of such Shares-in-Trust. Any amounts received by the
Trustee in excess of the amounts to be paid to the Prohibited Owner will be
distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept such
offer for a period of 90 days after the later of (i) the date of the purported
transfer which resulted in such Shares-in-Trust or (ii) the date the Company
determines in good faith that a transfer resulting in such Shares-in-Trust
occurred.
"Market Price" on any date shall mean the average of the Closing Price
(as defined below) for the five consecutive Trading Days (as defined below)
ending on such date. The "Closing Price" on any date shall mean the last quoted
price as reported by The Nasdaq National Market. "Trading Day" shall mean a day
on which the principal national securities exchange on which the shares of
Common Stock or Preferred Stock are listed or admitted to trading is open for
the transaction of business or, if the shares of Common Stock or Preferred Stock
are not listed or admitted to trading on any national securities exchange, shall
mean any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
66
<PAGE>
Any person who acquires or attempts to acquire shares of Common Stock
or Preferred Stock in violation of the foregoing restrictions, or any person who
owned shares of Common Stock or Preferred Stock that were transferred to a
Trust, will be required (i) to immediately give written notice to the Company of
such event and (ii) to provide to the Company such other information as the
Company may request in order to determine the effect, if any, of such transfer
on the Company's status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such
lower percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common Stock and Preferred Stock must, within 30 days
after January 1 of each year, provide to the Company a written statement or
affidavit stating the name and address of such direct or indirect owner, the
number of shares of Common Stock and Preferred Stock owned directly or
indirectly, and a description of how such shares are held. In addition, each
direct or indirect shareholder shall provide to the Company such additional
information as the Company may request in order to determine the effect, if any,
of such ownership on the Company's status as a REIT and to ensure compliance
with the Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
shares of Common Stock or Preferred Stock by an underwriter that participates in
a public offering of such shares. In addition, the Board of Directors, upon
receipt of a ruling from the Service or an opinion of counsel and upon such
other conditions as the Board of Directors may direct, may exempt a person from
the Ownership Limitation under certain circumstances. The foregoing restrictions
will continue to apply until (i) the Board of Directors determines that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT and (ii) there is an affirmative vote of
two-thirds of the number of shares of Common Stock and Preferred Stock entitled
to vote on such matter at a regular or special meeting of the shareholders of
the Company.
All certificates representing shares of Common Stock or Preferred Stock
will bear a legend referring to the restrictions described above.
The Ownership Limitation could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of shares
of Common Stock might receive a premium for their shares of Common Stock over
the then prevailing market price or which such holders might believe to be
otherwise in their best interest.
Other Matters
The transfer agent and registrar for the Common Stock is First Union
National Bank of North Carolina.
CERTAIN PROVISIONS OF VIRGINIA LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following summary of certain provisions of Virginia law and of the
Articles of Incorporation and Bylaws of the Company does not purport to be
complete and is subject to and qualified in its entirety by reference to
Virginia law and the Articles of Incorporation and Bylaws of the Company.
Certain provisions of Virginia law and the Articles of Incorporation and Bylaws
are described elsewhere in this Prospectus.
Board of Directors
The Bylaws provide that the number of Directors of the Company may be
established by the Board of Directors but may not be fewer than three nor more
than nine. Any vacancy will be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the remaining Directors,
except that a vacancy resulting from an increase in the number of Directors must
be filled by a majority of the entire Board of Directors.
The Company's Bylaws also provide that a Director may be removed with
or without cause with the affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of Directors. This provision, when coupled
with the provisions of the Bylaws authorizing the Board of Directors to fill
vacant directorships,
67
<PAGE>
precludes the Company's shareholders from removing incumbent Directors, except
upon the existence of a substantial affirmative vote, and filling the vacancies
created by such removal with their own nominees.
Amendment
The Articles of Incorporation may be amended by the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock, with the
shareholders voting as a class with one vote per share; provided, that the
Articles of Incorporation provision relating to the Company's election to be
taxed as a REIT shall not be amended, altered, changed or repealed without the
affirmative vote of at least 80% of the members of the Board of Directors or the
affirmative vote of holders of two-thirds of the outstanding shares of Common
Stock and any other shares of capital stock entitled to vote generally in the
election of Directors voting as a class. The Company's Bylaws may be amended by
the Board of Directors or by vote of the holders of a majority of the
outstanding shares of Common Stock, provided that provisions with respect to
removal of Directors, quorum requirements and approval of certain matters by a
majority of the Directors, cannot be amended without the affirmative vote of 80%
of the members of the entire Board of Directors, including a majority of the
Independent Directors, or the holders of two-thirds of the outstanding shares of
Common Stock and any other shares of capital stock entitled to vote generally in
the election of Directors.
Business Combinations
The Virginia Stock Corporation Act contains provisions restricting
"Affiliated Transactions." These provisions, with several exceptions discussed
below, require approval of material acquisition transactions between a Virginia
corporation having more than 300 shareholders of record and any holder of more
than 10% of any class of its outstanding voting shares (an "Interested
Shareholder") by the holders of at least two-thirds of the remaining voting
shares. Affiliated Transactions subject to this approval requirement include
mergers, share exchanges, material dispositions of corporate assets not in the
ordinary course of business, any dissolution of the corporation proposed by or
on behalf of an Interested Shareholder, or any reclassification, including, a
reverse stock split, a recapitalization or a merger of the corporation with its
subsidiaries that increases the percentage of voting shares owned beneficially
by an Interested Shareholder by more than 5%.
For three years following the time that an Interested Shareholder
becomes an owner of 10% of the outstanding voting shares, a Virginia corporation
cannot engage in an Affiliated Transaction with such Interested Shareholder
without approval of two-thirds of the voting shares other than those shares
beneficially owned by the Interested Shareholder, and majority approval of the
"Disinterested Directors." A Disinterested Director means, with respect to a
particular Interested Shareholder, a member of the Company's Board of Directors
who was (i) a Director on the date on which an Interested Shareholder became an
Interested Shareholder and (ii) recommended for election by, or was elected to
fill a vacancy and received the affirmative vote of, a majority of the
Disinterested Directors then on the Board. At the expiration of the three year
period, the statute requires approval of Affiliated Transactions by two-thirds
of the voting shares other than those beneficially owned by the Interested
Shareholder.
The principal exceptions to the special voting requirement apply to
transactions proposed after the three year period has expired and require either
that the transaction be approved by a majority of the corporation's
Disinterested Directors or that the transaction satisfy the fair-price
requirements of the statute. In general, the fair-price requirement provides
that in a two-step acquisition transaction, the Interested Shareholder must pay
the shareholders in the second step either the same amount of cash or the same
amount and type of consideration paid to acquire the Virginia corporation's
shares in the first step.
None of the foregoing limitations and special voting requirements
applies to a transaction with an Interested Shareholder whose acquisition of
shares making such person an Interested Shareholder was approved by a majority
of the Virginia corporation's Disinterested Directors.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the statute provides that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation can adopt an amendment to its Articles of
Incorporation or Bylaws providing that the
68
<PAGE>
Affiliated Transactions provisions shall not apply to the corporation. The
Company has not "opted out" of the Affiliated Transactions provisions.
Control Share Acquisitions
The Virginia Stock Corporation Act also contains provisions regulating
certain "Control Share Acquisitions," which are transactions causing the voting
strength of any person acquiring beneficial ownership of shares of a public
corporation in Virginia to meet or exceed certain threshold percentages (20%,
331/3% or 50%) of the total votes entitled to be cast for the election of
Directors. Shares acquired in a control share acquisition have no voting rights
unless: (i) the voting rights are granted by a majority vote of all outstanding
shares other than those held by the acquiring person or any officer or employee
Director of the corporation, or (ii) the Articles of Incorporation or Bylaws of
the corporation provide that these Virginia law provisions do not apply to
acquisitions of its shares. The acquiring person may require that a special
meeting of the shareholders be held to consider the grant of voting rights to
the shares acquired in the control share acquisition. These provisions were
designed to deter certain takeovers of Virginia public corporations. Under
Virginia law, a corporation may "opt out" of the Control Share Acquisitions
provisions in its Articles of Incorporation or Bylaws. The Company has not
"opted out" of the Control Share Acquisitions provisions.
Operations
The Company is generally prohibited from engaging in certain activities
and acquiring or holding property or engaging in any activity that would cause
the Company to fail to qualify as a REIT.
Advance Notice of Director Nominations and New Business
The Bylaws of the Company provide (a) with respect to an annual meeting
of shareholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by such shareholders may be made
only (i) pursuant to the Company's notice of the meeting, (ii) by the Board of
Directors or (iii) by a shareholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and (b)
with respect to special meetings of shareholders, nominations of persons for
election to the Board of Directors may be made only (i) pursuant to the
Company's notice of meeting, (ii) by the Board of Directors or (iii) provided
that the Board of Directors has determined that Directors shall be elected at
such meeting, by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws.
SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have 4,481,700
shares of Common Stock outstanding, 657,373 shares of Common Stock reserved for
issuance upon redemption of Units and no shares of Preferred Stock outstanding.
After the Closing Date, all shares of Common Stock will be freely tradeable by
persons other than "Affiliates" of the Company without restriction under the
Securities Act, subject to certain limitations on ownership set forth in the
Articles of Incorporation. See "Description of Capital Stock - Restrictions on
Transfer."
Pursuant to the Partnership Agreement, the Limited Partners, which are
Mr. Humphrey and three of his Affiliates, have the right to redeem their Units
in exchange for shares of Common Stock (the "Redemption Rights") on a
one-for-one basis (or for cash, at the election of the Company or if the
issuance of shares of Common Stock would result in any person owning, directly
or indirectly, more than 9.9% of the shares of Common Stock). The Redemption
Rights relating to all outstanding Units currently are exercisable at any time.
See "Partnership Agreement - Redemption Rights." Any amendment to the
Partnership Agreement that would affect the Redemption Rights requires the
consent of Limited Partners holding more than 50% of the Units held by all
Limited Partners (except the Company).
69
<PAGE>
Shares of Common Stock issued to holders of Units upon exercise of the
Redemption Rights will be "restricted" securities under the meaning of Rule 144
promulgated under the Securities Act ("Rule 144") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owned shares for at least one
year, including any person who may be deemed an "affiliate" of the Company,
would be entitled to sell within any three-month period a number of such shares
that does not exceed the greater of 1% of the then outstanding shares of Common
Stock or the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Commission. A person who is not deemed to have been an "affiliate" of the
Company at any time during the three months immediately preceding a sale and who
has beneficially owned shares for at least two years would be entitled to sell
such shares under Rule 144 without regard to the volume limitation described
above.
The Company has agreed to file a registration statement with the
Commission covering the resale of any shares of Common Stock issued to a Limited
Partner upon redemption of Units. Upon request from a Limited Partner at any
time, the Company will file such registration statement and use its best efforts
to have the registration statement declared effective and to keep it effective
for a period of two years. Upon effectiveness of such registration statement,
those persons who receive shares of Common Stock upon redemption of Units may
sell such shares in the secondary market without being subject to the volume
limitations or other requirements of Rule 144. The Company will bear expenses
incident to its registration requirements, except that such expenses shall not
include any selling commissions, the Commission or state securities registration
fees, transfer taxes or certain other fees or taxes relating to such shares.
Registration rights may be granted to future sellers of hotels to the
Partnership who may receive, in lieu of cash, shares of Common Stock, Units, or
other securities convertible into shares of Common Stock.
The Common Stock trades on The Nasdaq National Market under the symbol
"HUMP." See "Underwriting." No prediction can be made as to the effect, if
any, that the Offering or the availability of shares for future sale, will have
on the market price for shares of Common Stock or Preferred Stock prevailing
from time to time. Sales of substantial amounts of shares of Common Stock, or
the perception that such sales could occur, may affect adversely prevailing
market prices of the shares of Common Stock. See "Risk Factors - and
"Partnership Agreement - Transferability of Interests."
PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, and the
descriptions of certain provisions thereof set forth elsewhere in this
Prospectus, is qualified in its entirety by reference to the Partnership
Agreement, which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
Management
The Partnership has been organized as a Virginia limited partnership
pursuant to the terms of the Partnership Agreement. Pursuant to the Partnership
Agreement, the General Partner as the sole general partner of the Partnership,
has full, exclusive and complete responsibility and discretion in the management
and control of the Partnership. All of the outstanding shares of beneficial
interest of the General Partner are held by the Company. The Limited Partners
have no authority in their capacity as Limited Partners to transact business
for, or participate in the management activities or decisions of, the
Partnership. The General Partner, without the consent of the Limited Partners,
may amend the Partnership Agreement in any respect to the benefit of and not
adverse to the interests of the Limited Partners; provided, however, that any
other amendments to the Partnership Agreement requires the consent of Limited
Partners (other than the General Partner) holding more than 50% of the
percentage interests of the Limited Partners (other than the General Partner).
70
<PAGE>
Transferability of Interests
The General Partner may not voluntarily withdraw from the Partnership,
and the Company may not transfer or assign its interest in the General Partner.
In addition, the General Partner may not transfer or assign its interest in the
Partnership unless (i) the transaction in which such withdrawal or transfer
occurs results in the Limited Partners receiving property in an amount equal to
the amount they would have received had they exercised their Redemption Rights
immediately prior to such transaction, or (ii) the successor to the Company
contributes substantially all of its assets to the Partnership in return for an
interest in the Partnership. With certain limited exceptions, the Limited
Partners may not transfer their interests in the Partnership, in whole or in
part, without the written consent of the Company, which consent the Company may
withhold in its sole discretion. The Company may not consent to any transfer
that would cause the Partnership to be treated as a corporation for federal
income tax purposes.
Capital Contribution
The Company will contribute to the Partnership substantially all the
Net Proceeds of the Offering in exchange for 1,000,000 Units. After the Closing
Date, the Company will own an 87.21% partnership interest in the Partnership,
and the Limited Partners will collectively own a 12.79% limited partnership
interest in the Partnership. Upon the Company's contribution of the Net Proceeds
to the Partnership, the property of the Partnership will be revalued to its fair
market value (based on the Offering Price of the Common Shares), and the capital
accounts of the partners will be adjusted to reflect the manner in which the
unrealized gain or loss inherent in such property would be allocated among the
partners under the terms of the Partnership Agreement if there were a taxable
disposition of such property for such fair market value on the date of the
revaluation. The Partnership Agreement provides that if the Partnership requires
additional funds at any time or from time to time in excess of funds available
to the Partnership from borrowing or capital contributions, the Company may
borrow such funds from a financial institution or other lender and lend such
funds to the Partnership on the same terms and conditions as are applicable to
the Company's borrowing of such funds. Under the Partnership Agreement, the
Company generally is obligated to contribute the proceeds of a share offering as
additional capital to the Partnership. Moreover, the Company is authorized to
cause the Partnership to issue partnership interests for less than fair market
value if the Company has concluded in good faith that such issuance is in the
best interests of the Company and the Partnership. If the Company so contributes
additional capital to the Partnership, the Company will receive additional Units
and the Company's percentage interest in the Partnership will be increased on a
proportionate basis based upon the amount of such additional capital
contributions and the value of the Partnership at the time of such
contributions. Conversely, the percentage interests of the Limited Partners will
be decreased on a proportionate basis in the event of additional capital
contributions by the Company. In addition, if the Company contributes additional
capital to the Partnership, the Company will revalue the property of the
Partnership to its fair market value (as determined by the Company) and the
capital accounts of the partners will be adjusted to reflect the manner in which
the unrealized gain or loss inherent in such property (that has not been
reflected in the capital accounts previously) would be allocated among the
partners under the terms of the Partnership Agreement if there were a taxable
disposition of such property for such fair market value on the date of the
revaluation.
Redemption Rights
Pursuant to the Partnership Agreement, the Limited Partners have the
Redemption Rights, which enable them to cause the Partnership to redeem their
interests in the Partnership in exchange for cash or, at the Company's option,
shares of Common Stock on a one-for-one basis. The redemption price will be paid
in cash in the discretion of the Company or in the event that the issuance of
shares of Common Stock to the redeeming Limited Partner would (i) result in any
person owning, directly or indirectly, shares of Common Stock in excess of the
Ownership Limitation, (ii) result in shares of capital stock of the Company
being owned by fewer than 100 persons (determined without reference to any rules
of attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, (iv) cause the Company to own, actually
or constructively, 10% or more of the ownership interests in a tenant of the
Company's or the Partnership's real property, within the meaning of Section
856(d)(2)(B) of the Code, or (v) cause the acquisition of shares of Common Stock
by such redeeming Limited Partner to be "integrated" with any other distribution
of shares of Common Stock for purposes of complying with the Securities Act. The
Redemption Rights currently are exercisable at any time, provided that (i) no
Limited
71
<PAGE>
Partner may exercise the Redemption Right for less than 1,000 Units or, if such
Limited Partner holds less than 1,000 Units, less than all of the Units held by
such Limited Partner and (ii) no Limited Partner may exercise the Redemption
Rights if, as a result, such partner or any other person would, upon redemption,
own, directly or indirectly, shares of Common Stock in excess of the Ownership
Limitation. The aggregate number of shares of Common Stock issuable upon
exercise of the Redemption Rights is 657,373. The number of shares of Common
Stock issuable upon exercise of the Redemption Rights will be adjusted upon the
occurrence of share splits, mergers, consolidations or similar pro rata share
transactions, which otherwise would have the effect of diluting or increasing
the ownership interests of the Limited Partners or the shareholders of the
Company.
Operations
The Partnership Agreement requires that the Partnership be operated in
a manner that will enable the Company to satisfy the requirements for being
classified as a REIT, to use reasonable efforts to avoid any federal income or
excise tax liability imposed by the Code, and to ensure that the Partnership
will not be classified as a "publicly traded partnership" for purposes of
Section 7704 of the Code.
In addition to the administrative and operating costs and expenses
incurred by the Partnership, the Partnership pays all administrative costs and
expenses of the Company (the "Company Expenses") and the Company Expenses are
treated as expenses of the Partnership. The Company Expenses generally include
(i) all expenses relating to the formation and continuity of existence of the
Company, (ii) all expenses relating to the registration of securities by the
Company, (iii) all expenses associated with the preparation and filing of any
periodic reports by the Company under federal, state or local laws or
regulations, (iv) all expenses associated with compliance by the Company with
laws, rules and regulations promulgated by any regulatory body and (v) all other
operating or administrative costs of the Company incurred in the ordinary course
of its business on behalf of the Partnership. The Company Expenses, however, do
not include any administrative and operating costs and expenses incurred by the
Company that are attributable to hotel properties or partnership interests in
the Subsidiary Partnership that are owned by the Company directly. The Company
currently does not own any Hotel directly.
Distributions
The Partnership Agreement provides that the Partnership will distribute
cash from operations (including net sale or refinancing proceeds, but excluding
net proceeds from the sale of the Partnership's property in connection with the
liquidation of the Partnership) on a quarterly (or, at the election of the
Company, more frequent) basis, in amounts determined by the Company in its sole
discretion, to the partners in accordance with their respective percentage
interests in the Partnership. Upon liquidation of the Partnership, after payment
of, or adequate provision for, debts and obligations of the Partnership,
including any partner loans, any remaining assets of the Partnership will be
distributed to all partners with positive capital accounts in accordance with
their respective positive capital account balances. If the Company has a
negative balance in its capital account following a liquidation of the
Partnership, it will be obligated to contribute cash to the Partnership equal to
the negative balance in its capital account.
Allocations
Income, gain and loss of the Partnership for each fiscal year generally
are allocated among the partners in accordance with their respective interests
in the Partnership, subject to compliance with the provisions of Code Sections
704(b) and 704(c) and Treasury Regulations promulgated thereunder.
Term
The Partnership will continue until December 31, 2050, or until sooner
dissolved upon (i) the bankruptcy, dissolution or withdrawal of the Company
(unless the Limited Partners elect to continue the Partnership), (ii) the sale
or other disposition of all or substantially all the assets of the Partnership,
(iii) the redemption of all Units (other than those held by the Company, if
any), or (iv) the election of the General Partner and approval of the holders of
75% of the Percentage Interests of the Limited Partners (excluding the General
Partner).
72
<PAGE>
Tax Matters
Pursuant to the Partnership Agreement, the General Partner is the tax
matters partner of the Partnership and, as such, will have authority to handle
tax audits and to make tax elections under the Code on behalf of the
Partnership.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax
considerations that may be relevant to a prospective holder of Common Stock.
Hunton & Williams has acted as counsel to the Company and has reviewed this
summary and is of the opinion that the discussion contained herein fairly
summarizes the federal income tax considerations that are likely to be material
to a Common Shareholder. The discussion does not address all aspects of taxation
that may be relevant to particular shareholders in light of their personal
investment or tax circumstances, or to certain types of shareholders (including
insurance companies, tax-exempt organizations (except as described below),
financial institutions or broker-dealers, and, except as described below,
foreign corporations and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax laws.
The statements in this discussion and the opinion of Hunton & Williams
are based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations, the legislative history of the Code, existing
administrative rulings and practices of the Service, and judicial decisions. No
assurance can be given that future legislative, judicial, or administrative
actions or decisions, which may be retroactive in effect, will not affect the
accuracy of any statements in this Prospectus with respect to the transactions
entered into or contemplated prior to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF
COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Taxation of the Company
The Company elected to be taxed as a REIT under Sections 856 through
860 of the Code, effective for its short taxable year ended December 31, 1994.
The Company believes that, commencing with such taxable year, it has been
organized and has operated in such a manner as to qualify for taxation as a REIT
under the Code, and the Company intends to continue to operate in such a manner,
but no assurance can be given that the Company will operate in a manner so as to
qualify or remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a
REIT are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retrospectively.
Hunton & Williams has acted as counsel to the Company in connection
with the IPO, the Company's secondary public stock offerings, the Offering and
the Company's election to be taxed as a REIT. In the opinion of Hunton &
Williams, the Company qualified to be taxed as a REIT for its taxable years
ended December 31, 1994 through December 31, 1997, and the Company's
organization and current and proposed method of operation will enable it to
continue to qualify as a REIT for its taxable year ended December 31, 1998 and
in the future. Investors should be aware, however, that opinions of counsel are
not binding upon the Service or any court. It must be emphasized that Hunton &
Williams' opinion is based on various assumptions and is conditioned upon
certain representations made by the Company as to factual matters, including
representations regarding the nature of the Company's properties, the Percentage
Leases, and the future conduct of the Company's business. Such factual
assumptions and representations are described below in this discussion of
"Federal Income Tax Considerations" and
73
<PAGE>
are set out in the federal income tax opinion that will be delivered by Hunton &
Williams at the closing of the Offering. Moreover, such qualification and
taxation as a REIT depend upon the Company's ability to meet on a continuing
basis, through actual annual operating results, distribution levels, and share
ownership, the various qualification tests imposed under the Code discussed
below. Hunton & Williams will not review the Company's compliance with those
tests on a continuing basis. Accordingly, no assurance can be given that the
actual results of the Company's operation for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "Federal Income Tax Considerations - Failure to
Qualify."
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" of income (i.e., taxation at both the corporate and
shareholder levels) that generally results from an investment in a corporation.
However, the Company will be subject to federal income tax in the following
circumstances. First, the Company will be taxed at regular corporate rates on
any undistributed REIT taxable income, including undistributed net capital
gains. Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its undistributed items of tax preference. Third,
if the Company has (i) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property (other
than foreclosure property) held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if the
Company should fail to satisfy the 75% gross income test or the 95% gross income
test (as discussed below), and has nonetheless maintained its qualification as a
REIT because certain other requirements have been met, it will be subject to a
100% tax on the gross income attributable to the greater of the amount by which
the Company fails the 75% or 95% gross income test, multiplied by a fraction
intended to reflect the Company's profitability. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company will be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, beginning with its
1998 taxable year, the Company may elect to retain and pay income tax on the
long-term capital gain it received during a taxable year. Any such retained
amounts would be treated as having been distributed by the Company for purposes
of the 4% excise tax described above. Finally, if the Company acquires any asset
from a C corporation (i.e., a corporation generally subject to full
corporate-level tax) in a transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other asset) in the hands of the C corporation and the Company recognizes gain
on the disposition of such asset during the 10-year period beginning on the date
on which such asset was acquired by the Company, then to the extent of such
asset's "built-in gain" (i.e., the excess of the fair market value of such asset
at the time of acquisition by the Company over the adjusted basis in such asset
at such time), such gain will be subject to tax at the highest regular corporate
rate applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
"built-in gain" assume that the Company would make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition. See "Proposed Tax
Legislation."
Requirements for Qualification
The Code defines a REIT as a corporation, trust or association (i) that
is managed by one or more trustees or directors; (ii) the beneficial ownership
of which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for Sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and to maintain REIT status; (viii) that uses a calendar year for
federal income tax purposes and complies with the recordkeeping requirements of
the Code and Treasury Regulations; and (ix) that meets certain other tests,
described below, regarding the nature of its income and assets. The Code
provides that conditions (i) to (iv), inclusive, must be met
74
<PAGE>
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months. Conditions (v) and (vi) did not apply
until after the first taxable year for which an election was made by the Company
to be taxed as a REIT. For purposes of determining share ownership under the
5/50 Rule, a supplemental unemployment compensation benefits plan, a private
foundation, or a portion of a trust permanently set aside or used exclusively
for charitable purposes generally is considered an individual, although a trust
that is a qualified trust under Code Section 401(a) generally is not considered
an individual and the beneficiaries of such trust are treated as holding shares
of a REIT in proportion to their actuarial interests in the trust for purposes
of the 5/50 Rule.
The Company has issued sufficient shares of Common Stock with
sufficient diversity of ownership to allow it to satisfy requirements (v) and
(vi). In addition, the Company's Articles of Incorporation restrict the
ownership and transfer of shares of Common Stock in a manner intended to assist
the Company in continuing to satisfy the share ownership requirements described
in (v) and (vi) above. Such transfer restrictions are described in "Description
of Capital Stock - Restrictions on Ownership and Transfer."
The Company does not currently have any corporate subsidiaries, nor
will it have any corporate subsidiaries immediately after completion of the
Offering, although it may have corporate subsidiaries in the future. Code
Section 856(i) provides that a corporation that is a "qualified REIT subsidiary"
shall not be treated as a separate corporation, and all assets, liabilities, and
items of income, deduction, and credit of a "qualified REIT subsidiary" shall be
treated as assets, liabilities, and items of income, deduction, and credit of
the REIT. A "qualified REIT subsidiary" is a corporation, all of the capital
stock of which is owned by the REIT. Thus, in applying the requirements
described herein, any "qualified REIT subsidiaries" acquired or formed by the
Company will be ignored, and all assets, liabilities, and items of income,
deduction, and credit of such subsidiaries will be treated as assets,
liabilities and items of income, deduction, and credit of the Company.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of Section 856 of the Code, including satisfying the
gross income and asset tests, described below. Thus, the Company's proportionate
share of the assets, liabilities and items of income of the Partnership are
treated as assets and gross income of the Company for purposes of applying the
requirements described herein.
Income Tests
In order for the Company to maintain its qualification as a REIT, there
are two requirements relating to the Company's gross income that must be
satisfied annually. First, at least 75% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing. The specific application of these tests to the
Company is discussed below.
Rents received by the Company will qualify as "rents from real
property" for purposes of the gross income requirements for a REIT described
above only if several conditions are met. First, the amount of rent must not be
based in whole or in part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term "rents
from real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" for purposes of the
gross income tests if the Company, or an owner of 10% or more of the Company,
directly or constructively owns 10% or more of the ownership interests in such
tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable
75
<PAGE>
to such personal property will not qualify as "rents from real property."
Finally, for rents received to qualify as "rents from real property," the
Company generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" who is adequately compensated and from whom the Company derives no
revenue. The "independent contractor" requirement, however, does not apply to
the extent the services provided by the Company are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant." In addition, beginning with its
1998 taxable year, the Company may furnish or render a de minimis amount of
"noncustomary services" to the tenants of a property other than through an
independent contractor as long as the amount that the Company receives that is
attributable to such services does not exceed 1% of its total receipts from the
property. For that purpose, the amount attributable to the Company's
noncustomary services will be at least equal to 150% of the Company's cost of
providing the services.
Pursuant to the Percentage Leases, the Lessee leases from the
Partnership the land, buildings, improvements, furnishings and equipment
comprising the Hotels for a 10-year period. The Percentage Leases provide that
the Lessee is obligated to pay to the Partnership (i) the Base Rent and the
Percentage Rent (collectively, the "Rents") and (ii) certain other Additional
Charges. The Percentage Rent is calculated by multiplying fixed percentages by
the gross room and other revenues for each of the Hotels. The Base Rent accrues
and is required to be paid monthly and the Percentage Rent accrues and is
required to be paid monthly, quarterly, semi-annually and annually (if
applicable).
In order for the Base Rent, the Percentage Rent, and the Additional
Charges to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property) or the potential for economic gain (e.g.,
appreciation) with respect to the property.
In addition, Code Section 7701(e) provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (i) the
service recipient is in physical possession of the property, (ii) the service
recipient controls the property, (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of the
useful life of the property, the recipient shares the risk that the property
will decline in value, the recipient shares in any appreciation in the value of
the property, the recipient shares in savings in the property's operating costs,
or the recipient bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient, and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination whether a service
contract should be treated as a lease is inherently factual, the presence or
absence of any single factor may not be dispositive in every case.
The Company believes that the Percentage Leases will be treated as true
leases for federal income tax purposes. Such belief is based, in part, on the
following facts: (i) the Partnership and the Lessee intend for their
relationship to be that of a lessor and lessee and such relationship is
documented by lease agreements, (ii) the Lessee has the right to exclusive
possession and use and quiet enjoyment of the Hotels during the term of the
Percentage Leases, (iii) the Lessee bears the cost of, and is responsible for,
day-to-day maintenance and repair of the Hotels, other than the cost of capital
expenditures that are classified as capital items under generally accepted
accounting principles which are necessary for the continued operation of the
Hotels, and dictates how the Hotels are operated, maintained, and improved, (iv)
the Lessee bears all of the costs and expenses of operating the Hotels
(including the
76
<PAGE>
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, and the cost of replacement or refurbishment of furniture, fixtures
and equipment, to the extent such costs do not exceed the allowance for such
costs provided by the Partnership under each Percentage Lease), (v) the Lessee
benefits from any savings in the costs of operating the Hotels during the term
of the Percentage Leases, (vi) in the event of damage to or destruction of a
Hotel, the Lessee is at economic risk because it generally 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, (vii) the Lessee has indemnified the
Partnership against all liabilities imposed on the Partnership during the term
of the Percentage Leases by reason of (A) injury to persons or damage to
property occurring at the Hotels or (B) the Lessee's use, management,
maintenance or repair of the Hotels, (viii) the Lessee is obligated to pay
substantial fixed rent for the period of use of the Hotels, and (ix) the Lessee
stands to incur substantial losses (or reap substantial gains) depending on how
successfully it operates the Hotels.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. If the Percentage
Leases are recharacterized as service contracts or partnership agreements,
rather than true leases, part or all of the payments that the Partnership
receives from the Lessee may not be considered rent or may not otherwise satisfy
the various requirements for qualification as "rents from real property." In
that case, the Company likely would not be able to satisfy either the 75% or 95%
gross income test and, as a result, would lose its REIT status.
In order for the Rents to constitute "rents from real property,"
several other requirements also must be satisfied. One requirement is that the
Rents attributable to personal property leased in connection with the lease of
the real property comprising a Hotel must not be greater than 15% of the Rents
received under the Percentage Lease. The Rents attributable to the personal
property in a Hotel is the amount that bears the same ratio to total Rent for
the taxable year as the average of the adjusted basis of the personal property
in the Hotel at the beginning and at the end of the taxable year bears to the
average of the aggregate adjusted basis 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 each Hotel that the Partnership has
acquired, or will acquire, in exchange for Units, the initial adjusted basis of
the personal property in such hotel was, or will be, less than 15% of the
initial adjusted basis of both the real and personal property comprising such
Hotel. In addition, the Company obtained an appraisal of the personal property
at each Initial Hotel acquired for cash that indicates that the fair market
value of the personal property was less than 15% of the purchase price of such
Hotel. Further, in no event will the Partnership acquire additional personal
property for a Hotel to the extent that such acquisition would cause the
Adjusted Basis Ratio for that hotel to exceed 15%. There can be no assurance,
however, that the Service would not assert that the personal property acquired
by the Partnership had a value in excess of the appraised value, or that a court
would not uphold such assertion. If such a challenge were successfully asserted,
the Company could fail the Adjusted Basis Ratio as to one or more of the Hotels,
which in turn potentially could cause the Company to fail to satisfy the 95% or
75% gross income test and thus lose its REIT status.
Another requirement for qualification of the Rents as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as "rents from real property" if it is based on percentages of receipts or sales
and the percentages (i) are fixed at the time the Percentage Leases are entered
into, (ii) are not renegotiated during the term of the Percentage Leases in a
manner that has the effect of basing Percentage Rent on income or profits, and
(iii) conform with normal business practice. More generally, the Percentage Rent
will not qualify as "rents from real property" if, considering the Percentage
Leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice, but is in reality used as a means of basing the
Percentage Rent on income or profits. Since the Percentage Rent is based on
fixed percentages of the gross revenues from the Hotels that are established in
the Percentage Leases, and the Company has represented that the percentages (i)
will not be renegotiated during the terms of the Percentage Leases in a manner
that has the effect of basing the Percentage Rent on income or profits and (ii)
conform with normal business practice, the Percentage Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company has represented that, with respect to other hotels that
it acquires in the future, it will not charge rent for any property that is
based in whole or in part
77
<PAGE>
on the income or profits of any person (except by reason of being based on a
fixed percentage of gross revenues, as described above).
A third requirement for qualification of the Rents as "rents from real
property" is that the Company must not own, actually or constructively, 10% or
more of the Lessee. The constructive ownership rules generally provide that, if
10% or more in value of the shares of the Company is owned, directly or
indirectly, by or for any person, the Company is considered as owning the shares
owned, actually or indirectly, by or for such person. The Company does not own
directly any stock of the Lessee. The Limited Partners, including Mr. Humphrey,
who is the sole shareholder of the Lessee, may acquire shares of Common Stock by
exercising their Redemption Rights. The Partnership Agreement, however, provides
that a redeeming Limited Partner will receive cash, rather than shares of Common
Stock, if the Company so elects or if the acquisition of shares of Common Stock
by such partner would cause the Company to own, actually or constructively, 10%
or more of the ownership interests in a tenant of the Company's or the
Partnership's real property, within the meaning of Section 856(d)(2)(B) of the
Code. The Articles of Incorporation likewise prohibit transfers of Common Stock
that would cause the Company to own, actually or constructively, 10% or more of
the ownership interests in a tenant of the Company's real property, within the
meaning of Section 856(d)(2)(B) of the Code. Thus, the Company should never own,
actually or constructively, 10% of more of the Lessee. Furthermore, the Company
has represented that, with respect to other hotels that it acquires in the
future, it will not rent any property to a Related Party Tenant. However,
because the Code's constructive ownership rules for purposes of the Related
Party Tenant rules are broad and it is not possible to monitor continually
direct and indirect transfers of shares of Common Stock, no absolute assurance
can be given that such transfers or other events of which the Company has no
knowledge will not cause the Company to own constructively 10% or more of the
Lessee at some future date.
A fourth requirement for qualification of the Rents as "rents from real
property" is that other than pursuant to the 1% de minimis exception described
above, the Company cannot furnish or render noncustomary services to the tenants
of the Hotels, or manage or operate the Hotels, other than through an
independent contractor who is adequately compensated and from whom the Company
does not derive or receive any income. Provided that the Percentage Leases are
respected as true leases, the Company should satisfy that requirement because
the Partnership is not performing any services other than customary ones for the
Lessee. Furthermore, the Company has represented that, with respect to other
hotels that it acquires in the future, it will not perform noncustomary services
with respect to the tenant of the property. As described above, however, if the
Percentage Leases are recharacterized as service contracts or partnership
agreements, the Rents likely would be disqualified as "rents from real property"
because the Company would be considered to furnish or render services to the
occupants of the Hotels and to manage or operate the Hotels other than through
an independent contractor who is adequately compensated and from whom the
Company derives or receives no income.
If the Rents do not qualify as "rents from real property" because the
Rents attributable to personal property exceed 15% of the total Rents for a
taxable year, the portion of the Rents that is attributable to personal property
will not be qualifying income for purposes of either the 75% or 95% gross income
test. Thus, if the Rents attributable to personal property, plus any other
income that is nonqualifying income for purposes of the 95% gross income test,
during a taxable year exceed 5% of the Company's gross income during the year,
the Company would lose its REIT status. If, however, the Rents do not qualify as
"rents from real property" because either (i) the Percentage Rent is considered
based on income or profits of the Lessee, (ii) the Company owns, actually or
constructively, 10% or more of the Lessee, or (iii) the Company furnishes
noncustomary services to the tenants of the Hotels, or manages or operates the
Hotels, other than through a qualifying independent contractor (other than
pursuant to the 1% de minimis exception described above), none of the Rents
would qualify as "rents from real property." In that case, the Company likely
would lose its REIT status because it would be unable to satisfy either the 75%
or 95% gross income test.
In addition to the Rents, the Lessee is required to pay the Additional
Charges to the Partnership. To the extent that the Additional Charges represent
either (i) reimbursements of amounts that the Lessee is obligated to pay to
third parties or (ii) penalties for nonpayment or late payment of such amounts,
the Additional Charges should qualify as "rents from real property." To the
extent, however, that the Additional Charges represent interest that is accrued
on the late payment of the Rents or the Additional Charges, the Additional
Charges should not qualify as "rents from real property," but instead should be
treated as interest that qualifies for the 95% gross income test.
78
<PAGE>
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Furthermore, to the extent that interest from a loan that is based on
the residual cash proceeds from the sale of the property securing the loan
constitutes a "shared appreciation provision" (as defined in the Code), income
attributable to such participation feature will be treated as gain from the sale
of the secured property.
The net income derived from any prohibited transaction is subject to a
100% tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily
for sale to customers in the ordinary course of a trade or business. All
inventory required in the operation of the Hotels has been and will be purchased
by the Lessee or its designee as required by the terms of the Percentage Leases.
Accordingly, the Company believes that no asset owned by the Company or the
Partnership is held for sale to customers and that a sale of any such asset will
not be in the ordinary course of business of the Company or the Partnership.
Whether property is held "primarily for sale to customers in the ordinary course
of a trade or business" depends, however, on the facts and circumstances in
effect from time to time, including those related to a particular property.
Nevertheless, the Company and the Partnership will attempt to comply with the
terms of safe-harbor provisions in the Code prescribing when asset sales will
not be characterized as prohibited transactions. Complete assurance cannot be
given, however, that the Company or the Partnership can comply with the
safe-harbor provisions of the Code or avoid owning property that may be
characterized as property held "primarily for sale to customers in the ordinary
course of a trade or business."
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (i) that is acquired by a REIT as the
result of such REIT having bid in such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness that such property secured and (ii) for
which such REIT makes a proper election to treat such property as foreclosure
property. However, a REIT will not be considered to have foreclosed on a
property where such REIT takes control of the property as a mortgagee-
in-possession and cannot receive any profit or sustain any loss except as a
creditor of the mortgagor. Under the Code, property generally ceases to be
foreclosure property with respect to a REIT on the last day of the third taxable
year following the taxable year in which the REIT acquired such property (or
longer if an extension is granted by the Secretary of the Treasury). The
foregoing grace period is terminated and foreclosure property ceases to be
foreclosure property on the first day (i) on which a lease is entered into with
respect to such property that, by its terms, will give rise to income that does
not qualify for purposes of the 75% gross income test or any amount is received
or accrued, directly or indirectly, pursuant to a lease entered into on or after
such day that will give rise to income that does not qualify for purposes of the
75% gross income test, (ii) on which any construction takes place on such
property (other than completion of a building, or any other improvement, where
more than 10% of the construction of such building or other improvement was
completed before default became imminent), or (iii) which is more than 90 days
after the day on which such property was acquired by the REIT and the property
is used in a trade or business that is conducted by the REIT (other than through
an independent contractor from whom the REIT itself does not derive or receive
any income). As a result of the rules with respect to foreclosure property, if
the Lessee defaults on its obligations under a Percentage Lease for a Hotel, the
Company terminates the Lessee's leasehold interest, and the Company is unable to
find a replacement Lessee for such Hotel within 90 days of such foreclosure,
gross income from hotel operations conducted by the Company from such Hotel
would cease to qualify for the 75% and 95% gross income tests. In such event,
the Company likely would be unable to satisfy the 75% and 95% gross income tests
and, thus, would fail to qualify as a REIT.
It is possible that, from time to time, the Company or the Partnership
will enter into hedging transactions with respect to one or more of its assets
or liabilities. Any such hedging transactions could take a variety of forms,
including interest rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that the Company or the
Partnership enters into an interest rate swap or cap contract, option, futures
contract, forward rate agreement, or similar financial instrument to reduce the
interest rate risk with respect to
79
<PAGE>
indebtedness incurred or to be incurred to acquire or carry real estate assets,
any periodic income or gain from the disposition of such contract should be
qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test. To the extent that the Company or the Partnership hedges with
other types of financial instruments or in other situations, it may not be
entirely clear how the income from those transactions will be treated for
purposes of the various income tests that apply to REITs under the Code. The
Company intends to structure any hedging transactions in a manner that does not
jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
Those relief provisions generally will be available if the Company's failure to
meet such tests is due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations - Taxation of the
Company," even if those relief provisions apply, a 100% tax would be imposed
with respect to the gross income attributable to the greater of the amount by
which the Company fails the 75% or 95% gross income test, multiplied by a
fraction intended to reflect the Company's profitability.
Asset Tests
The Company, at the close of each quarter of its taxable year, also
must satisfy two tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through share or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the mortgage balance does
not exceed the value of the associated real property, and shares of other REITs.
For purposes of the 75% asset test, the term "interest in real property"
includes an interest in land and improvements thereon, such as buildings or
other inherently permanent structures (including items that are structural
components of such buildings or structures), a leasehold in real property, and
an option to acquire real property (or a leasehold in real property). Second, of
the investments not included in the 75% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets and the Company may not own more than 10% of any one
issuer's outstanding voting securities (except for its ownership interest in the
Partnership or a qualified REIT subsidiary). See "Proposed Tax Legislation."
For purposes of the asset tests, the Company will be deemed to own its
proportionate share of the assets of the Partnership, rather than its
partnership interest in the Partnership. The Company has represented that, at
all relevant times (including the taxable periods preceding the Offering), (i)
at least 75% of the value of its total assets has been and will be represented
by real estate assets, cash and cash items (including receivables), and
government securities and (ii) it has not owned and will not own any securities
that do not satisfy the 75% asset requirement (except for the stock of qualified
REIT subsidiaries). In addition, the Company has represented that it will not
acquire or dispose, or cause the Partnership to acquire or dispose, of assets in
the future in a way that would cause it to violate either asset test.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by an acquisition of one or more
nonqualifying assets. If the condition described in clause (ii) of the preceding
sentence were not satisfied, the Company still could avoid disqualification by
eliminating any discrepancy within 30 days after the close of the quarter in
which it arose.
80
<PAGE>
Distribution Requirements
The Company, in order to avoid corporate income taxation of its
earnings, is required each taxable year to distribute dividends (other than
capital gain dividends and retained capital gains) to its shareholders in an
amount at least equal to (i) the sum of (A) 95% of its "REIT taxable income"
(computed without regard to the dividends paid deduction and its net capital
gain) and (B) 95% of the net income (after tax), if any, from foreclosure
property, minus (ii) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
date after such declaration. To the extent that the Company does not distribute
all of its net capital gain or distributes at least 95%, but less than 100%, of
its "REIT taxable income," as adjusted, it will be subject to tax thereon at
regular ordinary and capital gains corporate tax rates. Furthermore, if the
Company should fail to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amounts actually distributed. To
the extent that the Company elects to retain and pay income tax on its net
capital gain, such retained amounts will be treated as having been distributed
for purposes of the excise tax. The Company has made, and has represented that
it will continue to make, timely distributions sufficient to satisfy all annual
distribution requirements.
It is possible that, from time to time, the Company may experience
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income. For example, under the
Percentage Leases, the Lessee may defer payment of the excess of the Percentage
Rent over the Base Rent for a period of up to 90 days after the end of the
calendar year in which such payment was due. In that case, the Partnership still
would be required to recognize as income the excess of the Percentage Rent over
the Base Rent in the calendar quarter to which it relates. Further, it is
possible that, from time to time, the Company may be allocated a share of net
capital gain attributable to the sale of depreciated property that exceeds its
allocable share of cash attributable to that sale. Therefore, the Company may
have less Cash Available for Distribution to Shareholders than is necessary to
meet its annual 95% distribution requirement or to avoid corporate income tax or
the excise tax imposed on certain undistributed income. In such a situation, the
Company may find it necessary to arrange for short-term (or possibly long-term)
borrowings or to raise funds through the issuance of additional common or
preferred shares.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to its shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest based upon the
amount of any deduction taken for deficiency dividends.
Recordkeeping Requirement
Pursuant to applicable Treasury Regulations, the Company must maintain
certain records and request on an annual basis certain information from its
shareholders designed to disclose the actual ownership of its outstanding
shares. The Company has complied, and represents that it will continue to
comply, with such requirements.
Partnership Anti-Abuse Rule
The U.S. Department of Treasury has issued a final regulation (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions") that authorizes the Service, in certain "abusive"
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or availed of in
connection with a transaction (or series of related transactions) a principal
purpose of which is to reduce substantially the present value of the partners'
aggregate federal tax liability in a manner inconsistent with the intent of the
Partnership Provisions. The Anti-Abuse Rule states that the Partnership
Provisions are intended to permit taxpayers to conduct joint business (including
investment) activities through a flexible economic arrangement that
81
<PAGE>
accurately reflects the partners' economic agreement and clearly reflects the
partners' income without incurring an entity-level tax. The purposes for
structuring a transaction involving a partnership are determined based on all of
the facts and circumstances, including a comparison of the purported business
purpose for a transaction and the claimed tax benefits resulting from the
transaction. A reduction in the present value of the partners' aggregate federal
tax liability through the use of a partnership does not, by itself, establish
inconsistency with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that
elects to be treated as a REIT contributes substantially all of the proceeds
from a public offering to a partnership in exchange for a general partnership
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, some of the limited partners have
the right, beginning two years after the formation of the partnership, to
require the redemption of their limited partnership interests in exchange for
cash or REIT stock (at the REIT's option) equal to the fair market value of
their respective interests in the partnership at the time of the redemption. The
example concludes that the use of the partnership is not inconsistent with the
intent of the Partnership Provisions and, thus, cannot be recast by the Service.
The Redemption Rights do not conform in all respects to the redemption rights
described in the foregoing example. Moreover, the Anti-Abuse Rule is
extraordinarily broad in scope and is applied based on an analysis of all of the
facts and circumstances. As a result, there can be no assurance that the Service
will not attempt to apply the Anti-Abuse Rule to the Company. If the conditions
of the Anti-Abuse Rule are met, the Service is authorized to take appropriate
enforcement action, including disregarding the Partnership for federal tax
purposes or treating one or more of its partners as nonpartners. Any such action
potentially could jeopardize the Company's status as a REIT.
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will they
be required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company also will be
disqualified from taxation as a REIT for the four taxable years following the
year during which the Company ceased to qualify as a REIT. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
Taxation of Taxable U.S. Shareholders
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends or retained capital gains)
will be taken into account by such U.S. shareholders as ordinary income and will
not be eligible for the dividends received deduction generally available to
corporations. As used herein, the term "U.S. shareholder" means a Common
Shareholder that for U.S. federal income tax purposes is (i) a citizen or
resident of the United States, (ii) a corporation, partnership, or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate whose income from sources without
the United States is includible in gross income for U.S. federal income tax
purposes regardless of its connection with the conduct of a trade or business
within the United States, or (iv) any trust with respect to which (A) a U.S.
court is able to exercise primary supervision over the administration of such
trust and (B) one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust.
Distributions that are designated as capital gain dividends will be
taxed as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the shareholder has held his shares of Common Stock. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Beginning with its 1998 taxable year, the Company
may elect to retain and pay income tax on its net long-term capital gains. In
that case, the Company's shareholders would include in income their
proportionate share of the Company's undistributed long-term capital
82
<PAGE>
gains. In addition, the shareholders would be deemed to have paid their
proportionate share of the tax paid by the Company, which would be credited or
refunded to the shareholders. Each shareholder's basis in his shares would be
increased by the amount of the undistributed long-term capital gain included in
the shareholder's income, less the shareholder's share of the tax paid by the
Company.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a Common Shareholder to the extent that they do not
exceed the adjusted basis of the Common Shareholder's shares, but rather will
reduce the adjusted basis of such shares. To the extent that distributions in
excess of current and accumulated earnings and profits exceed the adjusted basis
of a Common Shareholder's shares, such distributions will be included in income
as long-term capital gain (or short-term capital gain if the shares of Common
Stock have been held for one year or less) assuming the shares of Common Stock
are capital assets in the hands of the Common Shareholder. In addition, any
distribution declared by the Company in October, November, or December of any
year and payable to a Common Shareholder of record on a specified date in any
such month shall be treated as both paid by the Company and received by the
Common Shareholder on December 31 of such year, provided that the distribution
is actually paid by the Company during January of the following calendar year.
Common Shareholders may not include in their individual income tax
returns any net operating losses or capital losses of the Company. Instead, such
losses would be carried over by the Company for potential offset against its
future income (subject to certain limitations). Taxable distributions from the
Company and gain from the disposition of shares of Common Stock will not be
treated as passive activity income and, therefore, shareholders generally will
not be able to apply any "passive activity losses" (such as losses from certain
types of limited partnerships in which the shareholder is a limited partner)
against such income. In addition, taxable distributions from the Company and
gain from the disposition of shares of Common Stock generally will be treated as
investment income for purposes of the investment interest limitations. The
Company will notify shareholders after the close of the Company's taxable year
as to the portions of the distributions attributable to that year that
constitute ordinary income, return of capital, and capital gain.
Taxation of Shareholders on the Disposition of the Common Stock
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a shareholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Stock has been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Stock by a shareholder who has held such
shares for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss to the extent of distributions from the
Company required to be treated by such shareholder as long-term capital gain.
All or a portion of any loss realized upon a taxable disposition of the Common
Stock may be disallowed if other shares of Common Stock are purchased within 30
days before or after the disposition.
Capital Gains and Losses
The highest marginal individual income tax rate is 39.6%. The maximum
tax rate on net capital gains applicable to noncorporate taxpayers is 28% for
sales and exchanges of assets held for more than one year but not more than 18
months, and 20% for sales and exchanges of assets held for more than 18 months.
The maximum tax rate on long-term capital gain from the sale or exchange of
"section 1250 property" (i.e., depreciable real property) held for more than 18
months is 25% to the extent that such gain would have been treated as ordinary
income if the property were "section 1245 property." With respect to
distributions designated by the Company as capital gain dividends and any
retained capital gains that the Company is deemed to distribute, the Company may
designate (subject to certain limits) whether such a distribution is taxable to
its noncorporate stockholders at a 20%, 25%, or 28% rate. Thus, the tax rate
differential between capital gain and ordinary income for individuals may be
significant. In addition, the characterization of income as capital or ordinary
may affect the deductibility of capital losses. Capital losses not offset by
capital gains may be deducted against an individual's ordinary income only up to
a maximum annual amount of $3,000. Unused capital losses may be carried forward.
All net capital gain of a corporate taxpayer is subject to tax at ordinary
corporate rates. A corporate taxpayer can deduct capital losses only to the
extent of capital gains, with unused losses being carried back three years and
forward five years.
83
<PAGE>
Information Reporting Requirements and Backup Withholding
The Company will report to its U.S. shareholders and the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify their nonforeign status to the Company. The Service has
issued final regulations regarding the backup withholding rules as applied to
Non-U.S. Shareholders. The regulations alter the technical requirements relating
to backup withholding compliance and will be effective for distributions made
after December 31, 1998 See "Federal Income Tax Considerations - Taxation of
Non-U.S. Shareholders."
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions by a REIT to an exempt employee pension trust
do not constitute UBTI, provided that the shares of the REIT are not otherwise
used in an unrelated trade or business of the exempt employee pension trust.
Based on that ruling and on the intention of the Company to invest its assets in
a manner that will avoid the recognition of UBTI by the Company, amounts
distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition of
shares of Common Stock with debt, a portion of its income from the Company will
constitute UBTI pursuant to the "debt-financed property" rules. Furthermore,
social clubs, voluntary employee benefit associations, supplemental unemployment
benefit trusts, and qualified group legal services plans that are exempt from
taxation under paragraphs (7), (9), (17), and (20), respectively, of Code
Section 501(c) are subject to different UBTI rules, which generally will require
them to characterize distributions from the Company as UBTI. In addition, in
certain circumstances, a pension trust that owns more than 10% of the Company's
shares of capital stock is required to treat a percentage of the dividends from
the Company as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross
income derived by the Company from an unrelated trade or business (determined as
if the Company were a pension trust) divided by the gross income of the Company
for the year in which the dividends are paid. The UBTI rule applies to a pension
trust holding more than 10% of the Company's shares of capital stock only if (i)
the UBTI Percentage is at least 5%, (ii) the Company qualifies as a REIT by
reason of the modification of the 5/50 Rule that allows the beneficiaries of the
pension trust to be treated as holding shares of the Company in proportion to
their actuarial interests in the pension trust, and (iii) either (A) one pension
trust owns more than 25% of the value of the Company's shares of capital stock
or (B) a group of pension trusts individually holding more than 10% of the value
of the Company's shares of capital stock collectively owns more than 50% of the
value of the Company's shares of capital stock. Because the Ownership Limitation
prohibits any pension trust from owning more than 9.9% of the number of
outstanding shares of Common Stock or the outstanding shares of Preferred Stock
of any class or series, no pension trust should recognize UBTI as a result of
its investment in the Company.
Taxation of Non-U.S. Shareholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S.
SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT
OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE
COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
84
<PAGE>
Distributions to Non-U.S. Shareholders that are not attributable to
gain from sales or exchanges by the Company of U.S. real property interests and
are not designated by the Company as capital gains dividends or retained capital
gains will be treated as dividends of ordinary income to the extent that they
are made out of current or accumulated earnings and profits of the Company. Such
distributions ordinarily will be subject to a withholding tax equal to 30% of
the gross amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in shares of Common
Stock is treated as effectively connected with the Non-U.S. Shareholder's
conduct of a U.S. trade or business, the Non-U.S. Shareholder generally will be
subject to federal income tax at graduated rates, in the same manner as U.S.
shareholders are taxed with respect to such distributions (and also may be
subject to the 30% branch profits tax in the case of a Non-U.S. Shareholder that
is a foreign corporation). The Company expects to withhold U.S. income tax at
the rate of 30% on the gross amount of any such distributions made to a Non-U.S.
Shareholder unless (i) a lower treaty rate applies and any required form
evidencing eligibility for that reduced rate is filed with the Company or (ii)
the Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming that
the distribution is effectively connected income. The Service has issued final
regulations. Those regulations are effective for distributions made after
December 31, 1998 that modify the manner in which the Company complies with the
withholding requirements.
Distributions in excess of current and accumulated earnings and profits
of the Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's shares of
Common Stock, but rather will reduce the adjusted basis of such shares. To the
extent that distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a Non-U.S. Shareholder's shares of Common
Stock, such distributions will give rise to tax liability if the Non-U.S.
Shareholder would otherwise be subject to tax on any gain from the sale or
disposition of his shares of Common Stock, as described below. Because it
generally cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate as a dividend. However, amounts so withheld are
refundable to the extent it is determined subsequently that such distribution
was, in fact, in excess of the current and accumulated earnings and profits of
the Company. The Company is required to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution, to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
will be subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of U.S.
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S.
real property interests are taxed to a Non-U.S. Shareholder as if such gain were
effectively connected with a U.S. business. Non-U.S. Shareholders thus would be
taxed at the normal capital gain rates applicable to U.S. shareholders (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder not entitled to treaty relief or exemption. The Company is required
to withhold 35% of any distribution that is designated by the Company as a
capital gains dividend. The amount withheld is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his shares of
Common Stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. However, because the shares of
Common Stock are publicly traded, no assurance can be given that the Company is
or will continue to be a "domestically controlled REIT." A Non-U.S. Shareholder
that owned, actually or constructively, 5% or less of the Common Stock at all
times during a specified testing period will not be subject to tax under FIRPTA
if the Common Stock is "regularly traded" on an established securities market.
Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if (i) investment in the shares of Common Stock is effectively
connected with the Non-U.S. Shareholder's U.S. trade or business, in which case
the Non-U.S. Shareholder will be subject to the same treatment as U.S.
shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and certain other conditions apply, in which
case the nonresident alien individual
85
<PAGE>
will be subject to a 30% tax on the individual's capital gains. If the gain on
the sale of the shares of Common Stock were to be subject to taxation under
FIRPTA, the Non-U.S. Shareholder will be subject to the same treatment as U.S.
shareholders with respect to such gain (subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations).
Proposed Tax Legislation
On February 2, 1998, President Clinton released his budget proposal for
fiscal year 1999 (the "Proposal"). Two provisions contained in the Proposal
could affect the Company if enacted in final form. First, the Proposal would
prohibit a REIT from owning, directly or indirectly, more than 10% of the voting
power or value of all classes of a C corporation's stock (other than the stock
of a qualified REIT subsidiary). Currently, a REIT may own no more than 10% of
the voting stock of a C corporation (other than a qualified REIT subsidiary),
but its ownership of the nonvoting stock of a C corporation is not limited
(other than by the rule that the value of a REIT's combined equity and debt
interest in a C corporation may not exceed 5% of the value of a REIT's total
assets). That provision is proposed to be effective with respect to stock in a C
corporation acquired by a REIT on or after the date of "first committee action"
(i.e., first action by the House Ways and Means with respect to the provision)
("First Committee Action"). A REIT that owns stock in a C corporation in excess
of the new ownership limit prior to First Committee Action would be
"grandfathered," but only to the extent that the C corporation does not engage
in a new trade or business or acquire substantial new assets on or after the
date of First Committee Action. If enacted as presently written, that provision
would severely limit the use by a REIT of taxable subsidiaries to conduct
businesses the income from which would be nonqualifying income if received by
the REIT. Currently, the Company has no such taxable subsidiaries. Second, the
Proposal would require recognition of any built-in gain associated with the
assets of a "large" C corporation (i.e., a C corporation whose stock has a fair
market value of more than $5 million) upon its conversion to REIT status or
merger into a REIT. That provision is proposed to be effective for conversions
to REIT status effective for taxable years beginning after January 1, 1999 and
mergers of C corporations into REITs that occur after December 31, 1998. The
Company currently believes that the Proposal, if enacted in final form, would
not have a material adverse effect on the Company's business or operations, as
currently conducted.
Other Tax Consequences
The Company, the Partnership or the Company's shareholders may be
subject to state or local taxation in various state or local jurisdictions,
including those in which it or they own property, transact business, or reside.
The state and local tax treatment of the Company and its shareholders may not
conform to the federal income tax consequences discussed above. CONSEQUENTLY,
PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN THE COMPANY.
Tax Aspects of the Partnership and the Subsidiary Partnership
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in the
Partnership and the Subsidiary Partnership (each, a "Hotel Partnership"). The
discussion does not cover state or local tax laws or any federal tax laws other
than income tax laws.
Classification as a Partnership
The Company will be entitled to include in its income its distributive
share of each Hotel Partnership's income and to deduct its distributive share of
each Hotel Partnership's losses only if each Hotel Partnership is classified for
federal income tax purposes as a partnership rather than as a corporation or an
association taxable as a corporation. An entity will be classified as a
partnership rather than as a corporation for federal income tax purposes if the
entity (i) is treated as a partnership under Treasury regulations, effective
January 1, 1997, relating to entity classification (the "Check-the-Box
Regulations") and (ii) is not a "publicly traded" partnership. In general, under
the Check-the-Box Regulations, an unincorporated entity with at least two
members may elect to be classified
86
<PAGE>
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 will be respected for all
periods prior to January 1, 1997 if (i) the entity had a reasonable basis for
its claimed classification, (ii) the entity and all members of the entity
recognized the federal tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and (iii) neither
the entity nor any of its members was notified in writing by a taxing authority
on or before May 8, 1996 that the classification of the entity was under
examination. Each Hotel Partnership in existence on January 1, 1997 reasonably
claimed partnership classification under the Treasury Regulations relating to
entity classification in effect prior to January 1, 1997, and such
classification should be respected for federal income tax purposes. In addition,
no Hotel Partnership was notified by a taxing authority on or before May 8, 1996
that its classification was under examination. The Hotel Partnerships intend to
continue to be classified as partnerships and the Company has represented that
no Hotel Partnership will elect to be treated as an association taxable as a
corporation for federal income tax purposes under the Check-the-Box Regulations.
A publicly traded partnership is a partnership whose interests are
traded on an established securities market or are readily tradable on a
secondary market (or the substantial equivalent thereof). A publicly traded
partnership will be treated as a corporation for federal income tax purposes
unless at least 90% of such partnership's gross income for a taxable year
consists of "qualifying income" under section 7704(d) of the Code, which
generally includes any income that is qualifying income for purposes of the 95%
gross income test applicable to REITs (the "90% Passive-Type Income Exception").
See "-- Requirements for Qualification--Income Tests." The U.S. Treasury
Department has issued regulations effective for taxable years beginning after
December 31, 1995 (the "PTP Regulations") that provide limited safe harbors from
the definition of a publicly traded partnership. Pursuant to one of those safe
harbors (the "Private Placement Exclusion"), interests in a partnership will not
be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all interests in the partnership were issued in a
transaction (or transactions) that was not required to be registered under the
Securities Act of 1933, as amended, and (ii) the partnership does not have more
than 100 partners at any time during the partnership's taxable year. In
determining the number of partners in a partnership, a person owning an interest
in a flow-through entity (i.e., a partnership, grantor trust, or S corporation)
that owns an interest in the partnership is treated as a partner in such
partnership only if (a) substantially all of the value of the owner's interest
in the flow-through entity is attributable to the flow-through entity's interest
(direct or indirect) in the partnership and (b) a principal purpose of the use
of the flow-through entity is to permit the partnership to satisfy the
100-partner limitation. Each Hotel Partnership qualifies for the Private
Placement Exclusion. If a Hotel Partnership is considered to be a publicly
traded partnership under the PTP Regulations because it is deemed to have more
than 100 partners, such Hotel Partnership should not be treated as a corporation
because it should be eligible for the 90% Passive-Type Income Exception.
Each Hotel Partnership has not requested, and does not intend to
request, a ruling from the Service that it will be classified as a partnership
for federal income tax purposes. Instead, Hunton & Williams is of the opinion
that, based on the provisions of the partnership agreement of each Hotel
Partnership, certain factual assumptions, and certain representations described
in the opinion, each Hotel Partnership will be treated for federal income tax
purposes as a partnership and not as a corporation or an association taxable as
a corporation or as a publicly traded partnership. Unlike a tax ruling, an
opinion of counsel is not binding upon the Service, and no assurance can be
given that the Service will not challenge the status of each Hotel Partnership
as a partnership for federal income tax purposes. If such challenge were
sustained by a court, each Hotel Partnership would be treated as a corporation
for federal income tax purposes, as described below. The opinion of Hunton &
Williams is based on existing law, which is to a great extent the result of
administrative and judicial interpretation. No assurance can be given that
administrative or judicial changes would not modify the conclusions expressed in
the opinion.
If for any reason either Hotel Partnership were taxable as a
corporation, rather than as a partnership, for federal income tax purposes, the
Company would not be able to qualify as a REIT. See "Federal Income Tax
Considerations - Requirements for Qualification - Income Tests" and "-
Requirements for Qualification - Asset Tests." In addition, any change in either
Hotel Partnership's status for tax purposes might be treated as a taxable event,
in which case the Company might incur a tax liability without any related cash
distribution. See "Federal Income Tax Considerations - Requirements for
Qualification - Distribution Requirements." Further, items of income and
deduction of such Hotel Partnership would not pass through to its partners, and
its partners would be
87
<PAGE>
treated as shareholders for tax purposes. Consequently, such Hotel Partnership
would be required to pay income tax at corporate tax rates on its net income,
and distributions to its partners would constitute dividends that would not be
deductible in computing such Hotel Partnership's taxable income.
Income Taxation of Each Hotel Partnership and its Partners
Partners, Not the Hotel 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 Hotel Partnership's
income, gains, losses, deductions, and credits for any taxable year of such
Hotel Partnership ending within or with the taxable year of the Company, without
regard to whether the Company has received or will receive any distribution from
such Hotel Partnership.
Partnership Allocations. Although a partnership agreement generally
will determine the allocation of income and losses among partners, such
allocations will be disregarded for tax purposes under Section 704(b) of the
Code if they do not comply with the provisions of Section 704(b) of the Code and
the Treasury Regulations promulgated thereunder. If an allocation is not
recognized for federal income tax purposes, the item subject to the allocation
will be reallocated in accordance with the partners' interests in the
partnership, which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the partners with
respect to such item. Each Hotel Partnership's allocations of taxable income,
gain and loss are intended to comply with the requirements of Section 704(b) of
the Code and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The U.S. Department of Treasury has
issued regulations requiring partnerships to use a "reasonable method" for
allocating items affected by Section 704(c) of the Code and outlining several
reasonable allocation methods. The application of Section 704(c) to the
Partnership is not entirely clear, however, and may be affected by Treasury
Regulations promulgated in the future.
Under the Partnership Agreement, depreciation or amortization
deductions of the Partnership generally will be allocated among the partners in
accordance with their respective interests in the Partnership, except to the
extent that the Partnership is required under Code Section 704(c) to use a
method for allocating tax depreciation deductions attributable to the Hotels or
other contributed properties that results in the Company receiving a
disproportionately large share of such deductions. In addition, gain on the sale
of an Hotel will be specially allocated to the Limited Partners to the extent of
any "built-in" gain with respect to such Hotel for federal income tax purposes.
The Partnership generally has elected to use the "traditional method" for
allocating items of income, gain, and expense as required by Section 704(c) of
the Code with respect to Hotels that it acquires in exchange for Units.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally is equal to (i) the amount of
cash and the basis of any other property contributed to the Partnership by the
Company, (ii) increased by (A) its allocable share of the Partnership's income
and (B) its allocable share of indebtedness of the Partnership, and (iii)
reduced, but not below zero, by (A) the Company's allocable share of the
Partnership's loss and (B) the amount of cash distributed to the Company, and by
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Partnership.
If the allocation of the Company's distributive share of the
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Partnership below zero, the recognition of such loss
will be deferred until such time as the recognition of such loss would not
reduce the Company's adjusted tax basis below zero. To the extent that the
Partnership's distributions, or any decrease in the Company's share of the
indebtedness of the Partnership (such decrease being considered a constructive
cash distribution to the partners), would reduce the Company's adjusted tax
basis below zero, such distributions (including such constructive distributions)
will
88
<PAGE>
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
the long-term capital gain holding period (currently one year), the
distributions and constructive distributions will constitute long-term capital
gain.
Depreciation Deductions Available to the Partnership. To the extent
that a Hotel Partnership has acquired, or will acquire, equity interests in the
Hotels for cash, the Hotel Partnership's initial basis in the Hotels for federal
income tax purposes generally equals or will equal the purchase price paid by
the Hotel Partnership. The Hotel Partnerships generally depreciate such
depreciable hotel property for federal income tax purposes under either MACRS or
ADS. The Hotel Partnerships generally use MACRS for furnishings and equipment.
Under MACRS, the Hotel Partnerships generally depreciate such furnishings and
equipment over a seven-year recovery period using a 200% declining balance
method and a half-year convention. If, however, a Hotel Partnership places more
than 40% of its furnishings and equipment in service during the last three
months of a taxable year, a mid-quarter depreciation convention must be used for
the furnishings and equipment placed in service during that year. The Hotel
Partnerships generally use ADS for buildings and improvements. Under ADS, the
Hotel Partnerships generally depreciate such buildings and improvements over a
40-year recovery period using a straight line method and a mid-month convention.
However, to the extent that a Hotel Partnership has acquired, or will acquire,
equity interests in the Hotels in exchange for Units, the Hotel Partnership's
initial basis in each Hotel for federal income tax purposes should be the same
as the transferor's basis in such Hotel on the date of acquisition. Although the
law is not entirely clear, the Hotel Partnerships generally depreciate such
depreciable hotel property for federal income tax purposes over the same
remaining useful lives and using the same methods used by the transferors. A
Hotel Partnership's tax depreciation deductions will be allocated among its
partners in accordance with their respective interests in the partnership
(except to the extent that the Hotel Partnership is required under Code Section
704(c) to use a method for allocating depreciation deductions attributable to
the Hotels or other contributed properties that results in the Company receiving
a disproportionately large share of such deductions).
Sale of a Hotel Partnership's Property
Generally, any gain realized by a Hotel Partnership on the sale of
property by the Hotel Partnership held for more than one year will be long-term
capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture. Any gain recognized by a Hotel
Partnership on the disposition of the Hotels will be allocated first to the
Limited Partners under Section 704(c) of the Code to the extent of their
"built-in gain" on those hotels for federal income tax purposes. The Limited
Partners' "built-in gain" on the Hotels sold will equal the excess of the
Limited Partners' proportionate share of the book value of the Hotels over the
Limited Partners' tax basis allocable to the Hotels at the time of the sale. Any
remaining gain recognized by the Hotel Partnership on the disposition of the
Hotels will be allocated among the partners in accordance with their respective
percentage interests in the Hotel Partnership. The Board of Directors has
adopted a policy that any decision to sell a Hotel will be made by a majority of
the Directors, including a majority of the Independent Directors. See "Risk
Factors Conflicts of Interest - Conflicts Relating to Sales or Refinancings of
Hotels."
The Company's share of any gain realized by a Hotel 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. See "Federal Income Tax Considerations -
Requirements for Qualification - Income Tests." Such prohibited transaction
income also may have an adverse effect upon the Company's ability to satisfy the
income tests for REIT status. See "Federal Income Tax Considerations -
Requirements For Qualification - Income Tests" above. The Company, however, does
not presently intend to acquire or hold or allow a Hotel 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 the Hotel
Partnerships' trade or business.
89
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to the Underwriter, and the Underwriter has agreed to
take and pay for, all 1,000,000 Common Shares offered hereby, if any are taken.
The Underwriter proposes to offer the Common Shares in part directly to
the public at the Offering Price set forth on the cover page of this Prospectus
and in part to certain securities dealers at such prices less a concession of
$_____ per share. After the Common Stock is released for sale to the public, the
Offering Price and other selling terms may from time to time be varied by the
Underwriter.
The Company has granted the Underwriter an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 150,000
additional shares of Common Stock solely to cover over-allotments, if any.
In connection with the IPO, the Company also granted the Underwriter a
right of first refusal, expiring November 29, 1999, to act as underwriter or
sales agent with respect to any future offering by the Company or the
Partnership of any debt or equity securities, or the placement of any long-term
debt by the Company or the Partnership. In connection with this Offering, the
Underwriter will permanently waive this right of first refusal with respect to
any future offerings by the Company.
Mr. Whittemore, a Senior Vice President of the Underwriter, serves as a
Director of the Company and, as of March 1, 1998, owned directly and indirectly
92,952 shares of Common Stock. Mr. Whittemore received $12,500 in 1997 for
serving as a Director of the Company, which he used to purchase Common Stock in
open market transactions. See "Certain Relationships and Transactions --
Other."
Simultaneously with the closing of the Offering, the Company will enter
into a Capital Consulting Agreement with Charles A. Mills, III, the Senior Vice
President, Chairman and largest shareholder of the Underwriter. Pursuant to such
Agreement, Mr. Mills will provide the Company with advice with respect to future
equity offerings and access to capital markets generally. Under the terms of the
Capital Consulting Agreement, which has a one year term, Mr. Mills will receive
$20,000 plus .25% of the net proceeds of any future public equity offerings over
the next twelve months.
The Company and the Partnership have agreed to indemnify the
Underwriter or to contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
The Underwriter may engage in passive market making transactions in the
Common Stock in accordance with Rule 103 of Regulation M promulgated by the
Securities and Exchange Commission. In general, a passive market maker may not
bid for, or purchase, the Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed the greater of 30% of its average daily trading
volume in the Common Stock during a specified two month prior period, or 200
shares. A passive market maker must identify passive market making bids as such
on the Nasdaq electronic inter-dealer reporting system. Passive market making
may stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriter is not required to engage in passive market
making and may end passive market making activities at any time.
In order to facilitate the offering of the Common Stock, the
Underwriter may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Stock. Specifically, the Underwriter may
overallot in connection with the offering, creating a short position in the
Common Stock for its own account. In addition, to cover overallotments or to
stabilize the price of the Common Stock, the Underwriters may bid for, and
purchase, shares of Common Stock in the open market. Any of these activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriter is not required to engage in these activities,
and may end any of these activities at any time.
90
<PAGE>
The Underwriter does not intend to sell the Common Stock offered hereby
to any accounts over which it is exercising discretionary authority.
The Company's Directors will each agree, subject to certain limited
exceptions, not to offer, sell, contract to sell or otherwise dispose of any
Common Stock (or any securities convertible into, or exercisable or exchangeable
for shares in the Company) for a period of 90 days after the date of this
Prospectus, without the prior written consent of the Underwriter.
The Common Stock trades on The Nasdaq National Market under the symbol
"HUMP."
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1997 and for each of the years in the three year period ended December
31, 1997 and the financial statement schedule of the Company as of December 31,
1997 included in this Prospectus; the financial statements of the Lessee as of
December 31, 1996 and 1997 and for each of the years in the three year period
ended December 31, 1997 included in this Prospectus; the financial statements of
the Gateway Acquisition Hotel as of and for the year ended December 31, 1996;
and the combined financial statements as of and for the year ended December 31,
1996 for the H&W Acquisition Hotels, the BCL Acquisition Hotel, and the HERSHA
Acquisition Hotels included in this Prospectus, have been audited by Reznick
Fedder & Silverman, independent public accountants, as set forth in their
reports thereon included elsewhere herein and in the Registration Statement.
Such consolidated financial statements, financial statements, and combined
financial statements, are included in reliance upon such reports given on their
authority as experts in accounting and auditing.
REPORTS TO SHAREHOLDERS
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three quarters
of each fiscal year.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon
for the Company by Hunton & Williams. In addition, the description of federal
income tax consequences contained in the section of the Prospectus entitled
"Federal Income Tax Considerations" is based on the opinion of Hunton &
Williams. Certain legal matters related to this Offering will be passed upon for
the Underwriter by Willcox & Savage, P.C. Hunton & Williams will rely on
Gallagher, Evelius & Jones, LLP, Baltimore, Maryland as to certain matters of
Maryland law.
91
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus.
"ADA" means the Americans with Disabilities Act of 1990.
"Additional Charges" means certain amounts payable under the Percentage
Leases other than Rent, including interest on any late payments or charges.
"Additional Reserve Fund" means the additional capital reserve
set-aside, equal to 2% of room revenue, to be used at the Hotels to enhance
their competitive position.
"ADR" means average daily room rate.
"ADS" means the alternative depreciation system of depreciation.
"Affiliate" means (i) any person directly or indirectly owning,
controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person, (ii) any person ten percent
or more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held, with power to vote, by such other person, (iii) any person
directly or indirectly controlling, controlled by, or under common control with
such other person, (iv) any executive officer, director, trustee or general
partner of such other person, and (v) any legal entity for which such person
acts as an executive officer, director, trustee or general partner. The term
"person" means and includes any natural person, corporation, partnership,
association, limited liability company or any other legal entity. An indirect
relationship shall include circumstances in which a person's spouse, children,
parents, siblings or mothers-, fathers-, sisters- or brothers-in-law is or has
been associated with a person.
"Affiliated Transaction" means any material acquisition transaction
between a Virginia corporation having more than 300 holders of record and any
Interested Shareholder.
"Articles of Incorporation" means the Articles of Incorporation of the
Company.
"Base Rent" means the fixed obligation of the Lessee to pay a sum
certain in monthly Rent under each of the Percentage Leases.
"Beneficiary" means the beneficiary of the Trust.
"Best Western" means Best Western International, Inc.
"Board of Directors" means the Board of Directors of the Company.
"Bylaws" means the Bylaws of the Company.
"Capital Reserves Lease Amendment" means each amendment to a Lease that
provides for additional rent payments to the Company in the event that a Hotel
receives funds from the Additional Reserve Fund.
"Cash Available for Distribution to Shareholders" means net income, or
loss, plus depreciation and amortization and minority interest, minus capital
expenditures or reserves therefor and principal payments on indebtedness.
"Choice Hotels" means Choice Hotels International, Inc.
"Closing" means the closing of the Offering.
92
<PAGE>
"Closing Price" means on any date, the last quoted price as reported by
The Nasdaq National Market.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange
Commission.
"Common Shares" means 1,000,000 shares of Common Stock to be issued in
connection with the Offering.
"Common Shareholders" means the holders of shares of Common Stock.
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
"Company" means Humphrey Hospitality Trust, Inc., a Virginia
corporation.
"Company Expenses" means all administrative costs and expenses of the
Company.
"Control Share Acquisitions" means transactions causing the voting
strength of any person acquiring beneficial ownership of shares of a public
corporation in Virginia to meet or exceed certain threshold percentages (20%,
331/3% or 50%) of the total votes entitled to be cast for the election of
directors.
"Credit Facility" means the $25.5 million secured line of credit that
Mercantile Safe Deposit and Trust Company has extended to the Partnership.
"Days Inn" means Days Inn of America, Inc.
"Debt Policy" means the policy adopted by the Board of Directors
limiting the Company's consolidated indebtedness to less than 55% of the
aggregate purchase price paid by the Company for the Hotels in which it has
invested.
"Development Agreement" means the amended development services
agreement, as amended, between the Company and Humphrey Development.
"Directors" means the members of the Company's Board of Directors.
"Disinterested Director" means with respect to a particular Interested
Shareholder, a member of the Company's Board of Directors who was (i) a Director
on the date on which an Interested Shareholder became an Interested Shareholder
and (ii) recommended for election by, or was elected to fill a vacancy and
received the affirmative vote of, a majority of the Disinterested Directors then
on the Board.
"Event of Default" means an Event of Default as provided in the
Percentage Leases.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FFE Reserves" means the reserves for furniture, fixtures and capital
expenditures equal to 4% of room revenues per quarter on a cumulative basis that
the Company sets aside for the Lessee to use on the Hotels. Upon completion of
the Offering, the Company will increase its FFE Reserves from 4% to 6% of room
revenue. The additional 2% will be held in the Additional Reserve Fund and will
be used pursuant to the Capital Reserves Lease Amendment.
"Fixed Lease" means the operating lease between the Partnership and the
Lessee pursuant to which the Lessee leases the Comfort Suites-Dover, Delaware
Hotel and any additional hotels developed by the Company in the future from the
Partnership, for a fixed amount of rent.
"Franchise Licenses" means the franchise licenses held by the Lessee
for the Hotels.
93
<PAGE>
"Funds From Operations" represents net income (computed in accordance
with GAAP) excluding gains (or losses) from debt restructuring or sales of
property, plus depreciation and amortization on real estate assets, other than
amortization of loan fees, and after adjustments for unconsolidated partnerships
and joint ventures.
"GAAP" means generally accepted accounting principles.
"General Partner" means Humphrey Hospitality REIT Trust, a Maryland
real estate investment trust, as the sole general partner of the Partnership.
"Hotel Partnership" means either the Partnership or the Subsidiary
Partnership.
"Hotels" means the twenty existing limited service hotels in which the
Company through the Partnership owns interests.
"Humphrey Affiliates" means Mr. Humphrey and his Affiliates.
"Humphrey Associates" means Humphrey Associates, Inc., a Maryland
corporation.
"Humphrey Development" means Humphrey Development, Inc., a Maryland
corporation.
"Humphrey Key Largo" means Humphrey-Key Largo Associates, L.P., a
Maryland limited partnership, which assigned its interest in the purchase
agreement for the Best Western Suites-Key Largo, Florida Hotel to the Company.
"Independent Director" means a Director of the Company who within the
last two years, has not (i) owned an interest in any Humphrey Affiliates, (ii)
been employed by Mr. Humphrey or any Humphrey Affiliates, (iii) been an officer
or director of any Humphrey Affiliates, (iv) performed services for the Company,
(v) been a director for more than three REITs organized by Mr. Humphrey or any
of his Affiliates or (vi) had any material business or professional relationship
with Mr. Humphrey or any of his Affiliates.
"Initial Hotels" means the eight hotels acquired directly or indirectly
by the Partnership in connection with the IPO, which hotels include seven
Comfort Inn hotels and one Rodeway Inn hotel.
"Interested Shareholder" means any holder of more than 10% of any class
of outstanding voting shares of a Virginia corporation having more than 300
shareholders of record.
"Investment Policy" means the policy of the Board of Directors limiting
the Company's investments in hotel properties, including the acquisition of
existing hotels and development of hotels to properties that the Company can
reasonably demonstrate will yield an annual return on its investment in such
property, after deducting insurance, real estate and personal property taxes and
FFE Reserves of 4% of room revenues that is greater than or equal to 12% of the
total purchase price to be paid by the Company for such Property.
"IOC" means the International Operators Council for Choice Hotels.
"IPO" means the initial public offering of Common Stock of the Company,
which closed on November 29, 1994.
"Leases" means Fixed Leases and/or Percentage Leases.
"Lessee" means Humphrey Hospitality Management, Inc., a Maryland
corporation, which leases the Hotels from the Partnership pursuant to the
Leases.
"Limited Partners" means the limited partners of the Partnership.
94
<PAGE>
"LLC" means Farmville Lodging Associates, LLC, a Maryland limited
liability company, which sold the Days Inn-Farmville, Virginia Hotel to the
Company.
"MACRS" means the modified accelerated cost recovery system of
depreciation.
"Market Price" means, on any date, the average of the Closing Price for
the five consecutive Trading Days ending on such date.
"Mercantile" means Mercantile Safe Deposit and Trust Company, as lender
under the Credit Facility.
"NAREIT" means the National Association of Real Estate Investment
Trusts, Inc.
"Net Proceeds" means the proceeds of the Offering to be received by the
Company net of all Offering expenses and fees to the Underwriter.
"Non-Competition Agreement" means the acquisition agreement and
covenant not to compete between Mr. Humphrey, his Affiliates and the Company
pursuant to which Mr. Humphrey and his Affiliates agreed that none of them will
compete with the Company for hotel acquisition, development and management
opportunities within 20 miles of the Hotels or any other hotel acquired by the
Company.
"Offering" means the offering of Common Shares hereby.
"Offering Price" means the offering price of $____ per Common Share
offered hereby.
"Operator" means Humphrey Hotels, Inc., a Maryland corporation, which
operated the Hotels for the Lessee.
"Option Agreement" means the option agreement to be executed by the
Company and Mr. Humphrey and granting the Company certain rights in any hotels
to be developed or acquired by Mr. Humphrey or of any Affiliate of Mr. Humphrey
within the United States.
"Ownership Limitation" means the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of more than 9.9%
of the outstanding Common Shares or any other class of outstanding shares of
capital stock.
"Partnership" means Humphrey Hospitality Limited Partnership, a limited
partnership organized under the laws of the State of Virginia.
"Partnership Agreement" means the partnership agreement of the
Partnership, as amended and restated.
"Percentage Leases" means operating leases between the Lessee and the
Partnership pursuant to which the Lessee leases the Hotels from the Partnership
and any additional existing hotels acquired by the Company after the date of the
Offering.
"Percentage Rents" means Rent based on percentages of revenues payable
by the Lessee pursuant to the Percentage Leases.
"Preferred Stock" means the preferred stock, par value $.01 per share,
of the Company.
"Prohibited Owner" means the record holder of shares of Common Stock or
Preferred Stock that are designated as Shares-in-Trust.
95
<PAGE>
"Redemption Right" means the right of the persons receiving Units to
cause the redemption of Units in exchange for Common Shares on a one-for-one
basis (or for cash at the election of the Company or in certain other
circumstances).
"REIT" means real estate investment trust, as defined in Section 856 of
the Code.
"Remaining Indebtedness" means that certain indebtedness in the
aggregate approximate principal amount of $21 million to remain outstanding
after the application of the Net Proceeds.
"Rent" means the Base Rent and the Percentage Rents and rent payments
under the Fixed Lease.
"REVPAR" means revenue per available room for the applicable period.
"Rule 144" means the rule promulgated under the Securities Act that
permits holders of restricted securities as well as affiliates of an issuer of
the securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Partnerships" means the limited partnerships that sold the
Initial Hotels to the Company in connection with the IPO.
"Service" means the Internal Revenue Service.
"Services Agreement" means the amended and restated services agreement
between the Lessee and the Company.
"Shares-in-Trust" means those shares transferred to the Trust in the
event of any purported transfer of shares of Common Stock or Preferred Stock
that would (i) result in any person owning, directly or indirectly, shares of
Common Stock or Preferred Stock in excess of the Ownership Limitation, (ii)
result in the shares of Common Stock or Preferred Stock being owned by fewer
than 100 persons (determined without reference to any rules of attribution),
(iii) result in the Company being "closely held" within the meaning of Section
856(h) of the Code, or (iv) cause the Company to own, actually or
constructively, 10% of more of the ownership interests in a tenant of the
Company's, the Partnership's or the Subsidiary Partnership's real property,
within the meaning of Section 856(d)(2)(B) of the Code.
"Subsidiary Partnership" means the Solomons Beacon Inn Limited
Partnership, a Maryland limited partnership, which owns the Comfort Inn-Beacon
Marina, Solomons, Maryland Hotel.
"Trading Day" means a day on which the principal national securities
exchange on which the shares of Common Stock or Preferred Stock are listed or
admitted to trading is open for the transaction of business or, if the shares of
Common Stock or Preferred Stock are not listed or admitted to trading on any
national securities exchange, any day other than a Saturday, a Sunday or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Threshold" means the amount of annual room revenues set out in each
Percentage Lease above which the Lessee will pay the Partnership or Subsidiary
Partnership, as applicable, a Percentage Rent relating to annual room revenues
above that Threshold.
"Treasury Regulations" means the final, temporary and proposed tax
regulations promulgated under the Code.
96
<PAGE>
"Trust" means the record holder of Shares-in-Trust.
"Trustee" means the trustee of the Trust.
"Underwriter" means Anderson & Strudwick Incorporated.
"Units" means units of partnership interest in the Partnership.
97
INDEX TO FINANCIAL STATEMENTS
HUMPHREY HOSPITALITY TRUST, INC.
INDEPENDENT AUDITOR'S REPORT F-4
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996
AND 1997 F-5
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 1995, 1996 AND 1997 F-6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR
THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION F-25
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION F-26
HUMPHREY HOSPITALITY MANAGEMENT, INC.
INDEPENDENT AUDITOR'S REPORT F-27
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1997 F-28
STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 1995, 1996 AND 1997 F-29
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 F-30
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1995, 1996 AND 1997 F-31
NOTES TO FINANCIAL STATEMENTS F-32
HERSHA ACQUISITION HOTELS
INDEPENDENT AUDITORS' REPORT F-35
COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 F-36
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996 F-37
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 F-38
NOTES TO COMBINED FINANCIAL STATEMENTS F-39
H&W ACQUISITION HOTELS
INDEPENDENT AUDITORS' REPORT F-41
COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 F-42
COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 F-43
COMBINED STATEMENT OF EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 F-44
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 F-45
NOTES TO COMBINED FINANCIAL STATEMENTS F-46
GATEWAY ACQUISITION HOTEL
INDEPENDENT AUDITORS' REPORT F-50
BALANCE SHEET AS OF DECEMBER 31, 1996 F-51
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 F-52
STATEMENT OF PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 F-53
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 F-54
NOTES TO FINANCIAL STATEMENTS F-55
BCL ACQUISITION HOTEL
INDEPENDENT AUDITORS' REPORT F-57
COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 F-58
COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 F-59
F-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS
COMBINED STATEMENT OF EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 F-60
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 F-61
NOTES TO COMBINED FINANCIAL STATEMENTS F-62
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Humphrey Hospitality Trust, Inc.
We have audited the accompanying consolidated balance sheets of
Humphrey Hospitality Trust, Inc. and Subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997, and the financial statement schedule as of December 31,1997. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Humphrey
Hospitality Trust, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. The financial statement schedule referred to above, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
As described in Notes 1 and 6 to the consolidated financial statements,
the Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share, in 1997.
/s/ REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 4, 1998
F - 4
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
----------------- -----------------
<S> <C>
ASSETS
Investment in hotel properties, net of accumulated depreciation
of $1,134 and $2,636 $ 21,405 $ 50,476
Cash and cash equivalents 7,101 204
Accounts receivable from lessee 1,067 1,857
Reserve for replacements 68 149
Deferred expenses, net of accumulated amortization
of $76 and $207 373 904
Other assets 207 209
-------------- -------------
Total assets $ 30,221 $ 53,799
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgages and bonds payable $ 8,151 $ 31,721
Obligations under capital leases 34 34
Dividends payable 561 559
Accounts payable and accrued expenses 83 263
-------------- -------------
Total liabilities 8,829 32,577
-------------- -------------
MINORITY INTEREST 3,247 3,370
-------------- -------------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value, 25,000,000 shares authorized;
3,481,700 shares issued and outstanding 35 35
Additional paid-in capital 18,202 18,042
Distributions in excess of net earnings (92) (225)
-------------- -------------
18,145 17,852
-------------- -------------
Total liabilities and shareholders' equity $ 30,221 $ 53,799
============== =============
</TABLE>
See notes to consolidated financial statements
F - 5
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------------- ----------------- ----------------
<S> <C>
Revenue
Percentage lease revenue $ 3,750 $ 3,958 $ 7,326
Other revenue 21 47 106
-------------- -------------- -------------
Total revenue 3,771 4,005 7,432
-------------- -------------- -------------
Expenses
Interest 1,011 493 1,764
Real estate and personal property taxes and
property insurance 196 252 476
General and administrative 238 411 537
Depreciation and amortization 680 736 1,633
-------------- -------------- -------------
Total expenses 2,125 1,892 4,410
-------------- -------------- -------------
Income before allocation to minority
interest 1,646 2,113 3,022
Income allocated to minority interest 396 435 465
-------------- -------------- -------------
NET INCOME $ 1,250 $ 1,678 $ 2,557
============== ============== =============
Basic earnings per common share $ .72 $ .70 $ .73
============== ============== =============
Diluted earnings per common share $ .70 $ .70 $ .73
============== ============== =============
</TABLE>
See notes to consolidated financial statements
F - 6
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Common Stock Additional Distributions
--------------------------- Paid-In in excess of
Shares Dollars Capital net earnings Total
------------ ------------ -------------- --------------- -------------
<S> <C>
Balance, December 31, 1994 1,321,800 $ 13 $ 4,338 $ 14 $ 4,365
Redemption of shares (100) - (1) - (1)
Issuance of shares, net of offering expenses 1,010,000 10 6,947 - 6,957
Minority interest in the proceeds from the
common stock offering - - (1,467) - (1,467)
Net increase resulting from the acquisition of
Farmville, LLC - - 448 - 448
Dividends declared - - - (1,262) (1,262)
Net income - - - 1,250 1,250
------------ ---------- ------------ ------------ ----------
Balance, December 31, 1995 2,331,700 23 10,265 2 10,290
Issuance of shares, net of offering
expenses 1,150,000 12 8,633 - 8,645
Minority interest in the proceeds from the
common stock offering - - (696) - (696)
Dividends declared - - - (1,772) (1,772)
Net income - - - 1,678 1,678
------------ ---------- ------------ ------------ ----------
Balance, December 31, 1996 3,481,700 35 18,202 (92) 18,145
Offering expenses - - (7) - (7)
Minority interest issued in connection with the
acquisition of the Best Western Key Largo - - (153) - (153)
Dividends declared - - - (2,690) (2,690)
Net income - - - 2,557 2,557
------------ ---------- ------------ ------------ ----------
Balance, December 31, 1997 3,481,700 35 18,042 $ (225) $ 17,852
============ ========== ============ ============ ==========
</TABLE>
See notes to consolidated financial statements
F - 7
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------------- ---------------- ----------------
<S> <C>
Cash flows from operating activities
Net income $ 1,250 $ 1,678 $ 2,557
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 680 736 1,633
Income allocated to minority interests 396 435 465
Changes in assets and liabilities
Deferred franchise fees paid - - (363)
Increase in accounts receivable (881) (42) (790)
Increase in other assets (43) (64) (2)
(Decrease) increase in accounts payable and accrued expenses (68) 8 180
------------- ------------- -------------
Net cash provided by operating activities 1,334 2,751 3,680
------------- ------------- -------------
Cash flows from investing activities
Investment in hotel properties (212) (2,306) (29,325)
Deposits to reserve for replacements (407) - (776)
Withdrawals from reserve for replacements - 339 695
------------- ------------- -------------
Net cash used in investing activities (619) (1,967) (29,406)
------------- ------------- -------------
Cash flows from financing activities
Proceeds from sale of stock 6,957 8,645 -
Stock issuance costs - - (7)
Proceeds from mortgages and bonds payable 1,283 - -
Principal payments on mortgages and bonds payable (7,930) (3,175) (1,400)
Proceeds from line of credit 600 2,999 23,750
Repayment of line of credit (600) - -
Financing costs paid (221) (53) (299)
Dividends paid (1,172) (2,246) (3,187)
Principal payments on capital leases (16) (22) (28)
Redemption of common stock (1) - -
------------- ------------- -------------
Net cash (used in) provided by financing activities (1,100) 6,148 18,829
------------- ------------- -------------
(DECREASE) INCREASE IN CASH (385) 6,932 (6,897)
Cash and cash equivalents, beginning 554 169 7,101
------------- ------------- -------------
Cash and cash equivalents, ending $ 169 $ 7,101 $ 204
============= ============= =============
</TABLE>
See notes to consolidated financial statements
F - 8
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------------- -------------- ---------------
<S> <C>
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 1,074 $ 495 $ 1,582
============= =========== ==============
</TABLE>
Supplemental disclosures of non-cash investing and financing activities
During 1995, the Partnership acquired the Days Inn Hotel in Farmville,
Virginia, in exchange for units of limited partnership interest to Farmville
Lodging Associates, LLC, which are redeemable for an aggregate of 95,484
common shares with a value of approximately $740 based on the offering price
of $7.75 per common share, and the assumption of approximately $1,231 of
indebtedness. The assets acquired and the liabilities assumed consisted of:
Investment in hotel properties $ 1,800
Deferred expenses 24
Mortgages payable (1,231)
Obligations under capital leases (20)
Accounts payable and accrued expenses (6)
Minority interest (119)
Net increase in additional paid-in capital resulting from
acquisition of Farmville Lodging Associates, LLC (448)
-------
$ -
=======
During 1997, the Partnership issued units of limited partnership interest to
Humphrey-Key Largo Associates, L.P., which are redeemable for an aggregate
of 34,023 common shares, with a value of approximately $370 based on an
average price of $10.875 per share in connection with the acquisition of the
Best Western Suites Hotel in Key Largo, Florida. The recording of the
increase in minority interest resulted in a $153 reduction in additional
paid in capital.
During 1997, the Company acquired the Culpeper Comfort Inn Hotel for $1,900
of which $1,220 represented debt assumed.
During 1997, the Company acquired equipment subject to capital leases
totalling $28.
Dividends declared on December 1, 1996, and on November 28, 1997 and
December 31, 1997, are payable as of December 31, 1996 and 1997, in the
amounts of $561 and $559, respectively. Dividends declared during 1996 and
1997 included $474 and $495, respectively, to the minority interests which
have been deducted from the minority interest on the balance sheets as of
December 31, 1996 and 1997, respectively.
See notes to consolidated financial statements
F - 9
<PAGE>
Note 1. Organization and Summary of Significant Accounting Policies
Humphrey Hospitality Trust, Inc. was incorporated on August 23, 1994.
The Company is a self-administered real estate investment trust (REIT) for
Federal income tax purposes. Humphrey Hospitality Trust, Inc., through its
wholly-owned subsidiary Humphrey Hospitality REIT Trust (collectively, the
Company) owns a controlling partnership interest in Humphrey Hospitality Limited
Partnership (the Partnership) and through the Partnership owns interests in
twenty existing limited - service Hotels (including ten hotel properties
acquired during 1997) as of December 31, 1997. The Partnership owns a 99%
general partnership interest and the Company owns a 1% limited partnership
interest in Solomons Beacon Inn Limited Partnership (the Subsidiary
Partnership). As of December 31, 1997, the Company owns a 84.12% interest in the
Partnership. The Company began operations on November 29, 1994.
Since inception, the Partnership has leased all of its hotel facilities
to Humphrey Hospitality Management, Inc. (the Lessee), a corporation wholly
owned by James I. Humphrey, Jr., the President and Chairman of the Board of the
Company. The Lessee operates and leases the hotel properties pursuant to
separate percentage and fixed lease agreements (the Percentage Leases and the
Fixed Lease) which provide for both fixed base rents and percentage rents based
on the revenues of the hotels.
As of December 31, 1997, James I. Humphrey, Jr., Humphrey Associates,
Inc., Farmville Lodging Associates, LLC and Humphrey-Key Largo Associates, L.P.
(collectively, the Humphrey Affiliates) own a combined total of 657,373 units of
limited partnership interests, representing a 15.88% interest in the
Partnership.
The Company has completed the following public offerings since its
incorporation:
<TABLE>
<CAPTION>
Offering price per Shares sold Net proceeds
Offering Date completed share (in thousands)
- ------------------------- ---------------------- ------------------- -------------- ------------------
<S> <C>
Initial public offering November 29, 1994 $ 6.00 1,321,700 $ 6,950
Second offering July 21, 1995 $ 7.75 1,010,000 $ 6,957
Third offering December 6, 1996 $ 8.25 1,150,000 $ 8,645
</TABLE>
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, the Partnership and the Subsidiary Partnership. All significant
intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
F - 10
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
Investment in Hotel Properties
The hotel properties are recorded at cost. Depreciation is computed
using the straight-line method over estimated useful lives of the assets which
range from 31 to 40 years for buildings and 5 to 12 years for furniture and
equipment. Maintenance and repairs are generally the responsibility of the
Lessee and are charged to the Lessee's operations as incurred; major
replacements, renewals and improvements are capitalized. Upon disposition, both
the asset and accumulated depreciation accounts are relieved and the related
gain or loss is credited or charged to the statement of income.
The Company reviews the carrying value of each hotel property in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121 to
determine if circumstances exist indicating an impairment in the carrying value
of the investment in the hotel property or that depreciation periods should be
modified. If facts or circumstances support the possibility of impairment, the
Company will prepare a projection of the undiscounted future cash flows of the
specific hotel property and determine if the investment in the hotel property is
recoverable based on the undiscounted future cash flows. If impairment is
indicated, an adjustment will be made to the carrying value of the hotel
property based on the discounted future cash flows. The Company does not believe
that there are any current facts or circumstances indicating impairment of any
of its investment in hotel properties.
Cash and Cash Equivalents
Cash and cash equivalents includes cash, a repurchase agreement, a
certificate of deposit, and an investment in commercial paper, all with original
maturities of three months or less when acquired, carried at cost which
approximates fair value.
Deferred Expenses
Deferred expenses are recorded at cost and consist of the following at
December 31, 1996 and 1997:
1996 1997
---------------- --------------
(in thousands)
Initial franchise fees $ - $ 378
Computer software costs - 27
Loan costs 449 706
------------- -----------
449 1,111
Less accumulated amortization 76 207
------------- -----------
$ 373 $ 904
============= ===========
F - 11
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
Amortization of loan costs is computed using the straight-line method
over the terms of the loan agreements. The unamortized balance of loan costs
associated with retired debt is expensed upon repayment of the related debt.
Amortization of initial franchise fees is computed using the straight-line
method over the remaining lives of the franchise agreements, which range up to
20 years. Amortization of computer software costs is computed using the
straight-line method over three years.
Revenue Recognition
Lease income is recognized when earned from the Lessee under the lease
agreements from the date of acquisition of each hotel property (see Note 7).
Earnings Per Common Share
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share. Basic and diluted earnings per share
have been calculated in accordance therewith for 1995, 1996 and 1997 (see Note
6).
Distributions
The Company intends to pay regular monthly dividends which are
dependent upon the receipt of distributions from the Partnership.
Minority Interest
Minority interest in the Partnership represents the limited partners'
proportionate share of the equity of the Partnership. The limited partnership
interests are owned by the Humphrey Affiliates as of December 31, 1997. Income
is allocated to minority interest based on weighted average percentage ownership
throughout the year.
Income Taxes
The Company intends to continue to qualify as a REIT under Sections 856
and 860 of the Internal Revenue Code effective with its taxable period ended
December 31, 1994. Accordingly, no provision for Federal income taxes has been
reflected in the financial statements.
Earnings and profits, which will determine the taxability of dividends
to shareholders, will differ from net income reported for financial reporting
purposes due to the differences for Federal tax purposes in the estimated useful
lives and methods used to compute depreciation. Distributions made in 1996 are
considered to be 5.7% return of capital for Federal income tax purposes. During
1997, none of the distributions are considered to be return of capital.
F - 12
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
Concentration of Credit Risk
The Company maintains its deposits, including its repurchase agreements
and investment in commercial paper, with three major banks. At December 31,
1997, the balances reported by the banks, exceeded the federal depository
insurance limit, however, management believes that no significant concentration
of credit risk exists with respect to these uninsured cash balances.
Note 2. Investment in Hotel Properties
Investment in hotel properties consist of the following at December 31,
1996 and 1997:
1996 1997
-------------- --------------
(in thousands)
-----------------------------
Land $ 3,048 $ 4,455
Buildings and improvements 16,140 43,595
Furniture and equipment 1,631 4,937
Leased equipment 100 125
Construction-in-progress 1,620 -
----------- -----------
22,539 53,112
Less accumulated depreciation 1,134 2,636
----------- -----------
$ 21,405 $ 50,476
=========== ===========
Depreciation expense was $486, $610 and $1,502 for the years ended
December 31, 1995, 1996 and 1997, respectively.
The twenty hotel properties owned at December 31, 1997 (including the
10 hotels acquired during 1997) are all limited service hotels located in nine
states in the eastern United States and are subject to leases as described in
Note 7. During 1997, the Company also completed the development of a Comfort
Suites Hotel located in Dover, Delaware (the Dover Hotel) at a cost of
approximately $2,688 (see Note 7).
F - 13
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 2. Investment in Hotel Properties (Continued)
During 1997, the Company acquired the following hotels for the
approximate amounts indicated:
Contract Purchase
Price
Location Number of hotels (in thousands)
- ---------------------- ------------------ --------------------
Florida 1 $ 2,590
Kentucky 2 5,341
North Carolina 1 1,975
Pennsylvania 5 16,400
Virginia 1 1,900
------------
$ 28,206
============
The above acquisitions were accounted for as purchases, and the results
of such acquisitions are included in the Company's consolidated statements of
income from the date of acquisition. The hotel property in Key Largo, Florida,
was acquired pursuant to an assignment of a purchase contract from Humphrey-Key
Largo Associates, L.P. (the Affiliate), a partnership substantially owned by Mr.
Humphrey. Pursuant to the assignment of the contract, the Affiliate received as
compensation 34,023 units of limited partnership interest in the Partnership,
valued at $370 based on an average price of $10.875 per share of common stock
for the ten trading days prior to September 2, 1997. The acquisition of the
hotel has been recorded by the Company at its acquisition cost ($2,590) which
excludes the value of the units issued to the Affiliate ($370) and is less than
or equal to net realizable value.
Note 3. Dividends Payable
On December 1, 1996, the Company declared a $.19 dividend on each share
of common stock and on each unit of interest outstanding on December 1, 1996.
The dividend (including the distribution to minority interests) was paid on
January 31, 1997.
On November 28, 1997 and December 31, 1997, the Company declared a
$.0675 dividend on each share of common stock and on each unit of interest
outstanding on November 28, 1997 and December 31, 1997, respectively. The
dividends (including the distributions to minority interest) were paid on
January 9, 1998 and January 30, 1998, respectively.
F - 14
<PAGE>
Note 4. Mortgages and Bonds Payable
Mortgages and bonds payable at December 31, 1996 and 1997, consisted of
the following:
<TABLE>
<CAPTION>
1996 1997
----------------- -----------------
(in thousands)
<S> <C>
Comfort Inn - Morgantown, West Virginia
Bonds payable; see (a) below for repayment terms, interest rates, and maturity;
collateralized by a first mortgage on the hotel facility and equipment with a
net book value of $3,064,725 and $3,133,740 at December 31, 1996 and 1997,
respectively, and secured by a letter of credit issued by Crestar Bank in the
amount of $2,281,104 expiring in April 2000. The outstanding principal and
interest are guaranteed jointly and severally by the
Company and James I. Humphrey, Jr. $ 2,275 $ 2,230
Comfort Inn - Dublin, Virginia
Bonds payable; see (b) below for repayment terms, interest rates, and maturity;
collateralized by a first mortgage on the hotel facility and equipment with a
net book value of $2,920,557
and $2,741,938 at December 31, 1996 and 1997, respectively. 2,375 2,325
Rodeway Inn - Wytheville, Virginia
Bonds payable; see (c) below for repayment terms, interest rates, and maturity;
collateralized by a first mortgage on the hotel facility and equipment with a
net book value of $2,133,880 and $2,071,272 at December 31, 1996 and 1997,
respectively, and secured by a letter of credit issued by Crestar Bank in the
amount of $1,749,188 which expires November 1, 1999. The outstanding principal
and accrued interest are guaranteed jointly
and severally by the Company and James I. Humphrey, Jr. 1,795 1,710
</TABLE>
F - 15
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 4. Mortgage and Bonds Payable (Continued)
<TABLE>
<CAPTION>
1996 1997
----------- -----------
(in thousands)
<S> <C>
Mortgage payable to Mercantile Safe Deposit and Trust Company under the terms of
a $25.5 million line of credit, collateralized by 17 of the hotel properties
(see (d) below). The terms of the line of credit require monthly installments of
interest only at the prime rate plus .25% (8.75% per annum as of December 31,
1997). The outstanding principal balance plus any accrued interest are payable
in full in April 1999, with two one year extensions at the option of the bank.
The mortgage is collateralized by hotel facilities and equipment having a
combined net book value of $6,567,156 and $42,381,185 at December 31, 1996 and
1997, respectively. The first $2 million outstanding on the line is guaranteed
jointly and severally by the Company and James I. Humphrey, Jr. 1,706 25,456
-------------- -------------
$ 8,151 $ 31,721
============== =============
</TABLE>
- --------------
(a) The bonds are Monongalia County, West Virginia, Commercial Development
Variable Rate Demand Refunding Revenue Bonds, Series 1988 issued through
Crestar Bank in the amount of $2,500,000. Interest is accrued at the rate
necessary to remarket the bonds at a price equal to 100% of the
outstanding principal balance. The rate is adjusted weekly and is not to
exceed 11.3636%. At December 31, 1997, the interest rate was 4.15% . In
addition, letter of credit fees and financing fees increase the effective
rate on the bonds. The bonds may be redeemed at the option of the
Partnership in denominations greater than $25,000. Mandatory redemptions
are pursuant to a sinking fund redemption schedule which began on April
1, 1989, in the amount of $15,000 increasing annually until April 1,
2017, when the payment equals $140,000. The Partnership is required to
fund a principal reserve fund monthly equal to one-twelfth of the
mandatory sinking fund redemption. In addition, the Partnership is
required to fund an interest reserve fund. All principal and interest
payments will be automatically deducted by the trustee. Any deficiencies
will be drawn down under the letter of credit.
(b) On October 14, 1992, $2,528,000 of Variable Rate First Mortgage Refunding
Revenue Bonds were issued by the Industrial Development Authority of
Pulaski County, Virginia. Crestar Bank is the trustee. In August 1995,
the bonds were refinanced with approximately $2,460,000 of 1995 First
Mortgage Refunding Revenue Bonds bearing interest at 8% per annum. The
agreement establishes a sinking fund from which principal payments on the
bonds will be made. The bonds mature in varying amounts November 1, 1995
through November 1, 2005.
(c) The original $2,600,000 bond issue financing of 1984 was refunded with
$2,270,000, 1993 Series Industrial Development Revenue Bonds on December
21, 1993. Crestar Bank is the lender and bond
F - 16
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 4. Mortgage and Bonds Payable (Continued)
trustee. Interest is accrued at the rate necessary to remarket
the bonds at a price equal to 100% of the outstanding principal
balance. The rate is adjusted weekly and is not to exceed 15%. At
December 31, 1997, the interest rate was 4.15%. The bonds are
subject to mandatory redemption at a redemption price equal to
the principal amount thereof plus all unpaid accrued interest
thereon, pursuant to the sinking fund installments beginning on
November 1, 1994, in the amount of $65,000 increasing annually
until November 1, 2009, when the payment equals $300,000. The
Partnership is required to fund a principal reserve monthly equal
to one-twelfth of the mandatory sinking fund redemption. In
addition, the Partnership is required to fund an interest reserve
fund. All principal and interest payments will be automatically
deducted by the trustee. Any deficiencies will be drawn under the
letter of credit described above.
(d) As of December 31, 1997, the line of credit is secured by the
Company's hotels located in Solomons, MD; Farmville, VA (2
hotels); Elizabethton, TN; Dahlgren, VA; Princeton, WV; Dover,
DE; Culpeper, VA; New Castle, PA; Harlan, KY; Danville, KY;
Murphy, NC; Chambersburg, PA; Allentown, PA; Gettysburg, PA (2
hotels); and Key Largo, FL.
Aggregate annual principal payments and payments to bond sinking funds
for the five years following December 31, 1997, and thereafter are as follows:
(in thousands)
----------------
December 31, 1998 $ 195
1999 25,661
2000 225
2001 245
2002 265
Thereafter 5,130
------
$31,721
=======
Bond sinking funds and escrows for taxes and insurance in the amounts
of approximately $114 and $198 are included in other assets at December 31, 1996
and 1997, respectively.
Management believes that the carrying amounts of the Company's
mortgages and bonds payable approximate fair value at December 31, 1997, as
there were no significant changes in the market rate of interest between that
date and the dates of the respective mortgages and bonds.
F - 17
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 5. Obligations Under Capital Lease
Certain of the hotel properties lease equipment under noncancellable
capital leases expiring at various intervals through 1999. The leases provide
for bargain purchase options at the end of the respective terms. Future minimum
lease payments under the capital leases, together with the present value of the
net minimum lease payments are as follows:
(in thousands)
---------------
Years ended December 31, 1998 $25
1999 8
2000 6
2001 3
--
42
Less amount representing interest 8
---
Present value of net minimum lease
payments $34
===
F - 18
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 6. Earnings Per Share
The following is a reconciliation of the income (numerator) and
weighted average shares (denominator) used in the calculation of basic earnings
per common share and diluted earnings per common share in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share:
<TABLE>
<CAPTION>
Year ended December 31, 1995 Year ended December 31, 1996
------------------------------------ -----------------------------------------
Income Income
(Numerator) (Numerator)
(In Shares Per Share (In Shares Per Share
thousands) (Denominator) Amount thousands) (Denominator) Amount
----------- -------------- --------- ------------- --------------- ----------
<S> <C>
Basic earnings per share
Income available to common $1,250 1,742,533 $0.72 $1,678 2,410,252 $0.70
==== ====
Effect of diluted securities
Units held by minority interests 396 623,350 435 623,350
------ --------- ------ ---------
Income available to common shareholders
plus assumed conversion $1,646 2,365,883 $0.70 $2,113 3,033,602 $0.70
====== ========= ==== ====== ========= ====
</TABLE>
Year ended December 31, 1997
-------------------------------------
Income
(Numerator)
(In Shares Per Share
thousands) (Denominator) Amount
------------ ------------- ---------
Basic earnings per share
Income available to common $2,557 3,481,700 $0.73
====
Effect of diluted securities
Units held by minority interests 465 657,373
------ ---------
Income available to common shareholders
plus assumed conversion $3,022 4,139,073 $0.73
====== ========= ====
F - 19
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 7. Commitments and Contingencies and Related Party Transactions
Pursuant to the Humphrey Hospitality Limited Partnership Agreement (the
Partnership Agreement), the Humphrey Affiliates have received redemption rights,
which will enable them to cause the Partnership to redeem their interests in the
Partnership in exchange for shares of common stock or for cash at the election
of the Company. The redemption rights may be exercised by the Humphrey
Affiliates, excluding Humphrey - Key Largo Associates, L.P., at any time.
Humphrey - Key Largo Associates, L.P. may redeem its units at any time after
March 3, 1998. At December 31, 1997, the number of shares of common stock
issuable to the Humphrey Affiliates upon exercise of the redemption rights is
657,373. The number of shares issuable upon exercise of the redemption rights
will be adjusted upon the occurrence of stock splits, mergers, consolidations or
similar pro rata share transactions, which otherwise would have the effect of
diluting the ownership interests of the Humphrey Affiliates or the shareholders
of the Company.
The Company acts as the general partner of the Partnership, which acts
as a general partner of the Subsidiary Partnership and as such, is liable for
all recourse debt of the partnerships to the extent not paid by the
partnerships. In the opinion of management, the Company does not anticipate any
losses as a result of its general partner obligations.
The Company has entered into percentage leases relating to nineteen of
its twenty Hotels, and a fixed lease relating to the Dover Hotel, with Humphrey
Hospitality Management, Inc. (the "Lessee"). Each such lease (the Percentage
Leases and the Fixed Lease) has a term of 10 years, with a five year renewal
option at the option of the Lessee. Pursuant to the terms of the Percentage
Leases, the Lessee is required to pay a fixed rent and certain other additional
charges and is entitled to all profits from the operations of the Hotel after
the payment of certain specified operating expenses. The percentage rents are
based on a percentage of gross room revenue and other revenue. Also pursuant to
the terms of the Percentage Leases and the Fixed Lease, the Company is required
to make available to the Lessee an amount equal to 4% (increased to 6% upon
completion of the Offering) of room revenue on a quarterly, cumulative basis for
capital improvements and refurbishments. The Company has future lease
commitments from the Lessee through August 2007. Minimum future rental income
under these noncancelable operating leases at December 31, 1997, is as follows:
Years (in thousands)
---------------- ------------------------
1998 $ 4,082
1999 4,082
2000 4,082
2001 4,082
2002 4,082
Thereafter 13,693
$34,103
The Company earned base rents of $1,609, $1,679 and $3,303 and
percentage rents of $2,141, $2,279 and $4,023 for the years ended December 31,
1995, 1996 and 1997, respectively. As of December 31, 1996 and 1997, $1,067 and
$1,857, respectively, of lease revenue was due from the Lessee.
F - 20
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 7. Commitments and Contingencies and Related Party Transactions
(Continued)
On January 1, 1996, the Company executed an agreement with the Lessee
to provide accounting and securities reporting services for the Company. The
initial terms of the agreement provided for a fixed fee of $80,000 per year. On
October 1, 1996, the Company amended the Agreement reducing the initial annual
fee to $30,000 per year, with an increase of $10,000 per year (prorated from the
time of acquisition) for each hotel added to the Company's portfolio (excluding
the Dover Hotel). Under the terms of the amended agreement, the service fee
cannot exceed $100,000 in any year. As of December 31, 1996 and 1997, $67,503
and $79,388, respectively, has been charged to operations.
During 1996, the Company executed a Development Agreement with Humphrey
Development, Inc., a Humphrey Affiliate, pursuant to which Humphrey Development,
Inc. provided construction supervision services for the Dover Hotel and agreed
to pay any development costs in excess of $2,796 in exchange for a right to
purchase the Dover Hotel from the Company on the sixth anniversary of its
commencement of operations for $2,796. The development costs incurred in
connection with the Dover Hotel totaled approximately $2,794 of which $2,688 was
recorded as investment in hotel properties and $106 as deferred loan costs.
The hotel properties are operated under franchise agreements by the
Lessee that may be terminated by either party on certain anniversary dates
specified in the agreements. The agreements require annual payments for
franchise royalties, reservation and advertising services which are based upon
percentages of gross room revenue.
These fees are paid by the Lessee.
On April 17, 1997, the Company assumed a land lease agreement in
conjunction with the purchase of the Best Western, Harlan, Kentucky. The lease
requires monthly payments of the greater of $2 or 5% of room revenue through
November 2091. On May 23, 1997, the Company assumed a land lease agreement in
conjunction with the purchase of the Comfort Inn, Gettysburg, Pennsylvania. The
lease requires an annual payment of $35 through May 2025. For the year ended
December 31, 1997, land lease expense totalled approximately $52 and is included
in the general and administrative expense line item.
As of December 31, 1997, the future minimum lease payments applicable
to noncancellable land leases are as follows:
(in thousands)
----------------
December 31, 1998 $ 59
1999 59
2000 59
2001 59
2002 59
Thereafter 2,919
Total minimum lease payments $ 3,214
========
F - 21
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
In response to the year 2000 issue, the Company modified its existing
information systems in order to make them year 2000 compliant. The Company
believes that it has made all necessary modifications to its existing systems
and does not expect that additional costs associated with year 2000 compliance,
if any, will be material to the Company's results of operations or financial
position.
Note 8. Capital Stock
The Company's common stock is duly authorized, fully paid and
nonassessable. Subject to preferential rights of any other shares or series of
shares of capital stock, common shareholders are entitled to receive dividends
if and when authorized and declared by the Board of Directors of the Company out
of assets legally available therefor and to share ratably in the assets of the
Company legally available for distribution to its shareholders in the event of
its liquidation, dissolution or winding up after payment of, or adequate
provision for, all known debts and liabilities of the Company. Each outstanding
share of common stock entitles the holder to one vote on all matters submitted
to a vote of shareholders. See Notes 2 and 7 for a discussion of the units
issued during 1997 and the redemption rights of Humphrey Affiliates with respect
to 657,373 units that are redeemable on a one-for-one basis for shares of common
stock at any time. None of the units discussed in Notes 2 and 7 have been
redeemed.
The Board of Directors is authorized to provide for the issuance of ten
million shares of preferred stock in one or more series, to establish the number
of shares in each series and to fix the designation, powers, preferences and
rights of each such series and the qualifications, limitations or restriction
thereof. As of December 31, 1996 and 1997, no preferred stock was issued.
The Board of Directors, excluding the Chairman, unanimously agreed on
September 9, 1997, to utilize their Directors fees to purchase the Company's
Common Stock on the open market effective immediately. Presently, members of the
Board of Directors own approximately 9.5% of the Company's outstanding shares of
stock.
Note 9. Pro Forma Financial Information (Unaudited)
Due to the impact of the acquisitions discussed in Notes 1 and 2,
historical operations may not be indicative of future results of operations and
net income per common share.
F - 22
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
The following unaudited Pro Forma Consolidated Statements of Income for
the years ended December 31, 1996 and 1997, are presented as if the acquisition
of all 20 hotels owned at December 31, 1997 had occurred on January 1, 1996, and
all of the hotels had been leased to the Lessee pursuant to the Percentage and
Fixed Leases Agreements. The Pro Forma Consolidated Statements of Income do not
purport to present what actual results of operations would have been if the
acquisitions had occurred and the leases executed on such date or to project
results for any future period.
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
--------------------------------
(in thousands)
--------------------------------
1996 1997
-------------- ----------
<S> <C>
Revenue
Lease revenue $ 8,298 $ 8,827
Other revenue 47 106
----------- ----------
Total revenue 8,345 8,933
----------- ----------
Expense
Real estate and personal property taxes and insurance 554 592
Depreciation and amortization 1,735 2,040
Interest expense 2,549 2,582
General and administrative 521 568
Minority interest 474 504
----------- ----------
Total expense 5,833 6,286
----------- ----------
Net income applicable to common shareholders $ 2,512 $ 2,647
=========== ==========
</TABLE>
Note 10. Subsequent Events
On February 3, 1998, the Company exercised its option to pay off
various capital leases for a total of $39.
F - 23
<PAGE>
Humphrey Hospitality Trust, Inc.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Gross Amounts at which
Costs Capitalized Carried at
Initial Costs Subsequent to Acquisition Close of Period
--------------------- ------------------------- -----------------------
Encum- Buildings and Buildings and Buildings and
Description brances Land Improvements Land Improvements Land Improvements Total
- ------------------------ ------------ ------ ------------- --------- ------------ ----- ------------- -----------
<S> <C>
Comfort Inn Hotel
Morgantown,
West Virginia $2,230 $277 $2,574 - $120 $277 $2,694 $2,971
Comfort Inn Hotel
Dublin, Virginia 2,335 118 2,611 - 44 118 2,655 2,773
Best Western Hotel
Wytheville, Virginia 1,710 137 1,737 - 73 137 1,810 1,947
Solomons Beacon Inn
Solomons Island, (e) 1,354 2,012 - 155 1,354 2,167 3,521
Maryland
Comfort Inn Hotel
Elizabethton, Tennessee (e) 156 1,040 - 47 156 1,087 1,243
Comfort Inn Hotel
Farmville, Virginia (e) 148 1,201 - 17 148 1,218 1,366
Comfort Inn Hotel
Dahlgren, Virginia (e) 205 1,546 - 55 205 1,601 1,806
Comfort Inn Hotel
Princeton, West Virginia (e) 363 1,600 - 43 363 1,643 2,006
Days Inn Hotel
Farmville, Virginia (e) 290 1,389 - 29 290 1,418 1,708
Holiday Inn Express
Allentown, Pennsylvania (e) 139 3,360 - - 139 3,360 3,499
</TABLE>
<TABLE>
<CAPTION>
Life Upon
Which
Accumulated Net Book Depreciation
Depreciation Value in Latest Income
Buildings and Buildings and Year of Statement is
Description Improvements Improvements Acquisition Computed
- ------------------------ --------------- ------------- ----------- ---------------
<S> <C>
Comfort Inn Hotel
Morgantown,
West Virginia $140 $2,831 1994 (d)
Comfort Inn Hotel
Dublin, Virginia 156 2,617 1994 (d)
Best Western Hotel
Wytheville, Virginia 94 1,853 1994 (d)
Solomons Beacon Inn
Solomons Island, 116 3,405 1994 (d)
Maryland
Comfort Inn Hotel
Elizabethton, Tennessee 63 1,180 1994 (d)
Comfort Inn Hotel
Farmville, Virginia 74 1,292 1994 (d)
Comfort Inn Hotel
Dahlgren, Virginia 84 1,722 1994 (d)
Comfort Inn Hotel
Princeton, West Virginia 86 1,920 1994 (d)
Days Inn Hotel
Farmville, Virginia 54 1,654 1994 (d)
Holiday Inn Express
Allentown, Pennsylvania 49 3,450 1997 (d)
</TABLE>
F - 24
<PAGE>
<TABLE>
<CAPTION>
Gross Amounts at which
Costs Capitalized Carried at
Initial Costs Subsequent to Acquisition Close of Period
--------------------- ------------------------- -----------------------
Encum- Buildings and Buildings and Buildings and
Description brances Land Improvements Land Improvements Land Improvements Total
- ------------------------ ------------ ------ ------------- --------- ------------ ----- ------------- -----------
<S> <C>
Comfort Inn Hotel
Chambersburg,
Pennsylvania (e) 97 2,343 - - 97 2,343 2,440
Comfort Inn Hotel
Culpeper, Virginia (e) 97 2,343 - - 146 1,705 1,851
Holiday Inn Hotel Express
Danville, Kentucky (e) 140 2,366 - - 140 2,366 2,606
Comfort Suites
Dover, Delaware (e) 200 2,090 - - 200 2,090 2,290
Comfort Inn Hotel
Gettysburg,
Pennsylvania (e) - 4,036 - - - 4,036 4,036
Holiday Inn Express
Gettysburg,
Pennsylvania (e) 101 2,450 - - 101 2,450 2,551
Best Western Hotel
Harlan, Kentucky (e) - 2,395 - - - 2,395 2,395
Best Western Suites
Key Largo, Florida (e) 269 2,237 - - 269 2,237 2,506
Comfort Inn Hotel
Murphy, North
Carolina (e) 276 1,569 - - 276 1,569 1,845
Comfort Inn Hotel
New Castle, (e) 39 2,751 - - 39 2,751 2,790
Pennsylvania
---------- ------ ------------- --------- ------------ -------------------- -----------
$ 6,275 $4,455 $ 43,012 - $ 583 $ 4,455 $ 43,595 $ 48,050
========== ====== ============= ========= ============ ==================== ===========
</TABLE>
<TABLE>
<CAPTION>
Life Upon
Which
Accumulated Net Book Depreciation
Depreciation Value in Latest Income
Buildings and Buildings and Year of Statement is
Description Improvements Improvements Acquisition Computed
- ------------------------ --------------- ------------- ----------- ---------------
<S> <C>
Comfort Inn Hotel
Chambersburg,
Pennsylvania 34 2,406 1997 (d)
Comfort Inn Hotel
Culpeper, Virginia 36 1,815 1997 (d)
Holiday Inn Hotel Express
Danville, Kentucky 39 2,467 1997 (d)
Comfort Suites
Dover, Delaware 48 2,242 1997 (d)
Comfort Inn Hotel
Gettysburg,
Pennsylvania 59 3,977 1977 (d)
Holiday Inn Express
Gettysburg,
Pennsylvania 36 2,515 1997 (d)
Best Western Hotel
Harlan, Kentucky 45 2,350 1997 (d)
Best Western Suites
Key Largo, Florida 18 2,488 1997 (d)
Comfort Inn Hotel
Murphy, North
Carolina 26 1,819 1997 (d)
Comfort Inn Hotel
New Castle, 51 2,739 1997 (d)
Pennsylvania
---------- ---------------
$1,308 $ 46,742
========== ===============
</TABLE>
F-25
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
<TABLE>
<S> <C>
(a) Reconciliation of real estate:
Balance at December 31, 1995 $15,809
Additions to building and improvements 331
------
Balance at December 31, 1996 16,140
Acquisition of building and improvements 27,302
Additions to building and improvements 153
------
Balance at December 31, 1997 $43,595
======
(b) Reconciliation of accumulated depreciation:
Balance at December 31, 1995 $ 406
Depreciation for the period ended December 31, 1996 405
------
Balance at December 31, 1996 811
Depreciation for the period ended December 31, 1997 497
------
Balance at December 31, 1997 $ 1,308
======
</TABLE>
(c) The aggregate cost of land, buildings, furniture and
equipment for Federal income tax purposes is
approximately $48,807.
(d) Depreciation is computed based upon the following useful lives:
Buildings and improvements 31 - 40 years
Furniture and equipment 5 - 12 years
(e) The Company has a mortgage payable with a bank which is
collateralized by 17 of the hotels. The outstanding
balance at December 31, 1997, was $25,456.
F - 26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder
Humphrey Hospitality Management, Inc.
We have audited the accompanying balance sheets of Humphrey Hospitality
Management, Inc. as of December 31, 1997 and 1996, and the related statements of
income, shareholder's equity and cash flows for each of the three years in the
period ended December 31,1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Humphrey Hospitality
Management, Inc. as of December 31, 1997 and 1996, and the results of its
operations, the changes in shareholder's equity and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
January 19, 1998
F - 27
<PAGE>
Humphrey Hospitality Management, Inc.
BALANCE SHEETS
December 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
---------------- ----------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,127,573 $ 2,483,403
Accounts receivable 89,060 224,201
Accounts receivable - shareholder 51,250 -
Prepaid expenses 36,282 66,862
Other assets 818 60,377
------------- -------------
Total current assets $ 1,304,983 $ 2,834,843
============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 107,845 $ 402,188
Accrued expenses 67,328 346,744
Advanced deposits 1,730 12,031
Prepaid slip rentals - Marina 31,203 31,914
Due to affiliates 1,066,996 1,857,021
------------- -------------
Total current liabilities 1,275,102 2,649,898
------------- -------------
COMMITMENTS - -
SHAREHOLDER'S EQUITY
Common stock, $.01 par value, 1,000 shares authorized; 100
shares issued and outstanding 1 1
Retained earnings 29,880 184,944
------------- -------------
Total shareholder's equity 29,881 184,945
------------- -------------
Total liabilities and shareholder's equity $ 1,304,983 $ 2,834,843
============= =============
</TABLE>
See notes to financial statements
F - 28
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF INCOME
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------------- --------------- ----------------
<S> <C>
Revenue from hotel operations
Room revenue $ 7,499,245 $ 7,941,875 $ 15,581,298
Telephone revenue 168,385 173,743 273,256
Slip revenue 262,113 243,725 252,481
Other revenue 104,137 192,147 313,316
Interest revenue 20,972 27,422 32,131
-------------- ------------ -------------
Total revenue 8,054,852 8,578,912 16,452,482
-------------- ------------ -------------
Expenses
Salaries and wages 1,737,805 2,062,594 3,849,840
Room expense 407,335 433,870 950,239
Telephone 145,777 182,735 258,926
Marina expense 33,822 42,925 34,821
General and administrative 299,591 386,670 729,163
Marketing and promotion 240,438 254,205 621,067
Utilities 390,894 429,608 768,138
Repairs and maintenance 150,932 227,200 384,050
Taxes and insurance 130,544 149,811 244,877
Management fees 241,010 - -
Franchise fees 387,853 420,809 875,104
Lease payments 3,750,456 3,957,401 7,326,193
-------------- ------------ -------------
Total expenses 7,916,457 8,547,828 16,042,418
-------------- ------------ -------------
NET INCOME $ 138,395 $ 31,084 $ 410,064
============== ============ =============
</TABLE>
See notes to financial statements
F - 29
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF SHAREHOLDER'S EQUITY
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Common Stock Retained
----------------- Earnings
Shares Amount (Deficit) Total
------- ------ ------------ ----------
<S> <C>
Balance, December 31, 1994 100 $ 1 $ (89,599) $(89,598)
Net income - - 138,395 138,395
------- ---- --------- --------
Balance, December 31, 1995 100 1 48,796 48,797
Distributions - - (50,000) (50,000)
Net income - - 31,084 31,084
------- ---- --------- --------
Balance, December 31, 1996 100 1 29,880 29,881
Distributions - - (255,000) 255,000)
Net income - - 410,064 410,064
------- ---- --------- --------
Balance, December 31, 1997 100 $ 1 $ 184,944 $ 184,945
======= ==== ======== ========
</TABLE>
See notes to financial statements
F - 30
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C>
Cash flow from operating activities
Net income $ 138,395 $ 31,084 $ 410,064
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Changes in assets and liabilities
Decrease (increase) in accounts receivable 8,971 (10,475) (135,141)
Increase in prepaid expenses (368) (18,306) (30,580)
Increase in other assets - (818) (59,559)
Increase (decrease) in accounts payable 29,998 (62,610) 294,343
(Decrease) increase in prepaid slip rentals -
Marina (10,531) (6,862) 711
Increase (decrease) in due to affiliates 889,166 (25,477) 790,025
Increase in accrued expenses - 67,328 279,416
Increase in advanced deposits - 1,730 10,301
---------- ---------- ----------
Net cash provided by (used in)
operating activities 1,055,631 (24,406) 1,559,580
---------- ---------- ----------
Cash flows from financing activities
Distributions paid - (50,000) (255,000)
Advances to (from) shareholder - (51,250) 51,250
---------- ---------- ----------
Net cash used in financing activities - (101,250) (203,750)
---------- ---------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,055,631 (125,656) 1,355,830
Cash and cash equivalents, beginning of year 197,598 1,253,229 1,127,573
---------- ---------- ----------
Cash and cash equivalents, end of year $1,253,229 $ 1,127,573 $2,483,403
========== ========== ==========
</TABLE>
See notes to financial statements
F - 31
<PAGE>
Note 1. Organization and Summary of Significant Accounting Policies
Humphrey Hospitality Management, Inc. (the Lessee) was incorporated
under the laws of the State of Maryland on August 18, 1994, to lease and operate
hotel properties from Humphrey Hospitality Limited Partnership (the
Partnership). James I. Humphrey, Jr. is the sole shareholder of the Lessee.
The Lessee began operations on November 29, 1994. As of December 31, 1997, the
Lessee leases 20 hotel properties from the Partnership.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Accounts Receivable
The Lessee considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
Income Taxes
The Lessee has elected to be treated as an S Corporation for Federal
and state income tax purposes. Therefore, no provision or benefit for income
taxes has been included in these financial statements since taxable income or
loss passes through to, and is reportable by, the stockholder individually.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and a repurchase agreement
with a bank with an original maturity of three months or less when acquired,
carried at cost, which approximates fair value.
Concentration of Credit Risk
The Lessee places cash deposits with major banks. The Company has not
experienced any losses with respect to bank balances in excess of government
provided insurance. As of December 31, 1997, management believes that no
significant concentration of credit risk exists with respect to these cash
balances.
Note 2. Related Party Transactions
Management Fees and Payroll Reimbursements
The Lessee entered into separate management agreements, relating to
each of the Initial Hotels, with Humphrey Hotels, Inc. (the Operator), an
affiliate. Pursuant to the management agreements, a fee equal to 3% of total
revenue was payable to Humphrey Hotels, Inc. and was subordinate, in all
respects, to the Lessee's obligations under the percentage leases. For the year
ended December 31, 1995, management fees of $241,010 were accrued and charged to
operations.
F - 32
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
Note 2. Related Party Transactions (Continued)
The Operator provided all site employees for the Lessee and was
reimbursed for the salaries and related costs. During the year ended December
31, 1995, the Lessee incurred charges of $1,737,805 for such payroll
reimbursements.
On February 9, 1996, the Lessee announced the termination of its
operating agreements with the Operator effective January 1, 1996. The Lessee
immediately began operating all of the hotels that it leases from the
Partnership. All personnel from the Operator were hired in identical capacities
by the Lessee. The Lessee intends to operate the hotels throughout the lease
term.
Shared Expenses
Humphrey Associates, Inc., and HAI Management, Inc., affiliates of the
Lessee, share certain operating expenses with the Lessee. Expenditures are
allocated based on each entity's pro rata share of the expense.
Percentage Lease Payment
The Lessee has entered into percentage leases, with the Partnership
relating to nineteen of its Hotels (including ten hotels acquired in 1997) and a
fixed lease relating to the Dover Hotel (collectively , the Acquired Hotels).
Each such lease (the "Percentage Leases" and the "Fixed Lease") has a term of 10
years. Pursuant to the terms of the Percentage Leases, the Lessee is required to
pay both base rent and percentage rent and certain other additional charges.
Pursuant to the terms of the Fixed Lease, the Lessee is required to pay a fixed
rent and certain other additional charges. The Lessee has future lease
commitments through August 2007. Minimum future lease payments due under these
noncancellable operating leases as of December 31, 1997 are as follows:
Year Amount
1998 $ 4,081,920
1999 4,081,920
2000 4,081,920
2001 4,081,920
2002 4,081,920
Thereafter 13,693,746
--------------
$ 34,103,346
==============
The Lessee has incurred base rents of $1,608,976, $1,678,347 and
$3,302,922 and percentage rents of $2,141,480, $2,279,054 and $4,023,271 for the
years ended December 31, 1995, 1996 and 1997, respectively. As of December 31,
1996 and 1997, the amount due Humphrey Hospitality Limited Partnership and
Solomons Beacon Inn Limited Partnership for lease payments totalled $1,066,996
and $1,857,021, respectively, and is included in due to affiliates on the
balance sheets.
F - 33
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
Note 2. Related Party Transactions (Continued)
During 1996, the Lessee made a loan to its shareholder in the amount of
$51,250 which is unsecured and non-interest bearing. The amount was repaid in
January 1997.
Services Agreement
On January 1, 1996, the Lessee executed an Agreement with Humphrey
Hospitality Trust, Inc., to provide accounting and securities reporting
services. The initial terms of the Agreement provided for a fixed fee of $80,000
per year. On October 1, 1996, the Agreement was amended reducing the initial
annual fee to $30,000 per year with an increase of $10,000 per year (prorated
from the time of acquisition) for each hotel acquired by Humphrey Hospitality
Trust, Inc. (excluding the hotel property in Dover, DE). Under the terms of the
amendment, the service fee cannot exceed $100,000 in any year. As of December
31, 1996 and 1997, the Lessee received $67,503 and $79,388, respectively, for
the services provided in accordance with the Agreement, which is included in
other revenue.
Note 3. Commitments
Franchise Agreements
The Lessee operates the hotels owned by the Partnership and the
Subsidiary Partnership under the terms of existing franchise agreements. The
franchise licenses generally specify certain management, operational,
accounting, reporting and marketing standards and procedures with which the
franchisee must comply and provide for annual franchise fees based upon
percentages of gross room revenue. During the years ended December 31, 1995,
1996 and 1997, $387,853, $420,809 and $875,104, respectively, of franchise fees
were charged to operations.
Restaurant Leases
Three of the eight Initial Hotels have executed lease agreements for
the hotel's restaurant facilities with varying expiration dates, including
renewal periods, through December 1, 2023. Monthly rent is payable during the
terms of the leases at 3% to 8% of the previous month's gross receipts.
Note 4. Economic Dependency
The Lessee receives the majority of its income from related hotel
entities. The related hotels are primarily located in the Mid-Atlantic region of
the United States.
F - 34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Humphrey Hospitality Trust, Inc.
We have audited the accompanying combined balance sheet of the HERSHA
Acquisition Hotels as of December 31, 1996, and the related combined statements
of income and retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the management of the HERSHA
Acquisition Hotels. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of the
HERSHA Acquisition Hotels as of December 31, 1996, the combined results of their
operations and their combined cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
May 17, 1997
F - 35
<PAGE>
HERSHA Acquisition Hotels
COMBINED BALANCE SHEET
December 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 448,111
Accounts receivable 48,817
Prepaid expenses and other assets 6,901
Due from shareholders and affiliates 799,528
----------
Total current assets 1,303,357
Furniture and equipment, net of
accumulated depreciation of $55,575 238,166
Franchise costs, net of
accumulated amortization of $6,252 18,748
----------
$1,560,271
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 88,635
Advances deposits 2,600
Income taxes payable 37,990
----------
Total current liabilities 129,225
SHAREHOLDERS' EQUITY
Common stock, $1 par value, 3,000 shares
authorized; 1,200 shares issued and outstanding 1,200
Retained earnings 1,429,846
----------
$1,560,271
==========
</TABLE>
F - 36
<PAGE>
HERSHA Acquisition Hotels
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
Year ended December 31, 1996
<TABLE>
<S> <C>
REVENUES
Room revenue $4,484,652
Telephone revenue 50,861
Other revenue 110,836
----------
Total revenue 4,646,349
----------
EXPENSES
Salaries and wages 1,011,779
Room expense 279,495
Telephone 52,426
General and administrative 139,809
Marketing and promotion 227,898
Utilities 230,477
Repairs and maintenance 111,125
Taxes and insurance 188,634
Franchise fees 376,766
Rent 1,791,089
Land lease 35,000
Depreciation and amortization 31,964
----------
Total expenses 4,476,462
----------
INCOME BEFORE TAXES 169,887
INCOME TAXES, CURRENTLY PAYABLE 49,506
----------
NET INCOME 120,381
RETAINED EARNINGS, BEGINNING 1,309,465
----------
RETAINED EARNINGS, ENDING $1,429,846
==========
</TABLE>
F - 37
<PAGE>
HERSHA Acquisition Hotels
COMBINED STATEMENT OF CASH FLOWS
Year ended December 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities
Net Income $ 120,381
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 29,046
Amortization 2,918
Changes in assets and liabilities
Decrease in accounts receivable 1,832
Decrease in prepaid expenses 4,793
Decrease in other assets 3,297
Decrease in accounts payable and accrued expenses (110,608)
Increase in income taxes payable 37,990
----------
Net cash provided by operating activities 89,649
----------
Cash flow from investing activities
Investment in furniture and equipment (177,608)
Advances to shareholders and affiliates, net (276,648)
----------
Net cash used in investing activities (454,256)
----------
NET DECREASE IN CASH (364,607)
Cash and cash equivalents, beginning 812,718
----------
Cash and cash equivalents, ending $ 448,111
==========
Supplemental disclosures of cash flow information
Cash paid during the year for income taxes $ 11,516
==========
</TABLE>
F - 38
<PAGE>
HERSHA Acquisition Hotels
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The HERSHA Acquisition Hotels combined financial statements are a
combination of the balance sheets and statements of income, retained
earnings and cash flows of three corporations (collectively, the Companies).
The Companies are related through common control and management. Each
company operates under a lease arrangement hotel properties which are owned
by an affiliated entity.
The Companies combined in these financial statements consist of the
following hotel properties:
<TABLE>
<CAPTION>
Company Hotel Location
- ----------------- ------------------------ -----------------------------
<S> <C>
Chambersburg Comfort Inn - 65 Chambersburg, Pennsylvania
Lodging, Inc. rooms
Gettysburg Comfort Inn - 81 Gettysburg, Pennsylvania
Lodging, Inc. rooms
Allentown Holiday Inn Express - Allentown, Pennsylvania
Lodging, Inc. 83 rooms
Gettysburg Holiday Inn Express - Gettysburg, Pennsylvania
Lodging, Inc. 51 rooms
</TABLE>
During 1997, the HERSHA group sold the hotel properties to Humphrey
Hospitality Limited Partnership. The sales agreements did not extend to any
other assets or liabilities of the Companies or their affiliates.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reporting amounts and revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Furniture and Equipment
Furniture and equipment is stated at cost. Depreciation is provided for in
amount sufficient to relate the cost of depreciable assets to operations
over their estimated services lives using accelerated methods.
Franchise Fees
The Comfort Inn hotels are operated under franchise agreements with Choice
Hotels International. The Holiday Inn Express hotels are operated under
franchise agreements with Holiday Hospitality Corporation. Franchise fees
are being amortized over the term of the franchise agreements using the
straight-line method.
F - 39
<PAGE>
HERSHA Acquisition Hotels
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
(Continued)
Revenue Recognition
Room and other revenue is recognized as earned. Ongoing credit evaluations
are performed and accounts deemed uncollectible are charged to operations.
Income Taxes
Income tax expense includes federal and state taxes currently payable. For
the year ended December 31, 1996, there were no differences between income
for financial reporting and income tax purposes resulting in deferred taxes.
NOTE B - RELATED PARTY TRANSACTIONS
Operating Leases
The Companies lease the hotel properties from an affiliated partnership of a
shareholder under noncancellable operating leases. The lease for the
Allentown Holiday Inn Express calls for an annual rent of $120,000 through
the year 2000. The other HERSHA hotels are operated under month-to-month
leases which provide for rent payment based on a percentage of net operating
income. For the year ended December 31, 1997, lease expense totaled
$1,791,089.
Due From Shareholders and Affiliates
The Companies make advances to and from shareholders and entities related to
the Companies through common ownership. Amounts due from shareholders and
affiliates as of December 31, 1996 are unsecured, non-interest bearing and
payable on demand.
NOTE C - COMMITMENTS
Franchise costs represent the annual expense for franchise royalties,
reservation and advertising services under the terms of the hotel franchise
agreements. The payments are based upon percentages of gross room revenue.
For the year ended December 31, 1997, franchise fees totaled $376,766.
The Company has a land lease on the Comfort-Inn Gettysburg, PA, which
requires an annual payment of $35,000 through May 31, 2025.
F - 40
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Humphrey Hospitality Trust, Inc.
We have audited the accompanying combined balance sheet of the H&W
Acquisition Hotels as of December 31, 1996, and the related combined statements
of income, equity, and cash flows for the year then ended. These financial
statements are the responsibility of the management of the H&W Acquisition
Hotels. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the H&W
Acquisition Hotels as of December 31, 1996, the combined results of its
operations and its combined cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
March 26, 1997
F - 41
<PAGE>
H&W Acquisition Hotels
COMBINED BALANCE SHEET
December 31, 1996
<TABLE>
<S> <C>
ASSETS
INVESTMENT IN HOTEL PROPERTIES
Land $ 425,000
Buildings and improvements 3,862,686
Furniture and equipment 514,855
---------
4,802,541
Less accumulated depreciation 448,942
---------
Net investment in hotel properties 4,353,599
Cash and cash equivalents 144,669
Accounts receivable 42,064
Supplies inventory 5,892
Franchise costs, net of accumulated amortization of $16,338 77,962
Mortgage costs, net of accumulated amortization of $9,477 41,718
Goodwill, net of accumulated amortization of $20,000 180,000
----------
$4,845,904
==========
LIABILITIES AND EQUITY
Long-term debt $4,152,923
Accounts payable and accrued expenses 103,214
Accrued interest payable 21,192
Obligation under capital lease 12,870
---------
4,290,199
Equity 555,705
----------
$4,845,904
==========
</TABLE>
F - 42
See notes to financial statement
<PAGE>
H&W Acquisition Hotels
COMBINED STATEMENT OF INCOME
Year ended December 31, 1996
<TABLE>
<S> <C>
REVENUES
Room revenue $2,375,857
Telephone revenue 53,873
Other revenue 48,570
----------
Total revenue 2,478,300
----------
EXPENSES
Salaries and wages 483,323
Room expense 208,129
Telephone 31,131
General and administrative 133,690
Marketing and promotion 97,301
Utilities 114,979
Repairs and maintenance 66,035
Taxes and insurance 49,344
Management fees 137,577
Real estate taxes 56,519
Franchise fees 104,241
Land lease 38,990
Interest expense 404,370
Depreciation and amortization 202,155
----------
Total expenses 2,127,784
----------
NET INCOME $ 350,516
==========
</TABLE>
F - 43
See notes to financial statement
<PAGE>
H&W Acquisition Hotels
COMBINED STATEMENT OF EQUITY
Year ended December 31, 1996
<TABLE>
<CAPTION>
Common Retained Partners'
stock earnings equity Total
------------- ------------- ------------ ------------
<S> <C>
Balance, December 31, 1995
$ 100 $ 232,657 $ 322,432 $ 555,189
Net income - 306,112 44,404 350,516
Distributions - (350,000) - (350,000)
---- --------- -------- ---------
Balance, December 31, 1996 $ 100 $ 188,769 $ 366,836 $ 555,705
==== ========= ======== =========
</TABLE>
F - 44
See notes to financial statement
<PAGE>
H&W Acquisition Hotels
COMBINED STATEMENT OF CASH FLOWS
Year ended December 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities
Net Income $ 350,516
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 175,437
Amortization 26,718
Changes in assets and liabilities
Decrease in accounts receivable 11,713
Increase in inventory (1,231)
Decrease in accounts payable and accrued expenses (16,545)
------------
Net cash provided by operating activities 546,608
------------
Cash flow from investing activities
Investment in hotel property (37,125)
------------
Net cash used in investing activities (37,125)
------------
Cash flow from financing activities
Repayment of mortgage payable (1,196,760)
Proceeds from mortgage payable 1,345,870
Principal payments on mortgage (147,298)
Principal payments on notes payable (148,437)
Payment on loan fees (25,000)
Distribution to shareholders (350,000)
------------
Net cash used in financing activities (521,625)
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (12,142)
Cash and cash equivalents, beginning 156,811
------------
Cash and cash equivalents, ending $ 144,669
============
Supplemental disclosures of cash flow information
Cash paid during the year for interest $ 404,370
============
</TABLE>
F - 45
See notes to financial statement
<PAGE>
H&W Acquisition Hotels
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The H&W Acquisition Hotels combined financial statements are a combination
of the balance sheets and statements of income, equity and cash flows of one
limited liability company and two "Subchapter S" corporations (collectively
the Companies) The Companies are related through common control and
management.
Each company owns and operates one hotel property.
The Companies combined in these financial statements consist of the
following hotel properties:
<TABLE>
<CAPTION>
Companies Hotel Location
- ------------------------ ---------------------------------- ------------------------
<S> <C>
H&W Wheeling Inn, Comfort Inn - 56 rooms Murphy, North
LLC Best Western - 63 rooms Carolina
Harlan Hotel Corp. Holiday Inn Express - 62 rooms Harlan, Kentucky
Danville Hotel Corp. Danville, Kentucky
</TABLE>
In April 1997, the Companies sold their hotel properties to Humphrey
Hospitality Limited Partnership. The sales agreements did not extend to any
other assets or liabilities of the Companies. The Companies plan to
liquidate their remaining assets, satisfy their liabilities and make final
distributions to their owners.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reporting amounts and revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Investment in Hotel Properties
The hotel properties are stated at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives. Depreciation is provided by the use of
the straight-line and accelerated methods on the following estimated useful
lives:
Buildings and improvements 15 - 40 years
Property and equipment 5 - 7 years
Maintenance and repairs are charged to operations as incurred. Additions and
major improvements are capitalized. Upon sale or disposition, both the asset
and related accumulated depreciation are relieved and the related gain or
loss is included in operations.
The Companies evaluate long-lived assets for potential impairment by
analyzing the operating results, trends and prospects for the Company and
considering any other events and circumstances which might indicate
potential impairment.
F - 46
<PAGE>
H&W Acquisition Hotels
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
(Continued)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and all highly liquid investments
with original maturities of three months or less when acquired, carried at
cost which approximates fair value.
Franchise Fees
The Comfort Inn hotel is operated under a franchise agreement with Choice
Hotels International. The Best Western hotel is operated under a franchise
agreement with Best Western. The Holiday Inn Express hotel is operated under
a franchise agreement with Holiday Hospitality Corporation. Franchise fees
are being amortized over the term of the franchise agreement using the
straight-line method.
Mortgage Costs
Mortgage costs are amortized over the term of the mortgage using the
straight-line method.
Goodwill
Goodwill, which represents the excess of the cost of purchased hotel
properties over the fair value of their net assets at the date of
acquisition, is being amortized using the straight-line method of 10 years.
Revenue Recognition
Room and other revenue is recognized as earned.
Income Taxes
No provision or benefit for income taxes has been included in the financial
statement for the Companies since taxable income or loss passes through to,
and is reportable by, the owners individually.
F - 47
<PAGE>
H&W Acquisition Hotels
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE B - LONG-TERM DEBT
At December 31, 1996, long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable in equal monthly installments of principal and interest
of $15,124 bearing interest at 8.75%, due August 2008. $ 1,318,929
Note payable in equal monthly installments of principal and interest
of $13,400 bearing interest at 7.8%, due August 2012. 1,448,816
Note payable in equal monthly installments of principal and interest
of $16,029 bearing interest at 10.5%, due May 2010. 1,385,178
----------
$ 4,152,923
==========
</TABLE>
The debt is collateralized by the investments in hotel properties.
Aggregate annual principal payments for long-term debt at December 31, 1996,
are as follows:
December 31, 1997 $ 170,745
1998 $ 186,552
1999 $ 203,848
2000 $ 222,778
2001 $ 243,495
NOTE C - OBLIGATION UNDER CAPITAL LEASE
The Companies lease certain equipment under capital leases expiring in 2001.
Future minimum lease payments under these capital leases, together with the
present value of the net minimum lease payments are as follows:
Years ended December 31, 1997 $ 4,175
1998 4,175
1999 4,175
2000 4,175
2001 3,131
-------
19,831
Less amount representing interest 6,961
-------
Present value of net minimum lease payments $ 12,870
=========
F - 48
<PAGE>
H&W Acquisition Hotels
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE D - RELATED PARTY TRANSACTIONS
Management Fees
The Partnerships' hotel properties were managed by an affiliate of the
general partner. The management agreement called for percentage fees of 2%
of gross sales plus 8.5% of net operating income. As of December 31, 1996,
management fees totaled $137,577.
NOTE E - COMMITMENTS
Franchise costs represent the annual expense for franchise royalties,
reservation and advertising services under the terms of the hotel franchise
agreements. The payments are based upon percentages of gross room revenue.
As of December 31, 1996, franchise fees totaled, $104,241.
The Company has executed a land lease related to the Holiday Inn Express,
Harlan, Kentucky, which requires monthly payments of the greater of $2,000
or 5% of room revenue through November 2091. For the year ended December 31,
1996, land lease expense totaled $38,990.
F - 49
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Shareholders and
Board of Directors
Humphrey Hospitality Trust, Inc.
We have audited the accompanying balance sheet of the Gateway Acquisition
Hotel, as of December 31, 1996, and the related statements of income, partners'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Gateway Acquisition
Hotel as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
March 26, 1997
F - 50
<PAGE>
Gateway Acquisition Hotels
BALANCE SHEET
December 31, 1996
<TABLE>
<S> <C>
ASSETS
INVESTMENT IN HOTEL PROPERTIES
Land $ 144,875
Building and improvements 1,257,413
Furniture and equipment 211,996
-----------
1,614,284
Less accumulated depreciation (494,968)
-----------
Net investment in hotel properties 1,119,316
Cash and cash equivalents 89,659
Accounts receivable 8,108
Prepaid expenses and other assets 3,725
Bond escrows 50,341
Mortgage costs net of accumulated amortization of $34,734 90,311
-----------
$ 1,361,460
===========
LIABILITIES AND PARTNERS' EQUITY
Bond payable $ 1,245,000
Accounts payable and accrued expenses 18,475
Accrued interest payable 8,995
-----------
1,272,470
Partners' equity 88,990
-----------
$ 1,361,460
===========
</TABLE>
F - 51
See notes to financial statement
<PAGE>
Gateway Acquisition Hotels
STATEMENT OF INCOME
Year ended December 31, 1996
<TABLE>
<S> <C>
Revenue
Room revenue $ 682,885
Telephone revenue 20,243
Other revenue 9,912
---------
Total revenue 713,040
Expenses
Salaries and wages 146,125
Room expense 42,515
Telephone 8,878
General and administrative 41,832
Marketing and promotion 7,035
Utilities 37,177
Repairs and maintenance 46,604
Taxes and insurance 18,413
Management fees 37,743
Real estate taxes 13,052
Franchise fees 47,391
Interest expense 115,215
Depreciation and amortization 56,174
---------
Total expense 618,154
---------
NET INCOME $ 94,886
=========
</TABLE>
F - 52
See notes to financial statement
<PAGE>
Gateway Acquisition Hotels
STATEMENT OF PARTNERS' EQUITY
Year ended December 31, 1996
Partners' equity, beginning $ 24,104
Net income 94,886
Distributions (30,000)
--------
Partners' equity, ending $ 88,990
========
F - 53
See notes to financial statement
<PAGE>
Gateway Acquisition Hotels
STATEMENT OF CASH FLOW
Year ended December 31, 1996
<TABLE>
<S> <C>
Cash flow from operating activities
Net income $ 94,886
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation 47,838
Amortization 8,336
Changes in assets and liabilities
Decrease in accounts receivable 11,498
Increase in prepaid expenses and other assets (2,645)
Increase in bond escrow (2,309)
Decrease in accounts payable and accrued expenses (7,524)
--------
Net cash provided by operating activities 150,080
--------
Cash flows from investing activities
Investment in hotel property (38,007)
--------
Net cash used in investing activities (38,007)
--------
Cash flows from financing activities
Principal payments on mortgage (65,000)
Distributions to shareholders (30,000)
--------
Net cash used in financing activities (95,000)
--------
NET INCREASE IN CASH 17,073
Cash and cash equivalents, beginning 72,586
--------
Cash and cash equivalents, ending $ 89,659
========
Supplemental disclosures of cash flow information
Cash paid during the year for interest $ 115,215
========
</TABLE>
F - 54
See notes to financial statement
<PAGE>
Gateway Acquisition Hotels
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Gateway Partnership I (the Partnership) was formed to own and operate a
Comfort Inn in Culpeper, Virginia. In February 1997, the Partnership sold
its hotel property to Humphrey Hospitality Limited Partnership. The sales
agreements did not extend to any other assets or liabilities of the
Partnership. The Partnership plans to liquidate its remaining assets,
satisfy its liabilities and make final distributions to its owners.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Investment in Hotel Property
The hotel property is stated at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated services lives. Depreciation is provided by the use of
the straight-line method over estimated useful lives of 5 and 40 years for
furniture and equipment and buildings and improvements, respectively.
Maintenance and repairs are charged to operations as incurred. Additions and
major improvements are capitalized. Upon sale or disposition, both the asset
and related accumulated depreciation are relieved and the related gain or
loss is included in operations.
The Partnership evaluates long-lived assets for potential impairment by
analyzing the operating results, trends and prospects for the Partnership
and considering any other events and circumstances which might indicate
potential impairment.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and all highly liquid investments
with original maturities of three months or less when acquired, carried at
cost which approximates fair value.
Financing Costs
Financing costs are amortized over the term of the bonds using the
straight-line method.
Revenue Recognition
Room and other revenue is recognized as earned. Room payments received in
advance are deferred until earned.
Income Taxes
No provision or benefit for income taxes has been included in the financial
statement for the Partnership since taxable income or loss passes through to
and is reportable by the partners individually.
F - 55
<PAGE>
Gateway Acquisition Hotels
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE B - BOND PAYABLE
Bond payable consists of First Mortgage Revenue Refunding Bonds issued by
the Virginia Small Business Financing Authority in the original amount of
$1,465,000. Crestar Bank is the trustee. The bonds bear interest at 10% per
annum, which is subject to adjustment on November 1, 1997 to equal the then
current yield on five year Treasury Bonds plus 4%, with a minimum interest
rate of 10% and a maximum rate of 14%. The agreement established a sinking
fund from which principal payments on the bonds will be made. The bonds
mature in varying amounts through November 2002. The bonds are secured by
the investment in hotel property.
Aggregate annual payments to the bond sinking fund for the five years of
following December 31, 1996 are as follows:
December 31, 1997 $ 75,000
1998 $ 80,000
1999 $ 95,000
2000 $ 100,000
2001 $ 100,000
NOTE C - RELATED PARTY TRANSACTIONS
Management Fees
The hotel property is managed by an affiliate of the general partner. The
management agreement called for percentage fees of 2% of gross sales plus
$4,800 per annum.
NOTE D - COMMITMENTS
The Comfort Inn Hotel is operated under a franchise agreement with Choice
Hotels International. Franchise fees represent the annual expense for
franchise royalties, reservation and advertising services under the terms of
the hotel franchise agreements. The payments are based upon percentages of
gross room revenue.
F - 56
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Humphrey Hospitality Trust, Inc.
We have audited the accompanying combined balance sheet of the BCL
Acquisition Hotel as of December 31, 1996, and the related combined statements
of income, equity and cash flows for the year then ended. These financial
statements are the responsibility of the management of the BCL Acquisition
Hotel. Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the BCL
Acquisition Hotel as of December 31, 1996, the combined results of its
operations and its combined cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
March 26, 1997
F - 57
<PAGE>
BCL Acquisition Hotel
COMBINED BALANCE SHEET
December 31, 1996
<TABLE>
<S> <C>
ASSETS
INVESTMENT IN HOTEL PROPERTIES
Land $ 50,000
Buildings and improvements 2,535,970
Furniture and equipment 786,051
-----------
3,372,021
Less accumulated depreciation 1,592,462
-----------
Net investment in hotel properties 1,779,559
Cash and cash equivalents 569,675
Accounts receivable 62,366
Supplies inventory 10,969
Prepaid expenses and other assets 6,030
Mortgage costs, net of accumulated amortization of $32,000 6,404
-----------
$ 2,435,003
===========
LIABILITIES AND EQUITY
LIABILITIES
Long-term debt $ 1,615,589
Accounts payable and accrued expenses 38,205
Due from affiliates 459,901
-----------
2,113,695
EQUITY 321,308
-----------
$ 2,435,003
===========
</TABLE>
F - 58
See notes to financial statement
<PAGE>
BCL Acquisition Hotel
COMBINED STATEMENT OF INCOME
Year ended December 31, 1996
<TABLE>
<S> <C>
Revenue
Room revenue $1,024,143
Telephone revenue 13,992
Other revenue 21,101
Restaurant revenue 478,244
----------
Total revenue 1,537,480
----------
Expenses
Salaries and wages 209,838
Room expense 62,646
Restaurant expense 350,687
Telephone 13,136
General and administrative 40,195
Marketing and promotion 14,637
Utilities 95,325
Repairs and maintenance 38,691
Taxes and insurance 25,132
Real estate taxes 52,859
Franchise fees 49,210
Interest expense 164,498
Depreciation and amortization 165,035
----------
Total expenses 1,281,889
----------
NET INCOME $ 255,591
==========
</TABLE>
F - 59
See notes to financial statement
<PAGE>
BCL Acquisition Hotel
COMBINED STATEMENT OF EQUITY
Year ended December 31, 1996
<TABLE>
<CAPTION>
Common Retained Partners'
stock earnings deficit Total
-------------- ---------------- --------------- ---------------
<S> <C>
Balance, December 31, 1995 $ 15,000 $ 159,532 $ (108,815) $ 65,717
Net income (loss) - 688,342 (432,751) 255,591
------- -------- ---------- --------
Balance, December 31, 1996 $ 15,000 $ 847,874 $ (541,566) $ 321,308
======= ======== ========== ========
</TABLE>
F - 60
See notes to financial statement
<PAGE>
BCL Acquisition Hotel
COMBINED STATEMENT OF CASH FLOWS
Year ended December 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities
Net income $ 255,591
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 161,605
Amortization 3,430
Changes in assets and liabilities
Decrease in accounts receivable 8,052
Increase in prepaid expenses and other assets (4,664)
Increase in supplies inventory (2,314)
Increase in accounts payable and accrued expenses 4,515
----------
Net cash provided by operating activities 426,215
----------
Cash flow from investing activities
Investment in hotel property (25,475)
----------
Net cash used in investing activities (25,475)
----------
Cash flow from financing activities
Principal payments on long-term debt (194,577)
----------
Net cash used in financing activities (194,577)
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 206,163
Cash and cash equivalents, beginning 363,512
----------
Cash and cash equivalents, ending $ 569,675
==========
Supplemental disclosures of cash flow information
Cash paid during the year for interest $ 164,498
==========
</TABLE>
F - 61
See notes to financial statement
<PAGE>
BCL Acquisition Hotel
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The BCL Acquisition Hotel (BCL) combined financial statements are a
combination of the balance sheets and statements of income, equity and cash
flows of BCL Management, Inc., a "Subchapter S" corporation and BCL
Properties, L.P., a limited partnership. BCL owns and operates a Comfort Inn
located in New Castle, Pennsylvania. On March 17, 1997, BCL sold the hotel
property to Humphrey Hospitality Limited Partnership. The sales agreement
did not extend to any other assets or liabilities of BCL. BCL plans to
liquidate its remaining assets, satisfy its liabilities and make final
distributions to its owners.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reporting amounts and revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Investment in Hotel Properties
The hotel property is stated at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated services lives. Depreciation is provided for by use of
the straight-line method over estimated useful lives of 5 and 40 years for
furniture and equipment and buildings and improvements, respectively.
Maintenance and repairs are charged to operations as incurred. Additions and
major improvements are capitalized. Upon sale or disposition, both the asset
and related accumulated depreciation are relieved and the related gain or
loss is included in operations.
BCL evaluates long-lived assets for potential impairment by analyzing the
operating results, trends and prospects for BCL and considering any other
events and circumstances which might indicate potential impairment.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and all highly liquid investments
with original maturities of three months or less when acquired, carried at
cost which approximates fair value.
Mortgage Costs
Mortgage costs are amortized over the term of the debt using the
straight-line method.
Revenue Recognition
Room and other revenue is recognized as earned. Ongoing credit evaluations
are performed and accounts deemed uncollectible are charged to operations.
F - 62
<PAGE>
BCL Acquisition Hotel
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
(Continued)
Income Taxes
No provision or benefit for income taxes has been included in the financial
statement for BCL because taxable income or loss passes through to, and is
reportable by, the owners individually.
NOTE B - LONG-TERM DEBT
Mortgage payable in equal monthly principal payments of $6,000 plus interest
at the prime rate plus 1% per annum (9.75% at December 31, 1996) through
December 2006, at which time the remaining outstanding balance is due in
full. The mortgage is secured by the investment in hotel property. As of
December 31, 1996, the outstanding mortgage balance was $1,601,500.
Note payable in equal monthly installments of principal and interest of $337
bearing interest at 7.85%, due December 2000. The note payable is secured by
a vehicle having a net book value of approximately $9,500 at December 31,
1996. As of December 31, 1996, the outstanding note payable balance was
$14,089.
Aggregate annual principal payments on the mortgage and note payable to the
bond sinking fund for the five years following December 31, 1996, are as
follows:
December 31, 1997 $ 9,045
1998 $ 9,293
1999 $ 9,561
2000 $ 10,179
2001 $ 6,000
NOTE C - COMMITMENTS
The Comfort Inn hotel is operated under a franchise agreement with Choice
Hotel International. Franchise fees represent the annual expense for
franchise royalties, reservation and advertising services under the terms of
the hotel franchise agreements. The payments are based upon percentages of
gross room revenue. As of December 31, 1996, the franchise fees totaled
$49,210.
F - 63
<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 offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or the Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
in any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company or that information contained herein is correct as of any
time subsequent to the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PROSPECTUS SUMMARY........................................................................... 1
RISK FACTORS................................................................................. 14
THE COMPANY.................................................................................. 23
GROWTH STRATEGY.............................................................................. 24
USE OF PROCEEDS.............................................................................. 27
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS................................................ 28
CAPITALIZATION............................................................................... 29
DILUTION..................................................................................... 30
SELECTED FINANCIAL INFORMATION............................................................... 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.............................................................................. 36
BUSINESS AND PROPERTIES...................................................................... 40
POLICIES AND OBJECTIVES WITH RESPECT
TO CERTAIN ACTIVITIES...................................................................... 53
MANAGEMENT................................................................................... 56
CERTAIN RELATIONSHIPS AND TRANSACTIONS....................................................... 59
THE LESSEE................................................................................... 61
OWNERSHIP OF THE COMPANY'S COMMON STOCK...................................................... 63
DESCRIPTION OF CAPITAL STOCK................................................................. 64
CERTAIN PROVISIONS OF VIRGINIA LAW AND
OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS................................................................... 67
SHARES AVAILABLE FOR FUTURE SALE............................................................. 69
PARTNERSHIP AGREEMENT........................................................................ 70
FEDERAL INCOME TAX CONSIDERATIONS............................................................ 73
UNDERWRITING................................................................................. 90
EXPERTS...................................................................................... 91
REPORTS TO SHAREHOLDERS...................................................................... 91
LEGAL MATTERS................................................................................ 91
GLOSSARY..................................................................................... 92
INDEX TO FINANCIAL STATEMENTS................................................................F-1
</TABLE>
1,000,000 Shares
HUMPHREY HOSPITALITY
TRUST, INC.
Common Stock
--------------
PROSPECTUS
--------------
ANDERSON & STRUDWICK
INCORPORATED
- --------------------------------------------------------------
- --------------------------------------------------------------
, 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 30. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the approximate amount of the fees
and expenses (other than sales commissions) payable by the Registrant in
connection with the issuance and distribution of the Common Shares.
<TABLE>
<S> <C>
Securities and Exchange Commission, registration fee.............................................$ 3,944
NASD filing fee.................................................................................. 1,837
Printing and mailing............................................................................. 25,000
Accountant's fees and expenses................................................................... 42,000
Nasdaq National Market additional share listing fee.............................................. 17,500
Counsel fees and expenses........................................................................ 105,000
Miscellaneous.................................................................................... 14,719
-------
Total........................................................................................ $210,000
=======
</TABLE>
Item 31. Sales to Special Parties
None.
Item 32. Recent Sales of Unregistered Securities
None.
Item 33. Indemnification of Directors and Officers
The Articles of Incorporation of the Company contain a provision which,
subject to certain exceptions described below, eliminates the liability of a
Director or officer to the Company or its shareholders for monetary damages for
any breach of duty as a Director or officer. This provision does not eliminate
such liability to the extent that it is proved that the Director or officer
engaged in willful misconduct or a knowing violation of criminal law or of any
federal or state securities law.
The Company's Articles of Incorporation also require the Company to
indemnify any Director or officer who is or was a party to a proceeding,
including a proceeding by or in the right of the Company, by reason of the fact
that he or she is or was such a Director or officer or is or was serving at the
request of the Company as a director, officer, employee or agent of another
entity provided that the Board of Directors determines that the conduct in
question was in the best interest of the Company and such person was acting on
behalf of the Company. A Director or officer of the Company is entitled to be
indemnified against all liabilities and expenses incurred by the Director or
officer in the proceeding, except such liabilities and expenses as are incurred
(i) if such person is an Independent Director or officer, because of his or her
gross negligence, willful misconduct or knowing violation of the criminal law or
(ii) in the case of the Director other than the Independent Directors, because
of his or her negligence or misconduct. Unless a determination has been made
that indemnification is not permissible, a director or officer also is entitled
to have the Company make advances and reimbursement for expenses prior to final
disposition of the proceeding upon receipt of a written undertaking from the
Director or officer to repay the amounts advanced or reimbursed if it is
ultimately determined that he or she is not entitled to indemnification. Such
advance shall be permissible when the proceeding has been initiated by a
shareholder of the Company only if such advance is approved by a court of
competent jurisdiction. The Board of Directors of the Company also has the
authority to extend to any person who is an employee or agent of the Company, or
who is or was serving at the request of the Company as a director, officer,
employee or agent of another entity, the same indemnification rights held by
Directors and officers, subject to all of the accompanying conditions and
obligations.
II-1
<PAGE>
The Company has not purchased director and officer liability insurance
for the purpose of providing a source of funds to pay any indemnification
described above.
The Underwriting Agreement contains certain provisions pursuant to
which certain officers, directors and controlling persons may be entitled to be
indemnified by the underwriter named therein.
Item 34. Treatment of Proceeds from Shares Being Registered
None.
Item 35. Financial Statements and Exhibits
INDEX TO FINANCIAL STATEMENTS
HUMPHREY HOSPITALITY TRUST, INC.
INDEPENDENT AUDITOR'S REPORT F-4
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996
AND 1997 F-5
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 1995, 1996 AND 1997 F-6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR
THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION F-25
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION F-26
HUMPHREY HOSPITALITY MANAGEMENT, INC.
INDEPENDENT AUDITOR'S REPORT F-27
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1997 F-28
STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 1995, 1996 AND 1997 F-29
STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 F-30
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1995, 1996 AND 1997 F-31
NOTES TO FINANCIAL STATEMENTS F-32
HERSHA ACQUISITION HOTELS
INDEPENDENT AUDITORS' REPORT F-35
COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 F-36
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996 F-37
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 F-38
NOTES TO COMBINED FINANCIAL STATEMENTS F-39
II-2
<PAGE>
H&W ACQUISITION HOTELS
INDEPENDENT AUDITORS' REPORT F-41
COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 F-42
COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 F-43
COMBINED STATEMENT OF EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 F-44
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 F-45
NOTES TO COMBINED FINANCIAL STATEMENTS F-46
GATEWAY ACQUISITION HOTEL
INDEPENDENT AUDITORS' REPORT F-50
BALANCE SHEET AS OF DECEMBER 31, 1996 F-51
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 F-52
STATEMENT OF PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 F-53
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 F-54
NOTES TO FINANCIAL STATEMENTS F-55
BCL ACQUISITION HOTEL
INDEPENDENT AUDITORS' REPORT F-57
COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 F-58
COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 F-59
COMBINED STATEMENT OF EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 F-60
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 F-61
NOTES TO COMBINED FINANCIAL STATEMENTS F-62
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibits
<S> <C>
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit
3.1 to the Company's Registration Statement on Form S-11 (Registration No. 33-83658)).
*3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-11 (Registration No. 33-83658)).
*4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-11 (Registration No. 33-83658)).
5.1 Form of Opinion of Hunton & Williams.
8.1 Form of Opinion of Hunton & Williams as to Tax Matters.
*10.1 Declaration of Trust of Humphrey Hospitality REIT Trust
*10.2 Bylaws of Humphrey Hospitality REIT Trust
*10.3 First Amended and Restated Agreement of Limited Partnership of Humphrey Hospitality Limited
Partnership (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-11 (Registration No. 33-93346)).
10.4 First Amendment to First Amended and Restated Agreement of Limited Partnership of Humphrey
Hospitality Limited Partnership.
10.5 Second Amendment to First Amended and Restated Agreement of Limited Partnership of Humphrey
Hospitality Limited Partnership.
10.6 Third Amendment to First Amended and Restated Agreement of Limited Partnership of Humphrey
Hospitality Limited Partnership.
10.7 Second Amended and Restated Agreement of Limited Partnership of Humphrey Hospitality Limited
Partnership.
*10.8 Second Amended and Restated Agreement of Limited Partnership of Solomons Beacon Inn Limited
Partnership (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on
Form S-11 (Registration No. 33-93346)).
*10.9 Agreement of Purchase and Sale dated November 29, 1994 between
Dahlgren Lodging Associates Limited Partnership and Humphrey
Hospitality Limited Partnership for the Comfort Inn-Dahlgren,
Virginia (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-11 (Registration No.
33-93346)).
*10.10 Agreement of Purchase and Sale dated November 29, 1994 between
Dublin Lodging Associates Limited Partnership and Humphrey
Hospitality Limited Partnership for the Comfort Inn-Dublin,
Virginia (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-11 (Registration No.
33-93346)).
*10.11 Agreement of Purchase and Sale dated November 29, 1994, between
Elizabethton Lodging Associates Limited Partnership and Humphrey
Hospitality Limited Partnership for the Comfort Inn-Elizabethton,
Tennessee (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-11 (Registration No.
33-93346)).
*10.12 Agreement of Purchase and Sale dated November 29, 1994 between
Farmville Motor Inn Limited Partnership and Humphrey Hospitality
Limited Partnership for the Comfort Inn-Farmville, Virginia
(incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.13 Agreement of Purchase and Sale dated November 29, 1994 between
Morgantown Lodging Associates Limited Partnership and Humphrey
Hospitality Limited Partnership for the Comfort Inn-Morgantown,
West Virginia (incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-11 (Registration No.
33-93346)).
*10.14 Agreement of Purchase and Sale dated November 29, 1994 between
Princeton Inn Limited Partnership and Humphrey Hospitality Limited
Partnership for the Comfort Inn-Princeton, West Virginia
(incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
II-4
<PAGE>
*10.15 Agreement of Purchase and Sale dated November 29, 1994 between
Wytheville Motor Inn Limited Partnership and Humphrey Hospitality
Limited Partnership for the Best Western-Wytheville, Virginia
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.16 Agreement of Purchase and Sale dated June 8, 1995 between Farmville
Lodging Associates, LLC, and Humphrey Hospitality Limited Partnership for the
Days Inn - Farmville, Virginia (incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-11 (Registration No.
33-93346)).
*10.17 Agreement of Purchase and Sale dated March 26, 1997, between 344
Associates Limited Partnership and Humphrey Hospitality Limited
Partnership for the Comfort Inn-Gettysburg, Pennsylvania.
*10.18 Agreement of Purchase and Sale dated March 26, 1997, between 144
Associated Limited Partnership and Humphrey Hospitality Limited
Partnership for the Holiday Inn Express-Gettysburg, Pennsylvania.
*10.19 Purchase Agreement dated March 26, 1997, between 644 Associates
Limited Partnership and Humphrey Hospitality Limited Partnership
for the Holiday Inn Express - Allentown, Pennsylvania.
*10.20 Purchase Agreement, dated March 26, 1997, between 544 Associates
Limited Partnership and Humphrey Hospitality Limited Partnership
for the Comfort Inn-Chambersburg, Pennsylvania Hotel.
*10.21 Percentage Lease Agreement dated November 29, 1994 between Humphrey Hospitality Limited
Partnership and Humphrey Hospitality Management, Inc. relating to the Comfort Inn-Dahlgren,
Virginia (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form
S-11 (Registration No. 33-93346)).
*10.22 Percentage Lease Agreement dated November 29, 1994 between Humphrey Hospitality Limited
Partnership and Humphrey Hospitality Management, Inc. relating to the Comfort Inn-Dublin, Virginia
(incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-11
(Registration No. 33-93346)).
*10.23 Percentage Lease Agreement dated November 29, 1994 between Humphrey Hospitality Limited
Partnership and Humphrey Hospitality Management, Inc. relating to the Comfort Inn-Elizabethton,
Tennessee (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on
Form S-11 (Registration No. 33-93346)).
*10.24 Percentage Lease Agreement dated November 29, 1994 between Humphrey Hospitality Limited
Partnership and Humphrey Hospitality Management, Inc. relating to the Comfort Inn-Farmville,
Virginia (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form
S-11 (Registration No. 33-93346)).
*10.25 Percentage Lease Agreement dated November 29, 1994 between Humphrey Hospitality Limited
Partnership and Humphrey Hospitality Management, Inc. relating to the Comfort Inn-Morgantown,
West Virginia (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on
Form S-11 (Registration No. 33-93346)).
*10.26 Percentage Lease Agreement dated November 29, 1994 between Humphrey Hospitality Limited
Partnership and Humphrey Hospitality Management, Inc. relating to the Comfort Inn-Princeton, West
Virginia (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form
S-11 (Registration No. 33-93346)).
*10.27 Percentage Lease Agreement dated November 29, 1994 between Humphrey Hospitality Limited
Partnership and Humphrey Hospitality Management, Inc. relating to the Best Western-Wytheville,
Virginia (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form
S-11 (Registration No. 33-93346)).
*10.28 Form of Percentage Lease Agreement between Humphrey Hospitality
Limited Partnership and Humphrey Hospitality Management, Inc.
relating to the Days Inn - Farmville, Virginia (incorporated by
reference to Exhibit 10.18 to the Company's Registration Statement
on Form S-11 (Registration No.
33-93346)).
*10.29 Percentage Lease Agreement dated November 29, 1994 between Solomons Beacon Inn Limited
Partnership and Humphrey Hospitality Management, Inc. relating to the Comfort Inn-Beacon Marina,
Solomons, Maryland (incorporated by reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-11 (Registration No. 33-93346)).
10.30 Form of Percentage Lease Agreement
II-5
<PAGE>
10.31 Lease Agreement dated December 23, 1996, between Humphrey Hospitality Limited Partnership and
Humphrey Hospitality Management, Inc. relating to the Comfort Suites-Dover, Delaware.
*10.32 Option Agreement (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement
on Form S-11 (Registration No. 33-83658)).
*10.33 Non-Competition Agreement (incorporated by reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-11 (Registration No. 33-83658))
*10.34 Services Agreement dated as of January 1, 1996 between the Company
and the Lessee (incorporated by reference to Exhibit 10.22 to the
Company's Registration Statement on Form S-11 (Registration No.
333-15897)).
*10.35 First Amendment to Services Agreement, dated as of October 1, 1996,
between the Company and the Lessee (incorporated by reference to
Exhibit 10.23 to the Company's Registration Statement on Form S-11
(Registration No. 333-15897)).
*10.36 Construction Loan Agreement dated April 1, 1996, by and among the
Partnership, and Mercantile (incorporated by reference to Exhibit
10.24 to the Company's Registration Statement on Form S-11
(Registration No. 333-15897)).
*10.37 Development Services Agreement, dated as of April 4, 1996, between
the Partnership and Humphrey Development (incorporated by reference
to Exhibit 10.25 to the Company's Registration Statement on Form
S-11 (Registration No. 333-15897)).
*10.38 First Amendment to Development Services Agreement dated November 6,
1996 between the Partnership and Humphrey Development (incorporated
by reference to Exhibit 10.26 to the Company's Registration
Statement on Form S-11 (Registration No. 333-15897)).
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1).
*23.2 Consent of Reznick Fedder & Silverman.
27.1 Financial Data Schedule.
- --------------------
*Previously filed.
II-6
<PAGE>
Item 36. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referred to in Item 33 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question as to whether such indemnification by it is against public policy
as expressed in the Act, and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Silver Spring, State of Maryland, on the 5th day of April, 1998.
Humphrey Hospitality Trust, Inc.,
a Virginia corporation
(Registrant)
By /s/ James I Humphrey, Jr.
---------------------------------
James I. Humphrey, Jr.
Chairman of the Board and President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons on the 5th day of April, 1998 in the capacities indicated.
</TABLE>
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ James I Humphrey, Jr. Chairman of the Board of Directors, President
- ------------------------------------ and Director (Principal Executive Officer,
James I. Humphrey, Jr Financial and Accounting Officer)
*
- ------------------------------------
Margaret Allen Director
*
- ------------------------------------
Andrew A. Mayer Director
*
- ------------------------------------
Leah T. Robinson Director
*
- ------------------------------------
George R. Whittemore Director
*
- ------------------------------------
Jeffrey M. Zwerdling Director
*By: /s/ James I. Humphrey, Jr.
- ------------------------------------
JAMES I. HUMPHREY, JR., as
attorney-in-fact for the
persons indicated.
II-8
</TABLE>
Exhibit 5.1
[Letterhead of Hunton & Williams]
April __, 1998
Anderson & Strudwick, Incorporated
1108 East Main Street
Richmond, Virginia 23219
Gentlemen:
We have acted as counsel for Humphrey Hospitality Trust, Inc., a
Virginia corporation (the "Company"), Humphrey Hospitality REIT Trust, a
Maryland real estate investment trust (the "REIT Trust") and Humphrey
Hospitality Limited Partnership, a Virginia limited partnership (the
"Partnership"), in connection with the offering and sale (the "Offering") by the
Company of 1,000,000 shares (the "Shares") of its common stock, $.01 par value
per share (the "Common Stock"), pursuant to the Underwriting Agreement, dated as
of April __, 1998 (the "Agreement"), among the Company, the Partnership, the
REIT Trust and Anderson & Strudwick, Incorporated (the "Underwriter").
Our opinion is being delivered at the Company's request pursuant to
Section 6(c) of the Agreement. Capitalized terms used herein but not defined
herein shall have the respective meanings given them in the Agreement.
In this connection, we have examined signed copies of the registration
statement on Form S-11 (Registration No. 333-48583) filed by the Company with
the Securities and Exchange Commission (the "Commission") on March 25, 1998
under the Securities Act of 1933, as amended (the "1933 Act"), and Amendment No.
1 to the Registration Statement filed with the Commission on April 6, 1998,
relating to the Shares (such registration statement at the time it became
effective being herein referred to as the "Registration Statement") and the
Company's final prospectus dated April __, 1998 (the "Prospectus"). We have also
examined the following documents:
1. the Agreement;
<PAGE>
Anderson & Strudwick, Incorporated
April __, 1998
Page 2
2. the Company's Amended and Restated Articles of
Incorporation filed with the Virginia State Corporation
Commission on November 22, 1994 (the "Articles");
3. the Company's Bylaws (the "Bylaws") certified by the
Secretary of the Company;
4. resolutions of the Board of Directors of the Company, dated
______________, authorizing the Company, the REIT Trust and
the Partnership to enter into the Agreement and to consummate
all of the transactions described therein to be consummated by
them;
5. the Second Amended and Restated Agreement of Limited
Partnership of the Partnership, dated as of September 2, 1997;
and
6. the Certificate of Limited Partnership of the Partnership
filed with the Virginia State Corporation Commission on August
29, 1994 (the "Certificate of Limited Partnership").
We have also reviewed such books and records of the Company and the
Partnership and such other records and documents as we have considered necessary
for the purposes of this opinion.
For purposes of the opinions expressed below, we have assumed (i) the
authenticity of all documents submitted to us as originals, (ii) the conformity
to the originals of all documents submitted as photostatic copies and the
authenticity of the originals and (iii) due authorization, execution and
delivery of all documents by all parties and the validity and binding effect
thereof (other than the authorization, execution and delivery of documents by
the Company and the Partnership and the validity and binding effect thereof upon
the Company and the Partnership). Further, we have assumed due and complete
compliance by the Underwriters with all applicable requirements under the 1933
Act and the rules and regulations promulgated thereunder (the "1933 Act
Regulations").
As to factual matters, we have relied upon representations included in
the Agreement, upon certificates of officers of the Company and upon
certificates of public officials.
As to any opinion regarding the enforceability of the Agreement, all
are limited to the extent enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other laws relating to or affecting
creditors' rights generally and by principles of equity, whether considered at
law or in equity, and except to the extent that enforcement of the
indemnification and contribution provisions set forth in Section 7 of the
Agreement may be limited by federal or state securities laws or the public
policy underlying such laws.
<PAGE>
Anderson & Strudwick, Incorporated
April __, 1998
Page 3
I.
Based upon the foregoing and such other information and documents as we
have considered necessary for the purposes hereof, we are of the opinion that:
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the Commonwealth of Virginia,
with the corporate power and authority to execute, deliver and perform the
Agreement and to conduct its business as described in the Prospectus. The
Company is qualified or registered to transact business as a foreign corporation
and is in good standing in the states of Delaware, Florida, Kentucky, Maryland,
North Carolina, Pennsylvania, Tennessee and West Virginia.
(ii) The Partnership was duly formed and is validly existing as a
limited partnership under the Virginia Revised Uniform Limited Partnership Act
with the partnership power and authority to execute, deliver and perform the
Agreement and to conduct its business as described in the Prospectus. The
Partnership is qualified or registered to transact business as a foreign
partnership and is in good standing in the states of Delaware, Florida,
Kentucky, Maryland, North Carolina, Pennsylvania, Tennessee and West Virginia.
(iii) Except such as has been obtained, no consent, approval,
authorization, order, license, registration or filing by or with any
governmental agency or body is necessary for the issuance and sale of the
Shares, the execution, delivery and performance by the Company and the
Partnership of the Agreement and the consummation by the Company and the
Partnership of the transactions contemplated thereby, except as may be required
by state securities, blue sky or real estate syndication laws or required by the
National Association of Securities Dealers, Inc., as to which in each case we
express no opinion.
(iv) The Company has the corporate power and authority to execute,
deliver and perform the Agreement and to consummate the transactions
contemplated therein. The Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding agreement of the
Company.
(v) The Partnership has the partnership power and authority to execute,
deliver and perform the Agreement and to consummate the transactions
contemplated therein. The Agreement has been
<PAGE>
Anderson & Strudwick, Incorporated
April __, 1998
Page 4
duly authorized, executed and delivered by the Partnership and constitutes a
valid and binding agreement of the Partnership, enforceable in accordance with
its terms.
(vi) Neither the execution, delivery and performance of the Agreement,
nor the consummation of the transactions contemplated thereby by either such
entity will violate the Articles of Incorporation, Bylaws, Certificate of
Limited Partnership, or Partnership Agreement as amended by the Amendment, as
applicable, of the Company or the Partnership, or result in a breach of, or
constitute a default under, the terms or conditions of any contract or form of
contract filed as an exhibit to the Registration Statement; and to our
knowledge, the execution and delivery of the Agreement by the Company or the
Partnership will not violate any applicable statute, rule or regulation or any
judgment, decree or order of any court or governmental agency or body binding on
the Company or the Partnership or any of their respective businesses or hotel
properties, or result in the creation or imposition of any lien, charge, claim
or encumbrance upon any property or asset of the Company or the Partnership.
(vii) The statements set forth in the Prospectus under the caption
"Description of Capital Stock," insofar as they purport to constitute a summary
of the terms of the Shares and laws relating thereto, fairly summarize such
terms and applicable law, and present the information called for by the 1933 Act
and 1933 Act Regulations. The Shares conform in all material respects as to
legal matters to the description thereof contained in the Registration Statement
and the Prospectus.
(viii) The Shares have been duly and validly authorized by the Company
and, when issued and delivered against payment as provided in the Agreement,
will be validly issued, fully paid and nonassessable. No person or entity holds
preemptive rights with respect to any of the Shares. The form of the
certificates evidencing the Shares complies with all applicable requirements of
Virginia law.
(ix) The Common Stock, including the Shares, is approved for quotation
on The Nasdaq Stock Market.
(x) The Registration Statement has become effective under the 1933 Act
and, to our knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceeding for that purpose has
been instituted or is pending or contemplated under the 1933 Act.
<PAGE>
Anderson & Strudwick, Incorporated
April __, 1998
Page 5
(xi) Neither the Company, the REIT Trust nor the Partnership is, or
solely as the result of consummation of the transactions described in the
Prospectus under the caption "Use Of Proceeds" will become, an "investment
company," or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
(xii) To our knowledge and except as described in the Prospectus, there
is not pending or threatened, any action, suit, proceeding, inquiry or
investigation against either of the Company or the Partnership or any of their
officers and directors or to which the properties, assets or rights of either of
them are subject, which, if determined adversely to either the Company or the
Partnership would individually or in the aggregate (a) could reasonably be
expected to have a material adverse effect on the financial position, results of
operations, business or material assets of any of the Company or the
Partnership, taken as a whole or (b) that could reasonably be expected to
adversely affect the consummation of the transactions contemplated by the
Agreement.
(xiii) The information in the Prospectus under the captions "Certain
Provisions of Virginia Law and of the Company's Articles of Incorporation and
Bylaws," "Shares Available for Future Sale," and "Federal Income Tax
Considerations," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by us, is correct in all material respects, and
presents fairly the information required to be disclosed therein under the 1933
Act and the 1933 Act Regulations.
(xiv) The units of limited partnership interest in the Partnership to
be issued to the Company in connection with the transactions contemplated by the
Agreement (the "Units") have been duly and validly authorized by the Partnership
and the offer and sale of such Units by the Partnership constitutes an exempted
transaction pursuant to Section 4(2) of the 1933 Act.
III.
We have participated in various conferences with the officers and
directors of the Company and its independent certified public accountants. In
some conferences, you and your counsel also participated. At those conferences,
the contents of the Registration Statement and Prospectus were discussed and
revised. Since the dates of those conferences, we have inquired
<PAGE>
Anderson & Strudwick, Incorporated
April __, 1998
Page 6
of certain officers whether there had been any material change in
the affairs of the Company.
Because of the inherent limitations in the independent verification of
factual matters, and the character of determinations involved in the preparation
of registration statements under the 1933 Act, we are not passing upon, and do
not assume any responsibility for, and make no representation that we have
independently verified, the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, except as
specifically set forth above. Also, we do not express any opinion or belief as
to the financial statements or other financial or statistical information which
is or should be set forth in the Registration Statement and Prospectus or any
information furnished in writing by the Underwriter expressly for use in the
Registration Statement.
However, subject to the foregoing, on the basis of our participation in
the conferences referred to above and our examination of the documents referred
to herein, we advise you that (a) in our opinion, the Registration Statement,
when it became effective, and the Prospectus, as of its date and as of the date
hereof (other than with respect to the financial statements and other financial
or statistical data which is or should be included therein, as to which we
express no belief or opinion) comply as to form in all material respects to the
requirements of the 1933 Act and the 1933 Act Regulations; and (b) we do not
know of any contracts or documents, or any statutes or regulations applicable to
the Company or the Partnership, of a character required to be described in the
Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required. Further,
nothing has come to our attention that leads us to believe that the Registration
Statement, when it became effective, contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; or that the
Prospectus, as of its date and as of the date hereof, contained or contains any
untrue statement of a material fact or omitted or omits to state any material
fact required to be stated therein or necessary to make the statements, in light
of the circumstances under which they were made, not misleading.
<PAGE>
Anderson & Strudwick, Incorporated
April __, 1998
Page 7
We do not purport to express an opinion on any laws other than those of
the Commonwealth of Virginia and the United States of America.
We express no opinion herein on any party's compliance with
environmental laws or regulations, or on title to, or the zoning or permitted
uses of, any real estate described in the Prospectus, or on any other local laws
relating to the ownership, leasing or operation of such real estate.
The opinions set forth above do not include any opinions with respect
to state securities laws or any regulations adopted thereunder, and the opinion
set forth in the first sentence of paragraph I.(x) above is based upon oral
representations of the Commission's staff. The opinions set forth in paragraphs
I.(i) and (ii), to the extent that they relate to qualification or registration
to do business in a state, are based solely on certificates and oral advice from
the Virginia State Corporation Commission, the State of Delaware Secretary of
State, the State of Florida Department of State, the State of Kentucky Secretary
of State, the Maryland State Department of Assessments and Taxation, the State
of North Carolina Secretary of State, the Commonwealth of Pennsylvania
Department of State, the State of Tennessee Secretary of State and the State of
West Virginia Secretary of State.
Our opinion is rendered as of the date hereof and we do not undertake
to advise you of any changes in the opinions expressed herein from matters that
may hereafter arise or be brought to our attention. Whenever a statement herein
is qualified by "to our knowledge," "known to us" or a similar phrase, we do not
intend to indicate that we have affirmative knowledge of the matter set forth in
such statements; rather, we intend to indicate only that, during the course of
representation of the Company, no information that would give us current actual
knowledge of the inaccuracy of such statement has come to the attention of those
attorneys in this firm who have performed legal services in connection with the
representation described in the introductory paragraph of this opinion letter,
and we have not undertaken any independent investigations to determine the
accuracy of such statements.
No one but you is entitled to rely on this opinion without our prior
written consent. Notwithstanding the foregoing, your counsel, Willcox & Savage,
P.C., is entitled to rely upon certain
<PAGE>
Anderson & Strudwick, Incorporated
April __, 1998
Page 8
opinions with respect to Virginia law expressed herein in connection with its
opinion to you of even date herewith.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement.
Very truly yours,
Exhibit 8.1
[Letterhead of Hunton & Williams]
April __, 1998
Humphrey Hospitality Trust, Inc.
12301 Old Columbia Pike
Silver Spring, Maryland 20904
Humphrey Hospitality Trust, Inc.
Qualification as
Real Estate Investment Trust
Ladies and Gentlemen:
We have acted as counsel to Humphrey Hospitality Trust, Inc.,
a Virginia corporation (the "Company"), in connection with the preparation of a
Form S-11 registration statement (the "Registration Statement") filed with the
Securities and Exchange Commission ("SEC") on March 25, 1998 (No. 333-48583),
with respect to the offering and sale (the "Offering") of 1,150,000 shares of
common stock, par value $.01 per share, of the Company (the "Common Stock"), the
Company's contribution of the net proceeds of the Offering to Humphrey
Hospitality REIT Trust, a wholly owned subsidiary of the Company (the "General
Partner"), and the General Partner's contribution of such net proceeds to
Humphrey Hospitality Limited Partnership, a Virginia limited partnership (the
"Operating Partnership"), in exchange for an additional general partnership
interest in the Operating Partnership. You have requested our opinion regarding
certain U.S. federal income tax matters in connection with the Offering.
The Operating Partnership and Solomons Beacon Inn Limited
Partnership, a Maryland limited partnership (the "Subsidiary Partnership"),
currently own interests in 20 hotels and the associated personal property (the
"Hotels"). The Operating Partnership owns 19 of the Hotels directly and the
Subsidiary Partnership owns the remaining Hotel. The Operating Partnership owns
a 99% general partnership interest, and the Company owns a 1% limited
partnership interest, in the Subsidiary Partnership. The Operating Partnership
and the Subsidiary Partnership lease each of the Hotels to Humphrey Hospitality
Management, Inc., a Maryland corporation (the Lessee"), pursuant to
substantially similar operating leases (other than the lease for the Dover,
Delaware Comfort Suites, which provides only for the payment of fixed rent)
(collectively, the "Leases"). The Lessee entered into substantially similar
management agreements (collectively, the "Management Agreements") with Humphrey
Hotels, Inc., a Maryland corporation (the "Operator"), pursuant to which the
Operator operated and managed the Hotels on behalf of the Lessee until early
1996, when the Lessee terminated the Management Agreements and began operating
and managing the Hotels.
In connection with the opinions rendered below, we have
examined the following:
1. the Company's Amended and Restated Articles of Incorporation,
as filed with the Secretary of State of the Commonwealth of Virginia on November
22, 1994;
2. the Company's Bylaws;
3. the prospectus contained as part of the Registration
Statement (the "Prospectus");
4. the Second Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, dated as of September 2, 1997 (the
"Operating Partnership Agreement"), among the General Partner, as general
partner, and several limited partners;
5. the First Amended and Restated Agreement of Limited
Partnership of the Subsidiary Partnership, dated November 29, 1994 (the
"Subsidiary Partnership Agreement"), among the Operating Partnership, as general
partner, and the Company, as limited partner;
6. the Leases;
7. the Management Agreements; and
8. such other documents as we have deemed necessary or
appropriate for purposes of this opinion.
In connection with the opinions rendered below, we have
assumed generally that:
1. Each of the documents referred to above has been duly authorized,
executed, and delivered; is authentic, if an original, or is accurate, if a
copy; and has not been amended.
2. During its taxable year ending December 31, 1998 and subsequent
taxable years, the Company, the General Partner, the Operating Partnership, and
the Subsidiary Partnership have operated and will continue to operate in such a
manner that makes and will continue to make the representations contained in a
certificate, dated the date hereof and executed by a duly appointed officer of
the Company (the "Officer's Certificate"), true for such years.
3. The Company will not make any amendments to its organizational
documents, the Operating Partnership Agreement, or the Subsidiary Partnership
Agreement after the date of this opinion that would affect its qualification as
a real estate investment trust (a "REIT") for any taxable year.
4. Each partner of the Operating Partnership and the Subsidiary
Partnership (a "Partner") that is a corporation or other entity, other than the
General Partner, has a valid legal existence.
5. Each Partner has full power, authority, and legal right to enter
into and perform the terms of the Operating Partnership Agreement and the
Subsidiary Partnership Agreement and the transactions contemplated thereby.
6. No action will be taken by the Company, the General Partner, the
Operating Partnership, the Subsidiary Partnership, or the Partners after the
date hereof that would have the effect of altering the facts upon which the
opinions set forth below are based.
In connection with the opinions rendered below, we
also have relied upon the correctness of the representations contained in the
Officer's Certificate.
For purposes of our opinions, we made no independent
investigation of the facts contained in the documents and assumptions set forth
above, the representations set forth in the Officer's Certificate, or the
Prospectus. Consequently, we have relied on your representations that the
information presented in such documents, or otherwise furnished to us,
accurately and completely describes all material facts relevant to our opinions.
No facts have come to our attention, however, that would cause us to question
the accuracy and completeness of such facts or documents in a material way.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussion in
the Prospectus under the caption "Federal Income Tax Considerations" (which is
incorporated herein by reference), we are of the opinion that:
(a) the Company qualified to be taxed as a REIT pursuant to
sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"), for its taxable years ended December 31, 1994
through December 31, 1997, and the Company's organization and current
and proposed method of operation will enable it to continue to qualify
as a REIT for its taxable year ended December 31, 1998, and in the
future; and
(b) the descriptions of the law and the legal conclusions
contained in the Prospectus under the caption "Federal Income Tax
Considerations" are correct in all material respects, and the
discussion thereunder fairly summarizes the federal income tax
considerations that are likely to be material to a holder of the Common
Stock.
We will not review on a continuing basis the Company's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Company's operations for its 1998 and subsequent taxable
years will satisfy the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the
Code and the Treasury regulations thereunder (the "Regulations"), published
administrative interpretations thereof, and published court decisions. The
Internal Revenue Service has not issued Regulations or administrative
interpretations with respect to various provisions of the Code relating to REIT
qualification. No assurance can be given that the law will not change in a way
that will prevent the Company from qualifying as a REIT.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement. We also consent to the references to Hunton &
Williams under the caption "Federal Income Tax Considerations" in the
Prospectus. In giving this consent, we do not admit that we are in the category
of persons whose consent is required by Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations promulgated thereunder by the SEC.
The foregoing opinions are limited to the U.S. federal income
tax matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinions expressed herein after the date of this letter. This opinion letter
is solely for the information and use of the addressee, and it may not be
distributed, relied upon for any purpose by any other person, quoted in whole or
in part or otherwise reproduced in any document, or filed with any governmental
agency without our express written consent.
Very truly yours,
Exhibit 10.4
HUMPHREY HOSPITALITY LIMITED PARTNERSHIP
FIRST AMENDMENT TO FIRST AMENDED
AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
THIS FIRST AMENDMENT TO FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP (the "Amendment") made as of the 20th day of July 1995, among
Humphrey Hospitality Trust, Inc. a Virginia corporation, as general partner (the
"General Partner"), and James I. Humphrey, Jr., Humphrey Associates, Inc., a
Maryland corporation and Farmville Lodging Associates, LLC, a Maryland limited
liability company, as limited partners, recites and provides as follows:
RECITALS
Humphrey Hospitality Limited Partnership (the "Partnership") was formed
as a limited partnership under the laws of the Commonwealth of Virginia upon the
filing of its Certificate of Limited Partnership with the Virginia State
Corporation Commission on August 29, 1994. The Partnership is governed by the
First Amended and Restated Agreement of Limited Partnership, dated November 29,
1994 (the "Agreement"). Capitalized terms used and not defined herein shall have
the meaning given to them in the Agreement.
The purpose of this Amendment is (i) to admit a new Limited Partner to
the Partnership, (ii) to provide registration rights to the new limited partner
and any additional Limited Partners of the Partnership for the shares of stock
of the General Partner that such Limited Partners may receive upon redemption of
their Units, and (iii) to amend Exhibit A to the Agreement to reflect the
issuance of Units to the General Partner and to the new Limited Partner.
AMENDMENT
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
of the parties hereto, and of other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Farmville Lodging Associates, LLC, a Maryland limited liability company, is
hereby admitted as a Limited Partner of the Partnership, and Farmville Lodging
Associates, LLC agrees to be bound and subject to all terms, conditions and
provisions of the
Agreement as amended hereby.
<PAGE>
2. The definition of "Request" in Article I is hereby deleted.
3. The definition of "Target Effective Date" in Article I is hereby deleted.
4. Section 4.02(a)(i) is hereby amended by moving the last sentence thereof and
inserting it after the first sentence thereof.
5. Section 8.05(a) is hereby amended by deleting the first sentence thereof in
its entirety and replacing it with the following:
Subject to the terms of Section 8.05, on or after the date (i) that is
one (1) year after the closing of the Offering, James I Humphrey, Jr.
and Humphrey Associates, Inc. as Limited Partners with respect to the
Units received by them in connection with the offering of the REIT
Shares issued on November 29, 1994, or (ii) that is six months after
the issuance by the Partnership of any Units other than those issued in
connection with the November 29, 1994 issuance of REIT Shares (each
such date, a "First Redemption Date" with respect to the applicable
Units), each Limited Partner shall have the right (the "Redemption
Right") to require the Partnership to redeem on a Specified Redemption
Date all or a portion of the applicable Units held by such Limited
Partner at a redemption price equal to and in the form of the
Redemption Amount.
6. Section 8.05(c) is hereby amended by deleting the first word thereof and
replacing it with the following: "Except as provided in Section 8.05(e), the"
7. Section 8.05(e) is hereby added to read as follows:
(e) Notwithstanding any other provision of this Agreement, the
General Partner shall place appropriate restrictions on the ability of
the Limited Partners to exercise their Redemption Rights as and if
deemed necessary to ensure that the Partnership does not constitute a
"publicly traded partnership" under section 7704 of the Code.
- 2 -
<PAGE>
8. Section 8.06(a) is hereby deleted in its entirety and replaced with the
following:
(a) Shelf Registration. Within two weeks of any First
Redemption Date, the General Partner agrees to file with the Commission
a shelf registration statement under Rule 415 of the Securities Act, or
any similar rule that may be adopted by the Commission (the "Shelf
Registration"), with respect to all of the Redemption Shares that are
first eligible for redemption on such date. The General Partner will
use its best efforts to have the Shelf Registration declared effective
under the Securities Act as soon as practicable after such filing and
to keep the Shelf Registration continuously effective until the earlier
of (i) the date when all of the Redemption Shares registered thereby
are sold, or (ii) the date on which all of the holders of Redemption
Shares registered thereunder may sell such Redemption Shares without
registration under the Securities Act pursuant to Rule 144(k) under the
Securities Act. The General Partner further agrees to supplement or
make amendments to the Shelf Registration, if required by the rules,
regulations or instructions applicable to the registration form
utilized by the Company or by the Securities Act or rules and
regulations thereunder for the Shelf Registration. Notwithstanding the
foregoing, if for any reason the effectiveness of the Shelf
Registration is delayed or suspended or it ceases to be available for
sales of Redemption Shares thereunder, the Shelf Registration period
shall be extended by the aggregate number of days of such delay,
suspension or unavailability.
9. Section 8.06(b) is hereby deleted in its entirety and replaced with the
following:
(b) Registration and Qualification Procedures. The General
Partner is required by the provisions of Section 8.06(a) hereof to use
its best efforts to have a Shelf Registration relating to the
Redemption Shares declared effective under the Securities Act as soon
as practicable after each applicable First Redemption Date.
Accordingly, the General Partner, as soon as practical after a First
Redemption Date, shall with respect to the Redemption Shares first
eligible for redemption on such date:
- 3 -
<PAGE>
(i) prepare and file with the Commission a
registration statement, including amendments thereof and supplements
relating thereto, with respect to such Redemption Shares, in connection
with which the General Partner will give each holder of such Redemption
Shares, their underwriters, if any, and their counsel and accountants a
reasonable opportunity to participate in the preparation thereof and
will give such persons reasonable access to its books, records,
officers and independent public accountants;
(ii) use its best efforts to cause the registration
statement to be declared effective by the Commission;
(iii) keep the registration statement effective and
the related prospectus current throughout the Shelf Registration
period; provided, however, that the General Partner shall have no
obligation to file any amendment or supplement at its own expense or
the Partnership's expense more than ninety (90) days after the
effective date of the registration statement;
(iv) furnish to each holder of such Redemption Shares
such numbers of copies of prospectuses, and supplements or amendments
thereto, and such other documents as such holder reasonably requests;
(v) register or qualify such Redemption Shares
covered by the registration statement under the securities or blue sky
laws of such jurisdictions within the United States as any holder of
the such Redemption Shares shall reasonably request, and do such other
reasonable acts and things as may be required of it to enable such
holders to consummate the sale or other disposition in such
jurisdictions of such Redemption Shares; provided, however, that the
General Partner shall not be required to (i) qualify as a foreign
corporation or consent to a general and unlimited service or process in
any jurisdictions in which it would not otherwise be required to be
qualified or so consent or (ii) qualify as a dealer in securities;
(vi) furnish, at the request of the holders of such
Redemption Shares, on the date such Redemption Shares are delivered to
the
- 4 -
<PAGE>
underwriters for sale pursuant to such registration, or, if such
Redemption Shares are not being sold through underwriters, on the date
the Shelf Registration relating to such Redemption Shares becomes
effective, (A) a securities opinion of counsel representing the General
Partner for the purposes of such registration covering such legal
matters as are customarily included in such opinions and (B) letters of
the firm of independent public accountants that certified the financial
statements included in the registration statement, addressed to the
underwriters, covering substantially the same matters as are
customarily covered in accountant's letters delivered to underwriters
in underwritten public offerings of securities and such other financial
matters as such holders (or the underwriters, if any) may reasonably
request;
(vii) otherwise use its best efforts to comply with
all applicable rules and regulations of the Commission, and make
available to its shareholders as soon as reasonably practicable, but
not later than sixteen (16) months after the effective date of the
Shelf Registration, an earnings statement covering a period of at least
twelve (12) months beginning after the effective date of the Shelf
Registration, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act;
(viii) enter into and perform an underwriting
agreement relating to the related Redemption Shares with the managing
underwriter, if any, selected as provided herein, containing customary
(A) terms of offer and sale of the securities, payment provisions,
underwriting discounts and commissions and (B) representations,
warranties, covenants, indemnities, terms and conditions; and
(ix) keep the holders of such Redemption Shares
advised as to the initiation and progress of the registration.
- 5 -
<PAGE>
10. Exhibit A is hereby deleted in its entirety and replaced with the following:
EXHIBIT A
<TABLE>
<CAPTION>
Agreed Value
of Non-Cash
Partner Cash Capital Partnership Percentage
and Address Contribution Contribution Units Interest
<S> <C>
General
Partner:
Humphrey $15,746,065 2,331,700 78.90560%
Hospitality
Trust, Inc.
12301 Old
Columbia Pike,
Silver Spring,
MD 20904
Limited
Partners:
James I. $3,130,921 522,587 17.68454%
Humphrey, Jr.
12301 Old
Columbia Pike,
Silver Spring,
MD 20904
Humphrey $ 31,628 5,279 0.17864%
Associates,
Inc.
12301 Old
Columbia Pike
Silver Spring,
MD 20904
Farmville $ 740,001 95,484 3.23122%
Lodging
Associates,
LLC
12301 Old
Columbia Pike,
Silver Spring,
MD 20904
$15,746,065 $3,902,550 2,955,050 100.00000%
========== ========= ========= =========
- 6 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to First Amended and Restated Agreement of Limited Partnership to be executed
under seal as of the date
first written above.
GENERAL PARTNER:
HUMPHREY HOSPITALITY TRUST, a
Virginia corporation
By: //s// James I. Humphrey, Jr.
------------------------------------
James I. Humphrey, Jr.
President
ORIGINAL LIMITED PARTNERS:
By: //s// James I. Humphrey, Jr.
------------------------------------
James I. Humphrey, Jr.
HUMPHREY ASSOCIATES, INC.,
a Maryland corporation
//s// James I. Humphrey, Jr.
------------------------------------
James I. Humphrey, Jr.
President
NEW LIMITED PARTNER
FARMVILLE LODGING ASSOCIATES, LLC,
a Maryland limited liability
company
By: //s// James I. Humphrey, Jr.
------------------------------------
James I. Humphrey, Jr.
Member
- 7 -
</TABLE>
EXHIBIT 10.5
HUMPHREY HOSPITALITY LIMITED PARTNERSHIP
SECOND AMENDMENT TO
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
THIS SECOND AMENDMENT (the "Amendment") is made effective as of
March 13, 1997, by and between Humphrey Hospitality Trust, Inc. (the
"Withdrawing General Partner"), Humphrey Hospitality REIT Trust (the
"General Partner"), and James I. Humphrey, Jr., Humphrey Associates, Inc.
and Farmville Lodging Associates, LLC (together, the "Limited Partners").
WHEREAS, Humphrey Hospitality Limited Partnership (the "Partnership")
was formed as a limited partnership under the laws of the Commonwealth of
Virginia by a Certificate of Limited Partnership filed with the Secretary of
State of the Commonwealth of Virginia on August 28, 1994. The Partnership is
governed by an Agreement of Limited Partnership dated August 28, 1994, and
amended and restated November 29, 1994 and further amended on July 20, 1995,
maintained at the offices of the Partnership (the "Original Partnership
Agreement"); and
WHEREAS, the parties hereto wish to reflect the admission of Humphrey
Hospitality REIT Trust as a substitute general partner and allow the withdrawal
of Humphrey Hospitality Trust, Inc. as general partner through this amendment to
the provisions of the Partnership Agreement.
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises contained herein and in the Partnership Agreement, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
. Humphrey Hospitality REIT Trust is hereby admitted as the sole
General Partner of the Partnership and shall be assigned all the right, title
and interest in the Partnership currently held by the Withdrawing General
Partner.
. Humphrey Hospitality Trust, Inc. hereby withdraws as General
Partner of the Partnership.
. Exhibit A is hereby deleted in its entirety and replaced with
the following:
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Agreed Value of
Partner Cash Non-Cash Capital Partnership
and Address Contributions Contributions Units Percentage Interest
<S> <C>
General
Partner:
Humphrey $24,356,487 $3,481,700 84.81505%
Hospitality REIT
Trust
12301 Old Columbia
Pike, Silver
Spring, Maryland
20904
Limited Partners:
James I. Humphrey, $3,130,921 $ 522,587 12.73034%
Jr.
12301 Old Columbia
Pike,
Silver Spring,
Maryland 20904
Humphrey $ 31,628 $ 5,279 0.12860%
Associates.
12301 Old Columbia
Pike,
Silver Spring,
Maryland 20904
Farmville Lodging $ 740,001 $ 95,484 2.32601%
Associates, LLC
12301 Old Columbia
Pike, Silver
Spring, Maryland
20904
$24,356,487 $3,902,550 $4,105,050 100.0000%
=========== ========== ========== =========
</TABLE>
Except as amended hereby, the terms and provisions of the Partnership
Agreement which are incorporated herein by this reference are hereby reaffirmed
and shall remain in full force and effect and shall be binding upon the parties
hereto.
This Agreement may be executed in several counterparts and all so
executed shall constitute one agreement binding on all parties hereto.
<PAGE>
WITNESS the execution under seal effective as of the day and date
first above written.
WITNESS/ATTEST: WITHDRAWING GENERAL PARTNER:
HUMPHREY HOSPITALITY TRUST, a
Virginia corporation
By: /s/ James I. Humphrey, Jr.
----------------------------
James I. Humphrey, Jr.
President
WITNESS/ATTEST: GENERAL PARTNER:
HUMPHREY HOSPITALITY REIT TRUST
By: /s/ James I. Humphrey, Jr.
-----------------------------
James I. Humphrey, Jr.
President
WITNESS/ATTEST: LIMITED PARTNERS:
By: /s/ James I. Humphrey, Jr.
-------------------------------
JAMES I. HUMPHREY, JR.
HUMPHREY ASSOCIATES, INC., a
Maryland corporation
By: /s/ James I. Humphrey, Jr.
------------------------------
James I. Humphrey, Jr.
President
FARMVILLE LODGING ASSOCIATES,
LLC, a Maryland limited
liability company
By: /s/ James I. Humphrey, Jr.
-------------------------------
James I. Humphrey, Jr.
Member
EXHIBIT A
<TABLE>
<CAPTION>
Agreed Value
of Non-Cash
Partner Cash Capital Partnership Percentage
and Address Contribution Contribution Units Interest
<S> <C>
General
Partner:
Humphrey $24,356,487 3,481,700 84.12%
Hospitality
Trust, Inc.
12301 Old
Columbia Pike,
Silver Spring,
MD 20904
Limited
Partners:
James I. $3,130,921 522,587 17.68454%
Humphrey, Jr.
12301 Old
Columbia Pike,
Silver Spring,
MD 20904
Humphrey $ 31,628 5,279 0.13%
Associates,
Inc.
12301 Old
Columbia Pike
Silver Spring,
MD 20904
Farmville $ 740,001 95,484 2.30%
Lodging
Associates,
LLC
12301 Old
Columbia Pike,
Silver Spring,
MD 20904
Humphrey-Key Largo
Associates, L.P.
12301 Old Columbia Pike
Silver Sprint, MD 20904 $ 370,000 34,023 0.82%
----------- ---------- ---------- -----------
$15,746,065 $3,902,550 2,955,050 100.00000%
========== ========== ========== ===========
</TABLE>
Exhibit 10.6
HUMPHREY HOSPITALITY LMITED PARTNERSHIP
THIRD AMENDMENT TO FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHP
THIS THIRD AMENDMENT TO FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP (this "Amendment") is made as of the _____ day of ______________,
1997, by and among Humphrey Hospitality Reit Trust, a Maryland real estate
investment trust, as General Partner (the "General Partner"), and James I
Humphrey, Jr., Humphrey Associates, Inc., a Maryland corporation and Farmville
Lodging Associates, LLC, a Maryland limited liability company, as Limited
Partners (the "Limited Partners").
WHEREAS, Humphrey Hospitality Limited Partnership (the "Partnership")
was formed as a limited partnership under the laws of the Commonwealth of
Virginia upon the filing of its Certificate of Limited Partnership with the
Virginia State Corporation Commission on August 29, 1994, and is governed by a
First Amended and Restated Agreement of Limited Partnership, dated November 29,
1994, as amended by a First Amendment dated July 20, 1995 and a Second Amendment
dated March 13, 1997 (collectively, the "Partnership Agreement").
WHEREAS, Humphrey Hospitality Trust, Inc., a Virginia corporation
("HHTI") was originally the general partner of the Partnership and by virtue of
the Second Amendment withdrew from the Partnership and the General Partner, a
wholly-owned subsidiary of HHTI, became the general partner of the Partnership;
and
WHEREAS, as a result of the withdrawal of HHTI and the admission of the
General Partner, certain clarifying changes to the Partnership Agreement are
necessary.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
hereinafter set forth, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Amendments to Agreement.
(a) The definition of "Administrative Expenses" is hereby
amended to add the words "and HHTI" after the words "General Partner" each time
they appear.
(b) The definition of "Cash Amount" is hereby amended to
substitute the word "HHTI" for the words "the General Partner" each time they
appear.
(c) The definition of "General Partner" is amended to
substitute "Humphrey Hospitality Reit Trust" for the words "Humphrey Hospitality
Trust, Inc."
(d) The definition of "Offering" is hereby amended to
substitute the word "HHTI" for the words "the General Partner" each time they
appear.
(e) The definition of "Prospectus" is hereby amended to
substitute the word "HHTI's" for the words "the General Partner's".
(f) The definition of "Redemption Amount" is hereby amended to
substitute the word "HHTI" for the words "the General Partner".
(g) The definition of "REIT Expenses" is hereby amended to
substitute the word "HHTI" for the words "the General Partner" each time they
appear.
(h) The definition of "REIT Shares Amount" is hereby amended
to substitute the word "HHTI" for the words "the General Partner".
(i) The definition of "Specified Redemption Date" is hereby
amended to substitute the word "HHTI" for the words "the General Partner".
(j) Section 2.03(a) is hereby amended to substitute the words
"Humphrey Hospitality Reit Trust" for the words "Humphrey Hospitality Trust,
Inc." each time they appear.
(k) Article III is hereby amended to substitute the word
"HHTI" for the words "the General Partner" each time they appear in the first
sentence thereof.
(l) Section 4.02(a)(i)(1) is hereby amended to substitute the
word "HHTI" for the words "the General Partner" in the second line and in the
last line thereof.
(m) Section 4.02(a)(ii) is hereby amended and restated in its
entirety as follows:
(ii) Upon Issuance of New Securities. After the
initial public offering for HHTI (the "Initial Offering"),
HHTI shall not issue any additional REIT shares (other than
REIT shares issued in connection with a redemption pursuant to
Section 8.05 hereof) or rights, options, warrants or
convertible or exchangeable securities containing the right to
subscribe for or purchase REIT shares (collectively, "New
Securities") other than to all holders of REIT shares, unless
(A) the General Partner shall cause the Partnership to issue
to the General Partner, Partnership Interests or rights,
options, warrants or convertible or exchangeable securities of
the Partnership having designations, preferences and other
rights, all such that the economic interests are substantially
similar to those of the New Securities, and (B) HHTI
contributes to the General Partner and the General Partner
contributes to the Partnership the proceeds from the issuance
of such New Securities and from the exercise of rights
contained in such New Securities to the Partnership; provided,
however, that HHTI is allowed to issue New Securities in
connection with an acquisition of property to be held directly
by HHTI, but if and only if such direct acquisition and
issuance of New Securities have been approved and determined
to be in the best interests of HHTI, the General Partner and
the Partnership by a majority of the directors of HHTI, which
majority includes a majority of the Independent Directors (as
defined in the prospectus for the Initial Offering). Without
limiting the foregoing, HHTI is expressly authorized to issue
New Securities for less than fair market value and to cause
the Partnership to issue to the General Partner corresponding
Partnership Interests, so long as (x) HHTI concludes in good
faith that such issuance is in the best interests of HHTI, the
General Partner and the Partnership (for example, and not by
way of limitation, the issuance of REIT Shares and
corresponding Partnership Units pursuant to an employee stock
purchase plan providing for employee purchases of REIT shares
at a discount from fair market value or employee stock options
that have an exercise price that is less than the fair market
value of the REIT Shares, either at the time of issuance or at
the time of exercise), and (y) HHTI contributes to the General
Partner and the General Partner contributes to the Partnership
all proceeds from such issuance. By way of example, in the
event HHTI issues REIT Shares for a cash purchase price and
contributes all of the proceeds of such issuance to the
General Partner for contribution to the Partnership as
required hereunder, the General Partner shall be issued a
number of additional Partnership Units equal to the product of
(A) the number of such REIT Shares issued by HHTI, the
proceeds of which were so contributed, multiplied by (B) a
fraction, the numerator of which is one hundred percent
(100%), and the denominator of which is the Conversion Factor
in effect on the date of such contribution.
(n) Section 4.02(b) is amended to add the words "HHTI shall
contribute to the General Partner and" before the words "the General Partner" in
line 2 thereof.
(o) Section 4.03 is hereby amended by deleting the last
sentence thereof.
(p) Section 6.04(d) is hereby amended to substitute the word
"HHTI" for the words "the General Partner" in clauses (i) and (ii) thereof.
(q) Section 6.06(b) is hereby amended to substitute the word
"HHTI" for the words "the General Partner" in lines 1, 4, and 8 thereof.
(r) Section 6.09 is hereby amended to add the words "and HHTI"
after the words "the General Partner" each time they appear. Section 6.09 is
further amended to substitute the word "Directors" for the word "Trustees".
(s) Section 7.01(c) is hereby amended to add the words "and
HHTI" after the words "the General Partner" in line 2 thereof.
(t) The first sentence of Section 7.01(d) is hereby
amended and restated in its entirety as follows:
Notwithstanding Section 7.01(c), HHTI may merge into or
consolidate with another entity if immediately after such
merger or consolidation (i) substantially all of the assets of
the successor or surviving entity (the "Surviving Entity"),
are contributed to the Partnership as a Capital Contribution
in exchange for Partnership Units with a fair market value
equal to the value of the assets so contributed as determined
by the Surviving Entity in good faith and (ii) the Surviving
Entity expressly agrees to assume all obligations of HHTI
hereunder.
The second and third sentences of Section 7.01(d) are hereby amended to delete
the word "Surviving".
(u) Section 8.05(c) is hereby amended to substitute the word
"HHTI" for the words "the General Partner" in line 8 thereof, to add the words
"or HHTI" after the words "General Partner" in line 10 thereof, to add the word
",HHTI's" after the words "General Partner's" in line 11 thereof, and to add the
words "and HHTI" after the words "the General Partner" in lines 20 and 22
thereof.
(v) Section 8.06(a) is hereby amended to substitute the word
"HHTI" for the words "the General Partner" each time they appear.
(w) Section 8.06(b) is hereby amended to substitute the word
"HHTI" for the words "the General Partner" each time they appear.
(x) Section 8.06(d) is hereby amended by substituting the word
"HHTI" for the words "the General Partner" each time they appear.
(y) Section 8.06(f) is hereby amended by substituting the
word "HHTI" for the words "the General Partner".
2. Joinder of HHTI. HHTI joins in this Third Amendment to evidence its
agreement to be bound by all covenants and obligations of HHTI set forth herein.
Nothing herein shall be construed so as to make HHTI a partner in the
Partnership, however.
3. No Other Modifications. Except as expressly set forth herein, the
Partnership agreement remains in full force and effect in accordance with the
terms thereof and there are no other modifications thereto.
4. Governing Law. This Third Amendment shall be governed by the internal
laws of the State of Virginia (determined without reference to principles of
conflicts of law).
5. Counterparts. This Third Amendment may be executed in counterparts,
each of which shall constitute an original and all of which together shall
constitute one and the same agreement.
IN WITNESS WHEREOF, and intending to be legally bound, the undersigned
have executed this Third amendment as of the date and year first above written.
WITNESS: GENERAL PARTNER:
HUMPHREY HOSPITALITY REIT TRUST, a Maryland real
estate investment trust
By: /s/ James I. Humphrey, Jr.
______________________________
James I. Humphrey, Jr.
President
LIMITED PARTNERS:
/s/ James I. Humphrey, Jr.
------------------------------------
James I. Humphrey, Jr.
HUMPHREY ASSOCIATES, INC., a Maryland corporation
By: /s/ James I. Humphrey, Jr.
______________________________
James I. Humphrey, Jr.
President
FARMVILLE LODGING ASSOCIATES, LLC, a Maryland
limited liability company
By: /s/ James I. Humphrey, Jr.
______________________________
James I. Humphrey, Jr.
Authorize Member
CONSENTED TO FOR THE PURPOSES SET FORTH IN
SECTION 2:
HUMPHREY HOSPTALITY TRUST, INC.
By: /s/ James I. Humphrey
______________________________
James I. Humphrey
President
Exhibit 10.7
SECOND AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
HUMPHREY HOSPITALITY LIMITED PARTNERSHIP
<PAGE>
TABLE OF CONTENTS
EXHIBITS
EXHIBIT A - Partners, Capital Contributions and Percentage Interests
EXHIBIT B - Notice of Exercise of Redemption Right
<PAGE>
SECOND AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
HUMPHREY HOSPITALITY LIMITED PARTNERSHIP
THIS SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
HUMPHREY HOSPITALITY LIMITED PARTNERSHIP (the "Agreement") is made and entered
into as of September 2, 1997, by and among Humphrey Hospitality REIT Trust, a
Maryland real estate investment trust, as General Partner (the "General
Partner"), and James I. Humphrey, Jr., Humphrey Associates, Inc., a Maryland
corporation, Farmville Lodging Associates, LLC, a Maryland limited liability
company, and Humphrey-Key Largo Associates, L.P., a Maryland limited
partnership, as Limited Partners (the "Limited Partners").
RECITALS
WHEREAS, Humphrey Hospitality Limited Partnership (the "Partnership")
was formed as a limited partnership under the laws of the Commonwealth of
Virginia upon the filing of its Certificate of Limited Partnership with the
Virginia State Corporation Commission on August 29, 1994, and is governed by a
First Amended and Restated Agreement of Limited Partnership, dated November 29,
1994, as amended by a First Amendment dated July 20, 1995, a Second Amendment
dated March 13, 1997, and a Third Amendment dated September 2, 1997 to make
certain clarifying changes necessitated by the Second Amendment (collectively,
the "Partnership Agreement").
WHEREAS, Humphrey Hospitality Trust, Inc., a Virginia corporation
("HHTI") was originally the general partner of the Partnership and by virtue of
the Second Amendment withdrew from the Partnership and the General Partner, a
wholly-owned subsidiary of HHTI, became the general partner of the Partnership;
and
WHEREAS, the Partners desire to amend and restate the Partnership
Agreement in its entirety; and to admit Humphrey-Key Largo Associates, L.P., as
a Limited Partner.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises contained herein and in the Partnership Agreement, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
ARTICLE I
DEFINED TERMS
The following defined terms used in this Agreement shall have the
meanings specified below:
"Act" means the Virginia Revised Uniform Limited Partnership Act, as it
may be amended from time to time.
"Additional Limited Partner" means a Person admitted to this
Partnership as a Limited Partner pursuant to Section 4.02 hereof.
"Administrative Expenses" means (i) all administrative and operating
costs and expenses incurred by the Partnership, (ii) those administrative costs
and expenses of the General Partner and HHTI, including any salaries or other
payments to directors, officers and/or employees of the General Partner and HHTI
and any accounting and legal expenses of the General Partner and HHTI, which
expenses, the Partners have agreed, are expenses of the Partnership and not the
General Partner and HHTI, and (iii) to the extent not included in clause (ii)
above, REIT Expenses; provided, however, that Administrative Expenses shall not
include any administrative costs and expenses incurred by Solomons Beacon Inn
Limited Partnership that are attributable to Properties owned by the Company
directly or (ii) interest expenses attributable to any loans incurred by HHTI
the proceeds of which are distributed to its shareholders or other equity
holders pursuant to Section 4.03 hereof.
"Affiliate" means, (i) any Person that, directly or indirectly,
controls or is controlled by or is under common control with such Person, (ii)
any other Person that owns, beneficially, directly or indirectly, 5% or more of
the outstanding capital stock, shares or equity interests of such Person, or
(iii) any officer, director, employee, partner or trustee of such Person or any
Person controlling, controlled by or under common control with such Person
(excluding trustees and persons serving in similar capacities who are not
otherwise an Affiliate of such Person). For the purposes of this definition,
"control" (including the correlative meanings of the terms "controlled by" and
"under common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, through the ownership
of voting securities, partnership interests or other equity interests.
"Agreed Value" means the fair market value of a Partner's non-cash
Capital Contribution as of the date hereof as agreed to by the Partners. For
purposes of this Partnership Agreement, the Agreed Value of a Partner's non-cash
Capital Contribution shall be equal to the number of Partnership Units received
by such Partner in exchange for a Property or an interest therein or in
connection with the merger of a partnership of which such person is a partner
with and into the Partnership, or for any other non-cash asset so contributed,
multiplied by the Public Offering Price or, if the contribution is made after
the date hereof, the "Market Price" calculated in accordance with the second and
third sentences of the definition of "Cash Amount." The names and addresses of
the Partners, number of Partnership Units issued to each Partner, and the Agreed
Value of non-cash Capital Contributions is set forth on Exhibit A.
"Agreement" means this Second Amended and Restated Agreement of Limited
Partnership.
"Articles of Incorporation" means the Amended and Restated Articles of
Incorporation of HHTI filed with the Secretary of Virginia State Corporation
Commission as amended or restated from time to time.
"Capital Account" has the meaning provided in Section 4.04 hereof.
"Capital Contribution" means the total amount of capital initially
contributed or agreed to be contributed, as the context requires, to the
Partnership by each Partner pursuant to the terms of the Agreement. Any
reference to the Capital Contribution of a Partner shall include the Capital
Contribution made by a predecessor holder of the Partnership Interest of such
Partner. The paid-in Capital Contribution shall mean the cash amount or the
Agreed Value of other assets actually contributed by each Partner to the capital
of the Partnership.
"Capital Transaction" means the refinancing, sale, exchange,
condemnation, recovery of a damage award or insurance proceeds (other than
business or rental interruption insurance proceeds not reinvested in the repair
or reconstruction of Properties), or other disposition of any of Property (or
the Partnership's interest therein).
"Cash Amount" means an amount of cash per Partnership Unit equal to the
value of the REIT Shares Amount on the date of receipt by HHTI of a Notice of
Redemption. The value of the REIT Shares Amount shall be based on the average of
the daily market price of REIT Shares for the ten consecutive trading days
immediately preceding the date of such valuation. The market price for each such
trading day shall be: (i) if the REIT Shares are listed or admitted to trading
on any securities exchange or the NASDAQ-National Market System, the sale price,
regular way, on such day, or if no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, on such day, (ii) if
the REIT Shares are not listed or admitted to trading on any securities exchange
or the NASDAQ-National Market System, the last reported sale price on such day
or, if no sale takes place on such day, the average of the closing bid and asked
prices on such day, as reported by a reliable quotation source designated by
HHTI and by a majority in interest of the Limited Partners; or (iii) if the REIT
Shares are not listed or admitted to trading on any securities exchange or the
NASDAQ-National Market System and no such last reported sale price or closing
bid and asked prices are available, the average of the reported high bid and low
asked prices on such day, as reported by a reliable quotation source designated
by HHTI and by a majority in interest of the Limited Partners, or if there shall
be no bid and asked prices on such day, the average of the high bid and low
asked prices, as so reported, on the most recent day (not more than 10 days
prior to the date in question) for which prices have been so reported; provided
that if there are no bid and asked prices reported during the ten days prior to
the date in question, the value of the REIT Shares shall be determined by an
appraiser mutually agreed upon by the General Partner and a majority in interest
of the Limited Partners (excluding the General Partner). In the event that the
parties are unable to agree upon an appraiser, the General Partner and a
majority in interest of the Limited Partners (excluding the General Partner)
each shall select an appraiser. Each such appraiser shall complete an appraisal
of the fair market value of the REIT Shares within 20 days of the first attempt
at evaluating the REIT Shares, and the fair market value of the REIT Shares
shall be the average of the two appraisals; provided, however, that if the
higher appraisal exceeds the lower appraisal by more than 20% of the lower
appraisal, the two appraisers shall select a third appraiser who shall complete
an appraisal of the fair market value of the REIT Shares no later than 30 days
after the first attempt at evaluating the REIT Shares. In such case, the fair
market value of the REIT Shares shall be the average of the two appraisals
closest in value.
"Certificate" means any instrument or document that is required under
the laws of the Commonwealth of Virginia, or any other jurisdiction in which the
Partnership conducts business, to be signed and sworn to by the Partners of the
Partnership (either by themselves or pursuant to the power-of-attorney granted
to the General Partner in Section 8.02 hereof) and filed for recording in the
appropriate public offices within the Commonwealth of Virginia or such other
jurisdiction to perfect or maintain the Partnership as a limited partnership, to
effect the admission, withdrawal, or substitution of any Partner of the
Partnership, or to protect the limited liability of the Limited Partners as
limited partners under the laws of the Commonwealth of Virginia or such other
jurisdiction.
"Code" means the Internal Revenue Code of 1986, as amended, and as
hereafter amended from time to time. Reference to any particular provision of
the Code shall mean that provision in the Code at the date hereof and any
succeeding provision of the Code.
"Commission" means the U.S. Securities and Exchange Commission.
"Conversion Factor" means one (1), provided that in the event that the
General Partner (i) declares or pays a dividend on its outstanding REIT Shares
in REIT Shares or makes a distribution to all holders of its outstanding REIT
Shares in REIT Shares, (ii) subdivides its outstanding REIT Shares, or (iii)
combines its outstanding REIT Shares into a smaller number of REIT Shares, the
Conversion Factor shall be adjusted by multiplying the Conversion Factor by a
fraction, the numerator of which shall be the number of REIT Shares issued and
outstanding on the record date for such dividend, distribution, subdivision or
combination (assuming for such purposes that such dividend, distribution,
subdivision or combination has occurred as of such time), and the denominator of
which shall be the actual number of REIT Shares (determined without the above
assumption) issued and outstanding on such date. Any adjustment to the
Conversion Factor shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event.
"Event of Bankruptcy" as to any Person means the filing of a petition
for relief as to such Person as debtor or bankrupt under the Bankruptcy Code of
1978 or similar provision of law of any jurisdiction (except if such petition is
contested by such Person and has been dismissed within 90 days); insolvency or
bankruptcy of such Person as finally determined by a court proceeding; filing by
such Person of a petition or application to accomplish the same or for the
appointment of a receiver or a trustee for such Person or a substantial part of
his assets; commencement of any proceedings relating to such Person as a debtor
under any other reorganization, arrangement, insolvency, adjustment of debt or
liquidation law of any jurisdiction, whether now in existence or hereinafter in
effect, either by such Person or by another, provided that if such proceeding is
commenced by another, such Person indicates his approval of such proceeding,
consents thereto or acquiesces therein, or such proceeding is contested by such
Person and has not been finally dismissed within 90 days.
"Financial Statement" means an annual balance sheet, a statement of
partners' capital as of the end of such year, as well as statements of cash flow
and income, all in accordance with generally accepted accounting principles and
accompanied by an independent auditor's report.
"Funding Loan" means any loan advanced to the Partnership by the
General Partner or HHTI for any proper Partnership purpose.
"General Partner" means Humphrey Hospitality REIT Trust, a Maryland
real estate investment trust, and any Person who becomes a substitute or
additional General Partner as provided herein, and any of their successors as
General Partner.
"General Partnership Interest" means a Partnership Interest held by the
General Partner that is a general partnership interest.
"Indemnifying Party" means the party that would otherwise be required
to provide indemnification or the indemnifying party for the purposes of Section
8.06(e) hereof.
"Indemnitee" means (i) any Person made a party to a proceeding by
reason of his status as the General Partner or a director or officer of the
Partnership or the General Partner, and (ii) such other Persons (including
Affiliates of the General Partner or the Partnership) as the General Partner may
designate from time to time, in its sole and absolute discretion.
"Initial Hotels" means the following hotels: (1) Comfort Inn -
Dahlgren, Virginia, (2) Comfort Inn Dublin, Virginia, (3) Comfort Inn -
Elizabethton, Tennessee, (4) Comfort Inn - Farmville, Virginia, (5) Comfort Inn
- - Morgantown, West Virginia, (6) Comfort Inn - Princeton, West Virginia, (7)
Comfort Inn - Beacon Marina, Solomons, Maryland and (8) Rodeway Inn- Wytheville,
Virginia.
"Limited Partner" means any Person named as a Limited Partner on
Exhibit A attached hereto, and any Person who becomes a Substitute or Additional
Limited Partner, in such Person's capacity as a Limited Partner in the
Partnership.
"Limited Partnership Interest" means the ownership interest of a
Limited Partner in the Partnership at any particular time, including the right
of such Limited Partner to any and all benefits to which such Limited Partner
may be entitled as provided in this Agreement and in the Act, together with the
obligations of such Limited Partner to comply with all the provisions of this
Agreement and of such Act.
"Loss" has the meaning provided in Section 5.01(f) hereof.
"New Securities" means any REIT Shares in addition to those offered in
the Initial Offering and issued in connection with a redemption pursuant to
Section 8.05 hereof or any rights, options warrants or convertible or
exchangeable securities containing the right to subscribe for or purchase REIT
Shares
"Notice of Redemption" means the Notice of Exercise of Redemption Right
substantially in the form attached as Exhibit B hereto.
"Offer" Means a purchase, tender or exchange offer.
"Offering" means the initial offer and sale by HHTI and the purchase by
the Underwriters (as defined in the Prospectus) of the common shares of HHTI for
sale to the public.
"Original Limited Partners" means James I. Humphrey, Jr. and Humphrey
Associates, Inc.
"Partner" means any General Partner or Limited Partner.
"Partner Non-recourse Debt Minimum Gain" has the meaning set forth in
Regulations Section 1.704-2(i). A Partner's share of Partner Non-recourse Debt
Minimum Gain shall be determined in accordance with Regulations Section
1.704-2(i)(5).
"Partnership Interest" means an ownership interest in the Partnership
representing a Capital Contribution by either a Limited Partner or the General
Partner and includes any and all benefits to which the holder of such a
Partnership Interest may be entitled as provided in this Agreement, together
with all obligations of such Person to comply with the terms and provisions of
this Agreement.
"Partnership Minimum Gain" has the meaning set forth in Regulations
Section 1.704-2(d). In accordance with Regulations Section 1.704-2(d), the
amount of Partnership Minimum Gain is determined by first computing, for each
Partnership non-recourse liability, any gain the Partnership would realize if it
disposed of the property subject to that liability for no consideration other
than full satisfaction of the liability, and then aggregating the separately
computed gains. A Partner's share of Partnership Minimum Gain shall be
determined in accordance with Regulations Section 1.704-2(g)(1).
"Partnership Record Date" means the record date established by the
General Partner for the distribution of Distributable Cash pursuant to Section
5.02 hereof, which record date shall be the same as the record date established
by the General Partner for a distribution to its shareholders of some or all of
its portion of such distribution.
"Partnership Unit" means a fractional, undivided share of the
Partnership Interests of all Partners issued hereunder. As of the date of this
Agreement, there shall be considered to be 4,139,073 Partnership Units
outstanding, with each Partnership Unit representing a .00000024159% Percentage
Interest in the Partnership. The current allocation of Partnership Units among
the Partners is as set forth on Exhibit A.
"Percentage Interest" means the percentage ownership interest in the
Partnership of each Partner, as determined by dividing the Partnership Units
owned by a Partner by the total number of Partnership Units then outstanding.
The initial Percentage Interest of each Partner is as set forth opposite its
respective name on Exhibit A.
"Person" means any individual, partnership, corporation, limited
liability company, joint venture, trust or other entity.
"Profit" has the meaning provided in Section 5.01(f) hereof.
"Property" means any hotel property or other investment in which the
Partnership holds an ownership interest.
"Prospectus" means the final prospectus delivered to purchasers of
HHTI's common stock in the Offering.
"Public Offering Price" shall mean the initial public offering price
set forth in the Prospectus.
"Redeeming Partner" has the meaning provided in Section 8.05(a) hereof.
"Redemption Amount" means either the Cash Amount or the REIT Shares
Amount, as selected by HHTI in its sole discretion pursuant to Section 8.05(c)
hereof.
"Redemption Right" has the meaning provided in Section 8.05(a) hereof.
"Redemption Shares" are the REIT Shares that may be issued in
redemption of Partnership Units under Section 8.05(a) hereof.
"Regulations" means the Federal Income Tax Regulations issued under the
Code, as amended and as hereafter amended from time to time. Reference to any
particular provision of the Regulations shall mean that provision of the
Regulations on the date hereof and any succeeding provision of the Regulations.
"REIT" means a real estate investment trust under Sections 856 through
860 of the Code.
"REIT Expenses" means (i) costs and expenses relating to the formation
and continuity of existence of HHTI and any Subsidiaries thereof (which
Subsidiaries shall, for purposes of this definition, be included within all
references to HHTI in this definition), including taxes, fees and assessments
associated therewith, any and all costs, expenses or fees payable to any
director, officer, or employee of HHTI, (ii) costs and expenses relating to the
public offering and registration of securities by HHTI and all statements,
reports, fees and expenses incidental thereto, including underwriting discounts
and selling commissions applicable to any such offering of securities, (iii)
costs and expenses associated with the preparation and filing of any periodic
reports by HHTI under federal, state or local laws or regulations, including
filings with the Commission, (iv) costs and expenses associated with compliance
by HHTI with laws, rules and regulations promulgated by any regulatory body,
including the Commission, and (v) all other operating or administrative costs of
HHTI incurred in the ordinary course of its business on behalf of the
Partnership.
"REIT Share" means a common share of HHTI.
"REIT Shares Amount" shall mean a number of REIT Shares equal to the
product of the number of Partnership Units offered for redemption by a Redeeming
Partner, multiplied by the Conversion Factor; provided that in the event HHTI
issues to all holders of REIT Shares rights, options, warrants or convertible or
exchangeable securities entitling the shareholders to subscribe for or purchase
REIT Shares, or any other securities or property (collectively, the "rights") ,
then the REIT Shares Amount shall also include such rights that a holder of that
number of REIT Shares would be entitled to receive.
"Securities Act" means the Securities Act of 1933 as amended.
"Service" means the Internal Revenue Service.
"Shelf Registration" means a shelf registration statement under Rule
415 of the Securities Act, or any similar rule that may be adopted by the
Commission pursuant to Section 8.06 hereof.
"Specified Redemption Date" means the first business day of the month
that is at least 10 business days after the receipt by HHTI of the Notice of
Redemption.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of (i) the voting power of the voting equity
securities or (ii) the outstanding equity interests is owned, directly or
indirectly, by such Person.
"Subsidiary Partnership" means Solomons Beacon Inn Limited Partnership,
a Maryland limited Partnership.
"Substitute Limited Partner" means any Person admitted to the
Partnership as a Limited Partner pursuant to Section 9.03 hereof.
"Surviving General Partner" means the successor or surviving entity of
a merger or consolidation of the General Partner with another entity.
"Transaction" means, with respect to HHTI any merger, consolidation, or
other combination with or into another Person or sale of all or substantially
all of its assets or any reclassification or any recapitalization or change of
outstanding REIT Shares (other than a change in par value or from par value to
no par value, or as a result of a subdivision or combination of REIT Shares).
"Transfer" means collectively any offer, sale, assignment,
hypothecation, pledge or transfer, of a Limited Partnership Interest by a
Limited Partner, in whole or in part, whether voluntarily or by operation of law
or at judicial sale or otherwise.
ARTICLE II
PARTNERSHIP CONTINUATION AND IDENTIFICATION
2.01 Continuation. The Partners hereby agree to continue the
Partnership pursuant to the Act and upon the terms and conditions set forth in
this Agreement.
2.02 Name, Office and Registered Agent. The name of the Partnership
shall be Humphrey Hospitality Limited Partnership. The specified office and
place of business of the Partnership shall be 12301 Old Columbia Pike, Silver
Spring, Maryland 20904. The General Partner may at any time change the location
of such office, provided the General Partner gives notice to the Partners of any
such change. The name and address of the Partnership's registered agent is
Thurston R. Moore, Riverfront Plaza - East Tower, 951 E. Byrd St., Richmond,
Virginia 23219. The sole duty of the registered agent as such is to forward to
the Partnership any notice that is served on him as registered agent.
2.03 Partners.
(a) The General Partner of the Partnership is Humphrey
Hospitality REIT Trust, a Maryland real estate investment trust. Its principal
place of business shall be the same as that of the Partnership.
(b) The Limited Partners shall be those Persons identified as
Limited Partners in Exhibit A hereto, as amended from time to time. The Limited
Partners (other than the Original Limited Partners) hereby are admitted as
Limited Partners.
2.04 Term and Dissolution.
(a) The term of the Partnership shall continue in full force
and effect until December 31, 2050, except that the Partnership shall be
dissolved upon the happening of any of the following events:
(i) The occurrence of an Event of
Bankruptcy as to a General Partner or the dissolution, death or withdrawal of
a General Partner unless the business of the Partnership is continued pursuant
to Section 7.03(b) hereof; provided that if a General Partner is on the date of
such occurrence a partnership, the dissolution of such General Partner as a
result of the dissolution, death, withdrawal, removal or Event of Bankruptcy of
a partner in such partnership shall not be an event of dissolution of the
Partnership if the business of such General Partner is continued by the
remaining partner or partners, either alone or with additional partners, and
such General Partner and such partners comply with any other applicable
requirements of this Agreement;
(ii) The passage of 90 days after the sale or
other disposition of all or
substantially all the assets of the Partnership; (provided that if the
Partnership receives an installment obligation as consideration for such sale or
other disposition, the Partnership shall continue, unless sooner dissolved under
the provisions of this Agreement, until such time as such note or notes are paid
in full);
(iii) The redemption of all Limited
Partnership Interests (other than any of such interests held by the General
Partner); or
(iv) The election by the General
Partner and the holders of 75% of the Percentage Interests of the Limited
Partners (excluding the General Partner) that the Partnership should be
dissolved.
(b) Upon dissolution of the Partnership (unless the business
of the Partnership is continued pursuant to Section 7.03(b) hereof), the General
Partner (or its trustee, receiver, successor or legal representative) shall
amend or cancel the Certificate and liquidate the Partnership's assets and apply
and distribute the proceeds thereof in accordance with Section 5.06 hereof.
Notwithstanding the foregoing, the liquidating General Partner may either (i)
defer liquidation of, or withhold from distribution for a reasonable time, any
assets of the Partnership (including those necessary to satisfy the
Partnership's debts and obligations), or (ii) distribute the assets to the
Partners in kind.
2.05 Filing of Certificate and Perfection of Limited Partnership. The
General Partner shall execute, acknowledge, record and file at the expense of
the Partnership, the Certificate and any and all amendments thereto and all
requisite fictitious name statements and notices in such places and
jurisdictions as may be necessary to cause the Partnership to be treated as a
limited partnership under, and otherwise to comply with, the laws of each state
or other jurisdiction in which the Partnership conducts business.
ARTICLE III
BUSINESS OF THE PARTNERSHIP
The purpose and nature of the business to be conducted by the
Partnership is (i) to conduct any business that may be lawfully conducted by a
limited partnership organized pursuant to the Act, provided, however, that such
business shall be limited to and conducted in such a manner as to permit HHTI at
all times to qualify as a REIT, unless HHTI otherwise ceases to qualify as a
REIT, (ii) to enter into any partnership, joint venture or other similar
arrangement to engage in any of the foregoing or the ownership of interests in
any entity engaged in any of the foregoing and (iii) to do anything necessary or
incidental to the foregoing. HHTI and the General Partner shall also be
empowered to do any and all acts and things necessary or prudent to ensure that
the Partnership will not be classified as a "publicly traded partnership" for
the purposes of Section 7704(a) of the Code.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS
4.01 Capital Contributions. The General Partner shall contribute to the
capital of the Partnership cash in an amount set forth opposite its name on
Exhibit A, which shall represent the gross proceeds of the Offering. The Limited
Partners shall contribute to the capital of the Partnership cash and interests
in one or more of the Initial Hotels as set forth opposite their names on
Exhibit A. The Agreed Values of the Limited Partners' ownership interests in the
Initial Hotels that are contributed to the Partnership are as set forth opposite
their names on Exhibit A.
4.02 Additional Capital Contributions and Issuances of Additional
Partnership Interests. Except as provided in this Section 4.02 or in Section
4.03, the Partners shall have no right or obligation to make any additional
Capital Contributions or loans to the Partnership. The General Partner may
contribute additional capital to the Partnership, from time to time, and receive
additional Partnership Interests in respect thereof, in the manner contemplated
in this Section 4.02.
(a) Issuances of Additional Partnership Interests.
(i) General. The General Partner is
hereby authorized to cause the Partnership to issue such additional
Partnership Interests in the form of Partnership Units for any Partnership
purpose at any time or from time to time, to the Partners (including the General
Partner) or to other Persons for such consideration and on such terms and
conditions as shall be established by the General Partner in its sole and
absolute discretion, all without the approval of any Limited Partners. Upon such
issuance of Partnership Units hereunder, the General Partner is hereby
authorized to amend Exhibit A attached hereto to reflect such issuance. Any
additional Partnership Interests issued thereby may be issued in one or more
classes, or one or more series of any of such classes, with such designations,
preferences and relative, participating, optional or other special rights,
powers and duties, including rights, powers and duties senior to Limited
Partnership Interests, all as shall be determined by the General Partner in its
sole and absolute discretion and without the approval of any Limited Partner,
subject to Virginia law, including, without limitation, (i) the allocations of
items of Partnership income, gain, loss, deduction and credit to each such class
or series of Partnership Interests; (ii) the right of each such class or series
of Partnership Interests to share in Partnership distributions; and (iii) the
rights of each such class or series of Partnership Interests upon dissolution
and liquidation of the Partnership; provided, however, that no additional
Partnership Interests shall be issued to the General Partner unless either:
(1)(A) the additional Partnership Interests are issued in
connection with an issuance of shares of or other interests in
HHTI, which shares or interests have designations, preferences
and other rights, all such that the economic interests are
substantially similar to the designations, preferences and
other rights of the additional Partnership Interests issued to
the General Partner by the Partnership in accordance with this
Section 4.02 and (B) the General Partner shall make a Capital
Contribution to the Partnership in an amount equal to the
proceeds raised in connection with the issuance of such shares
of HHTI or other interests in HHTI, or
(2) the additional Partnership Interests are issued to all
Partners in proportion to their respective Percentage
Interests.
Without limiting the foregoing, the General Partner is expressly authorized to
cause the Partnership to issue Partnership Units for less than fair market
value, so long as the General Partner concludes in good faith that such issuance
is in the best interests of the General Partner and the Partnership.
(ii) Upon Issuance of New Securities.
After the initial public offering for HHTI (the "Initial Offering"), HHTI
shall not issue any additional REIT Shares (other than REIT Shares issued in
connection with a redemption pursuant to Section 8.05 hereof) or rights,
options, warrants or convertible or exchangeable securities containing the right
to subscribe for or purchase REIT Shares (collectively, "New Securities") other
than to all holders of REIT Shares, unless (A) the General Partner shall cause
the Partnership to issue to the General Partner, Partnership Interests or
rights, options, warrants or convertible or exchangeable securities of the
Partnership having designations, preferences and other rights, all such that the
economic interests are substantially similar to those of the New Securities, and
(B) HHTI contributes to the General Partner and the General Partner contributes
to the Partnership the proceeds from the issuance of such New Securities and
from the exercise of rights contained in such New Securities to the Partnership;
provided, however, that HHTI is allowed to issue New Securities in connection
with an acquisition of property to be held directly by HHTI, but if and only if
such direct acquisition and issuance of New Securities have been approved and
determined to be in the best interests of HHTI, the General Partner and the
Partnership by a majority of the directors of HHTI, which majority includes a
majority of the Independent Directors (as defined in the Articles of
Incorporation). Without limiting the foregoing, HHTI is expressly authorized to
issue New Securities for less than fair market value and to cause the
Partnership to issue to the General Partner corresponding Partnership Interests,
so long as (x) HHTI concludes in good faith that such issuance is in the best
interests of HHTI, the General Partner and the Partnership (for example, and not
by way of limitation, the issuance of REIT Shares and corresponding Partnership
Units pursuant to an employee stock purchase plan providing for employee
purchases of REIT Shares at a discount from fair market value or employee stock
options that have an exercise price that is less than the fair market value of
the REIT Shares, either at the time of issuance or at the time of exercise), and
(y) HHTI contributes to the General Partner and the General Partner contributes
to the Partnership all proceeds from such issuance. By way of example, in the
event HHTI issues REIT Shares for a cash purchase price and contributes all of
the proceeds of such issuance to the General Partner for contribution to the
Partnership as required hereunder, the General Partner shall be issued a number
of additional Partnership Units equal to the product of (A) the number of such
REIT Shares issued by HHTI, the proceeds of which were so contributed,
multiplied by (B) a fraction, the numerator of which is one hundred percent
(100%), and the denominator of which is the Conversion Factor in effect on the
date of such contribution.
(b) Certain Deemed Contributions of Proceeds of Issuance of
Shares. In connection with any and all issuance of REIT Shares, HHTI shall
contribute to the General Partner and the General Partner shall make a Capital
Contribution to the Partnership of the proceeds raised in connection with such
issuance as required above, provided that if the proceeds actually received by
the General Partner are less than the gross proceeds of such issuance as a
result of any underwriter's discount or other expenses paid or incurred in
connection with such issuance, then the General Partner shall be deemed to have
made a Capital Contribution to the Partnership in the amount of the gross
proceeds of such issuance and the Partnership shall be deemed simultaneously to
have paid such offering expenses in connection with the required issuance of
additional Partnership Units to General Partner for such Capital Contribution
pursuant to Section 4.02(a) hereof.
4.03 General Partner Loans. The General Partner or HHTI may from time
to time advance funds to the Partnership for any proper Partnership purpose as a
loan ("Funding Loan"), provided that any such funds must first be obtained by
the General Partner or HHTI from a third party lender, and then all of such
funds must be loaned by the General Partner or HHTI to the Partnership on the
same terms and conditions, including principal amount, interest rate, repayment
schedule and costs and expenses, as shall be applicable with respect to or
incurred in connection with such loan with such third party lender. Except for
Funding Loans, neither the General Partner nor HHTI shall incur any indebtedness
for borrowed funds; provided, however, that upon the affirmative vote of a
majority of the directors of HHTI, which majority must include a majority of the
Independent Directors, any loan proceeds received by the General Partner or HHTI
may be distributed to their respective shareholders or other equity holders if
such loan and distribution have been determined by the aforesaid majorities to
be necessary to enable HHTI to maintain its status as a REIT under Sections
856-860 of the Code.
4.04 Capital Accounts. A separate capital account (a "Capital Account")
shall be established and maintained for each Partner in accordance with
Regulations Section 1.704-1(b)(2)(iv). If (i) a new or existing Partner acquires
an additional Partnership Interest in exchange for more than a de minimis
Capital Contribution, (ii) the Partnership distributes to a Partner more than a
de minimis amount of Partnership property as consideration for a Partnership
Interest, or (iii) the Partnership is liquidated within the meaning of
Regulation Section 1.704-1(b)(2)(ii)(g), the General Partner shall revalue the
property of the Partnership to its fair market value (taking into account
Section 7701(g) of the Code) in accordance with Regulations Section
1.704-1(b)(2)(iv)(f). When the Partnership's property is revalued by the General
Partner, the Capital Accounts of the Partners shall be adjusted in accordance
with Regulations Sections 1.704-1(2)(iv)(f) and (g), which generally require
such Capital Accounts to be adjusted to reflect the manner in which the
unrealized gain or loss inherent in such property (that has not been reflected
in the Capital Accounts previously would be allocated among the Partners
pursuant to Section 5.01 if there were a taxable disposition of such property
for its fair market value (taking into account Section 7701(g) of the Code) on
the date of the revaluation.
4.05 Percentage Interests. If the number of outstanding Partnership
Units increases or decreases during a taxable year, each Partner's Percentage
Interest shall be adjusted to a percentage equal to the number of Partnership
Units held by such Partner divided by the aggregate number of outstanding
Partnership Units. If the Partners' Percentage Interests are adjusted pursuant
to this Section 4.05, the Profits and Losses for the taxable year in which the
adjustment occurs shall be allocated between the part of the year ending on the
day when the Partnership's property is revalued by the General Partner and the
part of the year beginning on the following day either (i) as if the taxable
year had ended on the date of the adjustment or (ii) based on the number of days
in each part. The General Partner, in its sole discretion, shall determine which
method shall be used to allocate Profits and Losses for the taxable year in
which the adjustment occurs. The allocation of Profits and Losses for the
earlier part of the year shall be based on the Percentage Interests before
adjustment, and the allocation of Profits and Losses for the later part shall be
based on the adjusted Percentage Interests.
4.06 No Interest on Contributions. No Partner shall be
entitled to interest on its Capital Contribution.
4.07 Return of Capital Contributions. No Partner shall be entitled to
withdraw any part of its Capital Contribution or its Capital Account or to
receive any distribution from the Company, except as specifically provided in
this Agreement. Except as otherwise provided herein, there shall be no
obligation to return to any Partner or withdrawn Partner any part of such
Partner's Capital Contribution for so long as the Partnership continues in
existence.
4.08 No Third Party Beneficiary. No creditor or other third party
having dealings with the Partnership shall have the right to enforce the right
or obligation of any Partner to make Capital Contributions or loans or to pursue
any other right or remedy hereunder or at law or in equity, it being understood
and agreed that the provisions of this Agreement shall be solely for the benefit
of, and may be enforced solely by, the parties hereto and their respective
successors and assigns. None of the rights or obligations of the Partners herein
set forth to make Capital Contributions or loans to the Partnership shall be
deemed an asset of the Partnership for any purpose by any creditor or other
third party, nor may such rights or obligations be sold, transferred or assigned
by the Partnership or pledged or encumbered by the Partnership to secure any
debt or other obligation of the Partnership or of any of the Partners. In
addition, it is the intent of the parties hereto that no distribution to any
Limited Partner shall be deemed a return of money or other property in violation
of the Act. However, if any court of competent jurisdiction holds that,
notwithstanding the provisions of this Agreement, any Limited Partner is
obligated to return such money or property, such obligation shall be the
obligation of such Limited Partner and not of the General Partner. Without
limiting the generality of the foregoing, a deficit Capital Account of a Partner
shall not be deemed to be a liability of such Partner nor an asset or property
of the Partnership.
4.09 Loans from Limited Partners. If a Limited Partner guarantying any
debt that is secured by Property is required by the related lender to pay all or
part of such debt, the amount paid toward such debt by such Limited Partner
shall be deemed a loan to the Partnership secured by the assets of the
Partnership only and not those of the General Partner and shall be repaid in
full, without interest, by the Partnership prior to it making any distributions
of cash pursuant to Sections 5.02 or 5.06.
ARTICLE V
PROFITS AND LOSSES; DISTRIBUTIONS
5.01 Allocation of Profit and Loss.
(a) General. Except as otherwise provided in this Section
5.01, Profit and Loss of the Partnership for each fiscal year of the Partnership
shall be allocated among the Partners in accordance with their respective
Percentage Interests.
(b) Minimum Gain Chargeback. Notwithstanding any provision to
the contrary, (i) any expense of the Partnership that is a "non-recourse
deduction" within the meaning of Regulations Section 1.704-2(b)(1) shall be
allocated in accordance with the Partners' respective Percentage Interests, (ii)
any expense of the Partnership that is a "partner non-recourse deduction" within
the meaning of Regulations Section 1.704-2(i)(2) shall be allocated in
accordance with Regulations Section 1.704-2(i)(1), (iii) if there is a net
decrease in Partnership Minimum Gain within the meaning of Regulations Section
1.704-2(f)(1) for any Partnership taxable year, items of gain and income shall
be allocated among the Partners in accordance with Regulations Section
1.704-2(f) and the ordering rules contained in Regulations Section 1.704-2(j),
and (iv) if there is a net decrease in Partner Non-recourse Debt Minimum Gain
within the meaning of Regulations Section 1.704-2(i)(4) for any Partnership
taxable year, items of gain and income shall be allocated among the Partners in
accordance with Regulations Section 1.704-2(i)(4) and the ordering rules
contained in Regulations Section 1.704-2(j). A Partner's "interest in
partnership profits" for purposes of determining its share of the non-recourse
liabilities of the Partnership within the meaning of Regulations Section
1.752-3(a)(3) shall be such Partner's Percentage Interest.
(c) Qualified Income Offset. If a Limited Partner receives in
any taxable year an adjustment, allocation, or distribution described in
subparagraphs (4), (5), or (6) of Regulations Section 1.704-1(b)(2)(ii)(d) that
causes or increases a negative balance in such Partner's Capital Account that
exceeds the sum of such Partner's shares of Partnership Minimum Gain and Partner
Non-recourse Debt Minimum Gain, as determined in accordance with Regulations
Sections 1.704-2(g) and 1.704-2(i), such Partner shall be allocated specially
for such taxable year (and, if necessary, later taxable years) items of income
and gain in an amount and manner sufficient to eliminate such negative Capital
Account balance as quickly as possible as provided in Regulations Section
1.704-1(b)(2)(ii)(d). After the occurrence of an allocation of income or gain to
a Limited Partner in accordance with this Section 5.01(c), to the extent
permitted by Regulations Section 1.704-1(b), items of expense or loss shall be
allocated to such Partner in an amount necessary to offset the income or gain
previously allocated to such Partner under this Section 5.01(c).
(d) Capital Account Deficits. Loss shall not be allocated to a
Limited Partner to the extent that such allocation would cause a deficit in such
Partner's Capital Account (after reduction to reflect the items described in
Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum of
such Partner's shares of Partnership Minimum Gain and Partner Non-recourse Debt
Minimum Gain. Any Loss in excess of that limitation shall be allocated to the
General Partner. After the occurrence of an allocation of Loss to the General
Partner in accordance with this Section 5.01(d), to the extent permitted by
Regulations Section 1.704-1(b), Profit shall be allocated to such Partner in an
amount necessary to offset the Loss previously allocated to such Partner under
this Section 5.01(d).
(e) Allocations Between Transferor and Transferee. If a
Partner transfers any part or all of its Partnership Interest, and the
transferee is admitted as a substitute Partner as provided herein, the
distributive shares of the various items of Profit and Loss allocable among the
Partners during such fiscal year of the Partnership shall be allocated between
the transferor and the substitute Partner either (i) as if the Partnership's
fiscal year had ended on the date of the transfer, or (ii) based on the number
of days of such fiscal year that each was a Partner without regard to the
results of Partnership activities in the respective portions of such fiscal year
in which the transferor and the transferee were Partners. The General Partner,
in its sole discretion, shall determine which method shall be used to allocate
the distributive shares of the various items of Profit and Loss between the
transferor and the substitute Partner.
(f) Definition of Profit and Loss. "Profit" and "Loss" and any
items of income, gain, expense, or loss referred to in this Agreement shall be
determined in accordance with federal income tax accounting principles, as
modified by Regulations Section 1.704-1(b)(2)(iv), except that Profit and Loss
shall not include items of income, gain and expense that are specially allocated
pursuant to Section 5.01(b), 5.01(c), or 5.01(d). All allocations of income,
Profit, gain, Loss, and expense (and all items contained therein) for federal
income tax purposes shall be identical to all allocations of such items set
forth in this Section 5.01, except as otherwise required by Section 704(c) of
the Code and Regulations Section 1.704-1(b)(4). The Partnership shall use the
"traditional method" for allocating items of income, gain and expense with
respect to its Initial Hotels as allowed by Regulations promulgated under
Section 704(c) of the Code.
5.02 Distribution of Cash.
(a) The General Partner shall distribute cash on a quarterly
(or, at the election of the General Partner, more frequent) basis, in an amount
determined by the General Partner in its sole discretion, to the Partners who
are Partners on the Partnership Record Date with respect to such quarter (or
other distribution period) in accordance with their respective Percentage
Interests on the Partnership Record Date.
(b) In no event may a Partner receive a distribution of cash
with respect to a Partnership Unit if such Partner is entitled to receive a
dividend with respect to a REIT Share for which all or part of such Partnership
Unit has been or will be exchanged.
5.03 REIT Distribution Requirements. The General Partner shall use its
reasonable efforts to cause the Partnership to distribute amounts sufficient to
enable the General Partner (i) to meet its distribution requirement for
qualification as a REIT as set forth in Section 857(a)(1) of the Code and (ii)
to avoid any federal income or excise tax liability imposed by the Code;
provided, however, that the Limited Partners shall receive their pro rata share
of all distributions.
5.04 No Right to Distributions in Kind. No Partner shall be entitled to
demand property other than cash in connection with any distributions by the
Partnership.
5.05 Limitations on Return of Capital Contributions. Notwithstanding
any of the provisions of this Article V, no Partner shall have the right to
receive and the General Partner shall not have the right to make, a distribution
which includes a return of all or part of a Partner's Capital Contributions,
unless after giving effect to the return of a Capital Contribution, the sum of
all Partnership liabilities, other than the liabilities to a Partner for the
return of his Capital Contribution, does not exceed the fair market value of the
Partnership's assets.
5.06 Distributions Upon Liquidation.
(a) Upon liquidation of the Partnership, after payment of, or
adequate provision for, debts and obligations of the Partnership, including any
Partner loans, any remaining assets of the Partnership shall be distributed to
all Partners with positive Capital Accounts in accordance with their respective
positive Capital Account balances. For purposes of the preceding sentence, the
Capital Account of each Partner shall be determined after all adjustments made
in accordance with Sections 5.01 and 5.02 resulting from Partnership operations
and from all sales and dispositions of all or any part of the Partnership's
assets. Any distributions pursuant to this Section 5.06 should be made by the
end of the Partnership's taxable year in which the liquidation occurs (or, if
later, within 90 days after the date of the liquidation). To the extent deemed
advisable by the General Partner, appropriate arrangements (including the use of
a liquidating trust) may be made to assure that adequate funds are available to
pay any contingent debts or obligations.
(b) If the General Partner has a negative balance in its
Capital Account following a liquidation of the Partnership, as determined after
taking into account all Capital Account Adjustments in accordance with Sections
5.01 and 5.02 resulting from Partnership operations and from all sales and
dispositions of all or any part of the Partnership's assets, the General Partner
shall contribute to the Partnership an amount of cash equal to the negative
balance in its Capital Account and such cash shall be paid or distributed by the
Partnership to creditors, if any, and then to the Limited Partners in accordance
with Section 5.06(a). Such contribution by the General Partner shall be made by
the end of the Partnership's taxable year in which the liquidation occurs (or,
if later, within 90 days after the date of the liquidation).
5.07 Substantial Economic Effect. It is the intent of the Partners that
the allocations of Profit and Loss under the Agreement have substantial economic
effect (or be consistent with the Partners' interests in the Partnership in the
case of the allocation of losses attributable to non-recourse debt) within the
meaning of Section 704(b) of the Code as interpreted by the Regulations
promulgated pursuant thereto. Article V and other relevant provisions of this
Agreement shall be interpreted in a manner consistent with such intent.
ARTICLE VI
RIGHTS, OBLIGATIONS AND
POWERS OF THE GENERAL PARTNER
6.01 Management of the Partnership.
(a) Except as otherwise expressly provided in this Agreement,
the General Partner shall have full, complete and exclusive discretion to manage
and control the business of the Partnership for the purposes herein stated, and
shall make all decisions affecting the business and assets of the Partnership.
Subject to the restrictions specifically contained in this Agreement, the powers
of the General Partner shall include, without limitation, the authority to take
the following actions on behalf of the Partnership:
(i) to acquire, purchase, own, lease
and dispose of any real property and any other property or assets that the
General Partner determines are necessary or appropriate or in the best interests
of the business of the Partnership;
(ii) to construct buildings and make
other improvements on the properties owned or leased by the Partnership;
(iii) to borrow money for the
Partnership, issue evidences of indebtedness in connection therewith,
refinance, guarantee, increase the amount of, modify, amend or change the terms
of, or extend the time for the payment of, any indebtedness or obligation to the
Partnership, and secure such indebtedness by mortgage, deed of trust, pledge or
other lien on the Partnership's assets;
(iv) to pay, either directly or by
reimbursement, for all operating costs and general administrative expenses of
the General Partner or the Partnership, to third parties or to the General
Partner as set forth in this Agreement;
(v) to lease all or any portion of
any of the Partnership's assets, whether or not the terms of such leases extend
beyond the termination date of the Partnership and whether or not any portion of
the Partnership's assets so leased are to be occupied by the lessee, or, in
turn, subleased in whole or in part to others, for such consideration and on
such terms as the General Partner may determine;
(vi) to prosecute, defend, arbitrate,
or compromise any and all claims or liabilities in favor of or against the
Partnership, on such terms and in such manner as the General Partner may
reasonably determine, and similarly to prosecute, settle or defend litigation
with respect to the Partners, the Partnership, or the Partnership's assets;
provided, however, that the General Partner may not, without the consent of all
of the Partners, confess a judgment against the Partnership;
(vii) to file applications, communicate,
and otherwise deal with any and all governmental agencies having jurisdiction
over, or in any way affecting, the Partnership's assets or any other aspect of
the Partnership business;
(viii) to make or revoke any election
permitted or required of the Partnership by any taxing authority; provided,
however, that the Partnership's election to use the traditional method as
specified in Section 5.01(f) of this Agreement shall not be revoked without the
consent of the holders of 75% of the Percentage Interests of the Limited
Partners (excluding the General Partner);
(ix) to maintain such insurance
coverage for public liability, fire and casualty, and any and all other
insurance for the protection of the Partnership, for the conservation of
Partnership assets, or for any other purpose convenient or beneficial to the
Partnership, in such amounts and such types, as it shall determine from time to
time;
(x) to determine whether or not to
apply any insurance proceeds for any property to the restoration of such
property or to distribute the same;
(xi) to retain legal counsel,
accountants, consultants, real estate brokers, and such other persons, as the
General Partner may deem necessary or appropriate in connection with the
Partnership business and to pay therefor such reasonable remuneration as the
General Partner may deem reasonable and proper;
(xii) to retain other services of any
kind or nature in connection with the Partnership business, and to pay
therefor such remuneration as the General Partner may deem reasonable and
proper;
(xiii) to negotiate and conclude
agreements on behalf of the Partnership with respect to any of the rights,
powers and authority conferred upon the General Partner;
(xiv) to maintain accurate accounting
records and to file promptly all federal, state and local income tax returns on
behalf of the Partnership;
(xv) to distribute Partnership cash or
other Partnership assets in accordance with this Agreement;
(xvi) to form or acquire an interest in,
and contribute property to, any further limited or general partnerships, joint
ventures or other relationships that it deems desirable (including, without
limitation, the acquisition of interests in, and the contributions of property
to, its Subsidiaries and any other Person in which it has an equity interest
from time to time);
(xvii) to establish Partnership
reserves for working capital, capital expenditures, contingent liabilities,
or any other valid Partnership purpose; and
(xviii) to take such other action, execute,
acknowledge, swear to or deliver such other documents and instruments, and
perform any and all other acts the General Partner deems necessary or
appropriate for the formation, continuation and conduct of the business and
affairs of the Partnership and to possess and enjoy all of the rights and powers
of a general partner as provided by the Act.
(b) Except as otherwise provided herein, to the extent the
duties of the General Partner require expenditures of funds to be paid to third
parties, the General Partner shall not have any obligations hereunder except to
the extent that Partnership funds are reasonably available to it for the
performance of such duties, and nothing herein contained shall be deemed to
authorize or require the General Partner, in its capacity as such, to expend its
individual funds for payment to third parties or to undertake any individual
liability or obligation on behalf of the Partnership.
6.02 Delegation of Authority. The General Partner may delegate any or
all of its powers, rights and obligations hereunder, and may appoint, employ,
contract or otherwise deal with any Person for the transaction of the business
of the Partnership, which Person may, under supervision of the General Partner,
perform any acts or services for the Partnership as the General Partner may
approve.
6.03 Indemnification and Exculpation of Indemnitees.
(a) The Partnership shall indemnify an Indemnitee from and
against any and all losses, claims, damages, liabilities, joint or several,
expenses (including reasonable legal fees and expenses), judgments, fines,
settlements, and other amounts arising from any and all claims, demands,
actions, suits or proceedings, civil, criminal, administrative or investigative,
that relate to the operations of the Partnership as set forth in this Agreement
in which any Indemnitee may be involved, or is threatened to be involved, as a
party or otherwise, unless it is established that: (i) the act or omission of
the Indemnitee was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the Indemnitee actually received an improper personal benefit
in money, property or services; or (iii) in the case of any criminal proceeding,
the Indemnitee had reasonable cause to believe that the act or omission was
unlawful. The termination of any proceeding by judgment, order or settlement
does not create a presumption that the Indemnitee did not meet the requisite
standard of conduct set forth in this Section 6.03(a). The termination of any
proceeding by conviction or upon a plea of nolo contendere or its equivalent, or
an entry of an order of probation prior to judgment, creates, a rebuttable
presumption that the Indemnitee acted in a manner contrary to that specified in
this Section 6.03(a). Any indemnification pursuant to this Section 6.03 shall be
made only out of the assets of the Partnership.
(b) The Partnership may reimburse an Indemnitee for reasonable
expenses incurred by an Indemnitee who is a party to a proceeding in advance of
the final disposition of the proceeding upon receipt by the Partnership of (i) a
written affirmation by the Indemnitee of the Indemnitee's good faith belief that
the standard of conduct necessary for indemnification by the Partnership as
authorized in this Section 6.03 has been met, and (ii) a written undertaking by
or on behalf of the Indemnitee to repay the amount if it shall ultimately be
determined that the standard of conduct has not yet been met.
(c) The indemnification provided by this Section 6.03 shall be
in addition to any other rights to which an Indemnitee or any other Person may
be entitled under any agreement, pursuant to any vote of the Partners, as a
matter of law or otherwise, and shall continue as to an Indemnitee who has
ceased to serve in such capacity.
(d) The Partnership may purchase and maintain insurance, on
behalf of the Indemnitees and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expenses that
may be incurred by such Person in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify such
Person against such liability under the provisions of this Agreement.
(e) For purposes of this Section 6.03, the Partnership shall
be deemed to have requested an Indemnitee to serve as fiduciary of an employee
benefit plan whenever the performance by it of its duties to the Partnership
also imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall constitute fines within the meaning of this Section 6.03; and actions
taken or omitted by the Indemnitee with respect to an employee benefit plan in
the performance of its duties for a purpose reasonably believed by it to be in
the interest of the participants and beneficiaries of the plan shall be deemed
to be for a purpose which is not opposed to the best interests of the
Partnership.
(f) In no event may an Indemnitee subject the Limited Partners
to personal liability by reason of the indemnification provisions set forth in
this Agreement.
(g) An Indemnitee shall not be denied indemnification in whole
or in part under this Section 6.03 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the transaction
was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.03 are for the benefit of
the Indemnitees, their heirs, successors, assigns and administrators and shall
not be deemed to create any rights for the benefit of any other Persons.
(i) Any amendment, modification or repeal of this Section 6.03
or any provision hereof shall be prospective only and shall not in any way
affect the limitations on the General Partner's or HHTI's liability to the
Partnership and the Limited Partners under this Section 6.03 as in effect
immediately prior to such amendment, modification or repeal with respect to
matters occurring, in whole or in part, prior to such amendment, modification or
repeal, regardless of when claims relating to such matters may arise or be
asserted.
6.04 Liability of the General Partner.
(a) Notwithstanding anything to the contrary set forth in this
Agreement, the General Partner shall not be liable for monetary damages to the
Partnership or any Partners for losses sustained or liabilities incurred as a
result of errors in judgment or of any act or omission if the General Partner
acted in good faith.
(b) The Limited Partners expressly acknowledge that the
General Partner is acting on behalf of the Partnership and the General Partner's
shareholders collectively, that the General Partner is under no obligation to
consider the separate interests of the Limited Partners (including, without
limitation, the tax consequences to Limited Partners) in deciding whether to
cause the Partnership to take (or decline to take) any actions, and that the
General Partner shall not be liable for monetary damages for losses sustained,
liabilities incurred, or benefits not derived by Limited Partners in connection
with such decisions, provided that the General Partner has acted in good faith.
(c) Subject to its obligations and duties as General Partner
set forth in Section 6.01 hereof, the General Partner may exercise any of the
powers granted to it under this Agreement and perform any of the duties imposed
upon it hereunder either directly or by or through its agents. The General
Partner shall not be responsible for any misconduct or negligence on the part of
any such agent appointed by it in good faith.
(d) Notwithstanding any other provisions of this Agreement or
the Act, any action of the General Partner on behalf of the Partnership or any
decision of the General Partner to refrain from acting on behalf of the
Partnership, undertaken in the good faith belief that such action or omission is
necessary or advisable in order (i) to protect the ability of HHTI to continue
to qualify as a REIT, or (ii) to prevent HHTI from incurring any taxes under
Section 857, Section 4981, or any other provision of the Code, is expressly
authorized under this Agreement and is deemed approved by all of the Limited
Partners.
(e) Any amendment, modification or repeal of this Section 6.04
or any provision hereof shall be prospective only and shall not in any way
affect the limitations on the General Partner's liability to the Partnership and
the Limited Partners under this Section 6.04 as in effect immediately prior to
such amendment, modification or repeal with respect to matters occurring, in
whole or in part, prior to such amendment, modification or repeal, regardless of
when claims relating to such matters may arise or be asserted.
6.05 Expenditures by Partnership. The General Partner is hereby
authorized to pay compensation for accounting, administrative, legal, technical,
management and other services rendered to the Partnership. All of the aforesaid
expenditures (including Administrative Expenses) shall be made on behalf of the
Partnership, and the General Partner and HHTI shall be entitled to reimbursement
by the Partnership for any expenditure (including Administrative Expenses)
incurred by it on behalf of the Partnership which shall be made other than out
of the funds of the Partnership. The Partnership shall also assume, and pay when
due, all Administrative Expenses.
6.06 Outside Activities; Redemption/Tender Offer of REIT Shares.
(a) Subject to Section 6.09 hereof, the Articles of
Incorporation and any agreements entered into by the General Partner or its
Affiliates with the Partnership or a Subsidiary, any officer, director,
employee, agent, Affiliate or shareholder of the General Partner shall be
entitled to and may have business interests and engage in business activities in
addition to those relating to the Partnership, including business interests and
activities substantially similar or identical to those of the Partnership.
Neither the Partnership nor any of the Limited Partners shall have any rights by
virtue of this Agreement in any such business ventures, interest or activities.
None of the Limited Partners nor any other Person shall have any rights by
virtue of this Agreement or the partnership relationship established hereby in
any such business ventures, interests or activities, and the General Partner
shall have no obligation pursuant to this Agreement to offer any interest in any
such business ventures, interests and activities to the Partnership or any
Limited Partner, even if such opportunity is of a character which, if presented
to the Partnership or any Limited Partner, could be taken by such Person.
(b) In the event HHTI redeems any REIT Shares, then the
General Partner shall cause the Partnership to purchase from it a number of
Partnership Units as determined based on the application of the Conversion
Factor on the same terms that HHTI redeemed such REIT Shares. Moreover, if HHTI
makes a cash tender offer or other offer to acquire REIT Shares, then the
General Partner shall cause the Partnership to make a corresponding offer to the
General Partner to acquire an equal number of Partnership Units held by the
General Partner. In the event any REIT Shares are redeemed by HHTI pursuant to
such offer, the Partnership shall redeem an equivalent number of the General
Partner's Partnership Units for an equivalent purchase price based on the
application of the Conversion Factor.
6.07 Employment or Retention of Affiliates.
(a) Any Affiliate of the General Partner may be employed or
retained by the Partnership and may otherwise deal with the Partnership (whether
as a buyer, lessor, lessee, manager, furnisher of goods or services, broker,
agent, lender or otherwise) and may receive from the Partnership any
compensation, price, or other payment therefor that is fair and reasonable for
the services provided.
(b) The Partnership may lend or contribute to its Subsidiaries
or other Persons in which it has an equity investment, and such Persons may
borrow funds from the Partnership, on terms and conditions established in the
sole and absolute discretion of the General Partner. The foregoing authority
shall not create any right or benefit in favor of any Subsidiary or any other
Person.
(c) The Partnership may transfer assets to joint ventures,
other partnerships, corporations or other business entities in which it is or
thereby becomes a participant upon such terms and subject to such conditions as
the General Partner deems are consistent with this Agreement and applicable law.
(d) Except as expressly permitted by this Agreement, neither
the General Partner nor any of its Affiliates shall sell, transfer or convey any
property to, or purchase any property from, the Partnership, directly or
indirectly, except pursuant to transactions that are on terms that are fair and
reasonable to the Partnership.
6.08 General Partner Participation. The General Partner and HHTI agree
that all business activities of the General Partner and HHTI, including
activities pertaining to the acquisition, development and/or ownership of hotels
or other property, shall be conducted through the Partnership; provided,
however, that the General Partner and HHTI are each allowed to make a direct
acquisition, but if and only if, such acquisition is made in connection with the
issuance of New Securities, which direct acquisition and issuance have been
approved and determined to be in the best interests of the General Partner and
HHTI and the Partnership by a majority of the Independent Directors. The General
Partner and HHTI also agree that all borrowings shall constitute Funding Loans,
subject to the exception set forth in Section 4.03 hereof.
ARTICLE VII
CHANGES IN GENERAL PARTNER
7.01 Transfer of the General Partner's Partnership Interest.
(a) The General Partner may not transfer any of its General
Partnership Interest or Limited Partnership Interests or withdraw as General
Partner or HHTI may not transfer its interest in the General Partner or withdraw
from the General Partner except as provided in Section 7.01(c) or in connection
with a transaction described in Section 7.01(d).
(b) The General Partner agrees that it will at all
times own at least a 20% Percentage Interest in the form of a General Partner
Interest.
(c) Except as otherwise provided in Section 6.06(b) or Section
7.01(d) hereof, the General Partner and HHTI shall not engage in any merger,
consolidation or other combination with or into another Person or sale of all or
substantially all of its assets, or any reclassification, or any
recapitalization or change of outstanding REIT Shares (other than a change in
par value, or from par value to no par value, or as a result of a subdivision or
combination of REIT Shares) (a "Transaction"), unless (i) the Transaction also
includes a merger of the Partnership or sale of substantially all of the assets
of the Partnership as a result of which all Limited Partners will receive for
each Partnership Unit an amount of cash, securities, or other property equal to
the product of the Conversion Factor and the greatest amount of cash, securities
other property paid in the Transaction to a holder of one REIT Share in
consideration of one REIT Share, provided that if, in connection with the
Transaction, a purchase, tender or exchange offer ("Offer") shall have been made
to and accepted by the holders of more than fifty percent (50%) of the
outstanding REIT Shares, each holder of Partnership Units shall be given the
option to exchange its Partnership Units for the greatest amount of cash,
securities, or other property which a Limited Partner would have received had it
(A) exercised its Redemption Right and (B) sold, tendered or exchanged pursuant
to the Offer the REIT Shares received upon exercise of the Redemption Right
immediately prior to the expiration of the Offer.
(d) Notwithstanding Section 7.01(c), HHTI may merge into or
consolidate with another entity if immediately after such merger or
consolidation (i) substantially all of the assets of the successor or surviving
entity (the "Surviving Entity"), other than the Partnership Units held by the
General Partner or HHTI's interest in the General Partner, respectively, are
contributed to the Partnership as a Capital Contribution in exchange for
Partnership Units with a fair market value equal to the value of the assets so
contributed. Such valuation shall be determined by an appraiser mutually agreed
upon by the Surviving Entity and a majority-in-interest of the Limited Partners
(excluding the Surviving Entity or the General Partner) within 10 days following
the effective date of the merger or consolidation. In the event that the parties
are unable to agree upon an appraiser, the Surviving Entity and a
majority-in-interest of the Limited Partners (excluding the General Partner)
each shall select an appraiser. Each such appraiser shall complete an appraisal
of the fair market value of the Units and the assets contributed within 30 days
of the effective date of the merger or consolidation. The fair market value of
the General Partner's General Partnership Interest shall be the average of the
two appraisals; provided, however, that if the higher appraisal exceeds the
lower appraisal by more than 20% of the amount of the lower appraisal, the two
appraisals, no later than 40 days after the effective date of the merger or
consolidation, shall select a third appraiser who shall complete an appraisal of
the fair market value of the General Partner's General Partnership Interest no
later than 60 days after the effective date of the merger or consolidation. In
such case, the fair market value of the General Partner's General Partnership
Interest shall be the average of the two appraisals closest in value. The above
provisions of this Section 7.01(d) shall similarly apply to successive mergers
or consolidations permitted hereunder.
7.02 Admission of a Substitute or Successor General Partner. A Person
shall be admitted as a substitute or successor General Partner of the
Partnership only if the following terms and conditions are satisfied:
(a) a majority-in-interest of the Limited Partners (other than
the General Partner) shall have consented in writing to the admission of the
substitute or successor General Partner, which consent may be withheld in the
sole discretion of such Limited Partners;
(b) the Person to be admitted as a substitute or additional
General Partner shall have accepted and agreed to be bound by all terms and
provisions of this Agreement by executing a counterpart thereof and such other
documents or instruments as may be required or appropriate in order to effect
the admission of such Person as a General Partner, and a certificate evidencing
the admission of such Person as a General Partner shall have been filed for
recordation and all other actions required by Section 2.05 hereof in connection
with such admission shall have been performed;
(c) if the Person to be admitted as a substitute or additional
General Partner is a corporation or a partnership it shall have provided the
Partnership with evidence satisfactory to counsel for the Partnership of such
Person's authority to become a General Partner and to be bound by the terms and
provisions of this Agreement; and
(d) counsel for the Partnership shall have rendered an opinion
(relying on such opinions from other counsel and the state or any other
jurisdiction as may be necessary) that the admission of the person to be
admitted as a substitute or additional General Partner is in conformity with the
Act, that none of the actions taken in connection with the admission of such
Person as a substitute or additional General Partner will cause (i) the
Partnership to be classified other than as a partnership for federal income tax
purposes, or (ii) the loss of any Limited Partner's limited liability.
7.03 Effect of Bankruptcy, Withdrawal, Death or Dissolution of a
General Partner.
(a) Upon the occurrence of an Event of Bankruptcy as to a
General Partner (and its removal pursuant to Section7.04(a) hereof) or the
withdrawal, removal or dissolution of a General Partner (except that, if a
General Partner is on the date of such occurrence a partnership, the withdrawal,
death, dissolution, Event of Bankruptcy as to, or removal of a partner in, such
partnership shall be deemed not to be a dissolution of such General Partner if
the business of such General Partner is continued by the remaining partner or
partners), the Partnership shall be dissolved and terminated unless the
Partnership is continued pursuant to Section 7.03(b) hereof.
(b) Following the occurrence of an Event of Bankruptcy as to a
General Partner (and its removal pursuant to Section 7.04(a) hereof) or the
withdrawal, removal or dissolution of a General Partner (except that, if a
General Partner is on the date of such occurrence a partnership, the withdrawal,
death, dissolution, Event of Bankruptcy as to, or removal of a partner in, such
partnership shall be deemed not to be a dissolution of such General Partner if
the business of such General Partner is continued by the remaining partner or
partners), the Limited Partners, within 90 days after such occurrence, may elect
to reconstitute the Partnership and continue the business of the Partnership for
the balance of the term specified in Section 2.04 hereof by selecting, subject
to Section 7.02 hereof and any other provisions of this Agreement, a substitute
General Partner by unanimous consent of the Limited Partners. If the Limited
Partners elect to reconstitute the Partnership and admit a substitute General
Partner, the relationship with the Partners and of any Person who has acquired
an interest of a Partner in the Partnership shall be governed by this Agreement.
7.04 Removal of a General Partner.
(a) Upon the occurrence of an Event of Bankruptcy as to, or
the dissolution of, a General Partner, such General Partner shall be deemed to
be removed automatically; provided, however, that if a General Partner is on the
date of such occurrence a partnership, the withdrawal, death, dissolution, Event
of Bankruptcy as to or removal of a partner in such partnership shall be deemed
not to be a dissolution of the General Partner if the business of such General
Partner is continued by the remaining partner or partners.
(b) if a General Partner has been removed pursuant to this
Section 7.04 and the Partnership is continued pursuant to Section 7.03 hereof,
such General Partner shall promptly transfer and assign its General Partnership
Interest in the partnership (i) to the substitute General Partner approved by a
majority-in-interest of the Limited Partners (excluding the General Partner) in
accordance with Section 7.03(b) hereof and otherwise admitted to the Partnership
in accordance with Section 7.02 hereof. At the time of assignment, the removed
General Partner shall be entitled to receive from the substitute General Partner
the fair market value of the General Partnership Interest of such removed
General Partner as reduced by any damages caused to the Partnership by such
General Partner. Such fair market value shall be determined by an appraiser
mutually agreed upon by the General Partner and a majority-in-interest of the
Limited Partners (excluding the General Partner) within 10 days following the
removal of the General Partner. In the event that the parties are unable to
agree upon an appraiser, the General Partner and a majority-in-interest of the
Limited Partners (excluding the General Partner) each shall select an appraiser.
Each such appraiser shall complete an appraisal of the fair market value of the
General Partner's General Partnership Interest within 30 days of the General
Partner's removal, and the fair market value of the General Partner's General
Partnership Interest shall be the average of the two appraisals; provided
however, that if the higher appraisal exceeds the lower appraisal by more than
20% of the amount of the lower appraisal, the two appraisers, no later than 40
days after the removal of the General Partner, shall select a third appraiser
who shall complete an appraisal of the fair market value of the General
Partner's General Partnership Interest no later than 60 days after the removal
of the General Partner. In such case, the fair market value of the General
Partner's General Partnership Interest shall be the average of the two
appraisals closest in value.
(c) The General Partnership Interest of a removed General
Partner, during the time after default until transfer under Section 7.04(b),
shall be converted to that of a special Limited Partner; provided, however, such
removed General Partner shall not have any rights to participate in the
management and affairs of the Partnership, and shall not be entitled to any
portion of the income, expense, profit, gain or loss allocations or cash
distributions allocable or payable as the case may be, to the Limited Partners.
Instead, such removed General Partner shall receive and be entitled only to
retain distributions or allocations of such items which it would have been
entitled to receive in its capacity as General Partner, until the transfer is
effective pursuant to Section 7.04(b).
(d) All Partners shall have given and hereby do give such
consents, shall take such actions and shall execute such documents as shall be
legally necessary and sufficient to effect all the foregoing provisions of this
Section.
ARTICLE VIII
RIGHTS AND OBLIGATIONS
OF THE LIMITED PARTNERS
8.01 Management of the Partnership. The Limited Partners shall not
participate in the management or control of Partnership business nor shall they
transact any business for the Partnership, nor shall they have the power to sign
for or bind the Partnership, such powers being vested solely and exclusively in
the General Partner.
8.02 Power of Attorney. Each Limited Partner hereby irrevocably
appoints the General Partner his true and lawful attorney-in-fact, who may act
for each Limited Partner and in his name, place and stead, and for his use and
benefit, to sign, acknowledge, swear to, deliver, file and record, at the
appropriate public offices, any and all documents, certificates, and instruments
as may be deemed necessary or desirable by the General Partner to carry out
fully the provisions of this Agreement and the Act in accordance with their
terms, which power of attorney is coupled with an interest and shall survive the
death, dissolution or legal incapacity of the Limited Partner, or the transfer
by the Limited Partner of any part or all of his Interest in the Partnership.
This power of attorney shall be limited to documents, certificates and
instruments the contents of which shall have no adverse economic impact on the
Limited Partners.
8.03 Limitation on Liability of Limited Partners. No Limited Partner
shall be liable for any debts, liabilities, contracts or obligations of the
Partnership. A Limited Partner shall be liable to the Partnership only to make
payments of his Capital Contribution, if any, as and when due hereunder. After
his Capital Contribution is fully paid, no Limited Partner shall, except as
otherwise required by the Act, be required to make any further Capital
Contribution or other payments or lend any funds to the Partnership.
8.04 Ownership by Limited Partner of Corporate General Partner or
Affiliate. No Limited Partner shall at any time, either directly or indirectly,
own any stock or other interest in the General Partner or in any Affiliate
thereof, if such ownership by itself or in conjunction with other stock or other
interests owned by other Limited Partners would, in the opinion of counsel for
the Partnership, jeopardize the classification of the Partnership as a
partnership for federal income tax purposes. The General Partner shall be
entitled to make such reasonable inquiry of the Limited Partners as is required
to establish compliance by the Limited Partners with the provisions of this
Section.
8.05 Redemption Right.
(a) Subject to the terms of Section 8.05, on or after the date
(i) that is one (1) year after the closing of the Offering, James I. Humphrey,
Jr. and Humphrey Associates, Inc. as Limited Partners with respect to the Units
received by them in connection with the offering of the REIT Shares issued on
November 29, 1994, or (ii) that is six months after the issuance by the
Partnership of any Units other than those issued in connection with the November
29, 1994 issuance of REIT Shares (each such date, a "First Redemption Date" with
respect to the applicable Units), each Limited Partner shall have the right (the
"Redemption Right") to require the Partnership to redeem on a Specified
Redemption Date all or a portion of the applicable Units held by such Limited
Partner at a redemption price equal to and in the form of the Redemption Amount.
The Redemption Right shall be exercised pursuant to a Notice of Redemption
delivered to the General Partner by the Limited Partner who is exercising the
Redemption Right (the "Redeeming Partner"). A Limited Partner may not exercise
the Redemption Right for (i) less than one thousand (1,000) Partnership Units
or, if such Limited Partner holds less than one thousand (1,000) Partnership
Units, all of the Partnership Units held by such Partner and (ii) more than the
number of Partnership Units that would, upon redemption, entitle such Limited
Partner to 9.9% of the REIT Shares. The Redeeming Partner shall have no right,
with respect to any Partnership Units so redeemed, to receive any distribution
paid with respect to Partnership Units if the record date for such distribution
is on or after the Specified Redemption Date.
(b) Notwithstanding the provisions of Section 8.05(a), the
General Partner or HHTI may, in its sole and absolute discretion, assume
directly and satisfy a Redemption Right within the maximum and minimum limits
provided in Section 8.05(a) by paying to the Redeeming Partner the Redemption
Amount on the Specified Redemption Date, whereupon the General Partner or HHTI,
as applicable, shall acquire the Partnership Units offered for redemption by the
Redeeming Partner and shall be treated for all purposes of this Agreement as the
owner of such Partnership Units. In the event the General Partner or HHTI shall
exercise its right to satisfy the Redemption Right in the manner described in
the preceding sentence, the Partnership shall have no obligation to pay any
amount to the Redeeming Partner with respect to such Redeeming Partner's
exercise of the Redemption Right, and each of the Redeeming Partner, the
Partnership, and the General Partner shall treat the transaction between the
General Partner or HHTI, applicable, and the Redeeming Partner as a sale of the
Redeeming Partner's Partnership Units to the General Partner or HHTI, as
applicable, for federal income tax purposes. Each Redeeming Partner agrees to
execute such documents as the General Partner may reasonably require in
connection with the issuance of REIT Shares upon exercise of the Redemption
Right.
(c) Except as provided in Section 8.05(e), the Partnership,
the General Partner or HHTI, as the case may be, shall pay the Cash Amount to a
Redeeming Partner as the Redemption Amount for such Partner if (i) the
acquisition of REIT Shares by such Partner on the Specified Redemption Date
would (A) result in such Partner or any other person owning, directly or
indirectly, REIT Shares in excess of the "Ownership Limit," as defined in the
Articles of Incorporation and calculated in accordance therewith, except as
provided in the Articles of Incorporation, (B) result in REIT Shares being owned
by fewer than 100 persons (determined without reference to any rules of
attribution), except as provided in the Articles of Incorporation, (C) result in
HHTI being "closely held" within the meaning of Section 856(h) of the Code, (D)
cause the General Partner or HHTI to own, directly or constructively, 10% or
more of the ownership interests in a tenant of the General Partner's, HHTI's,
the Partnership's or the Subsidiary Partnership's real property, within the
meaning of Section 856(d)(2)(B) of the Code, or (E) cause the acquisition of
REIT Shares by such Partner to be "integrated" with any other distribution of
REIT Shares for purposes of complying with the registration provisions of the
Securities Act of 1933, as amended, or (ii) the Partnership, the General Partner
or HHTI, as the case may be, so elects in its sole discretion, unless the
Redeeming Partner delivers an opinion of counsel satisfactory to the Partnership
or HHTI, as the case may be, in its sole discretion, opining that the
acquisition of REIT Shares would not adversely affect HHTI's status as a REIT
under Sections 856-860 of the Code. Any Cash Amount to be paid to a redeeming
Limited Partner pursuant to this Section 8.05 shall be paid within sixty (60)
days after the initial date of receipt by the General Partner of the Notice of
Redemption relating to the Partnership Units to be redeemed; provided, however,
that such sixty (60) day period may be extended for up to an additional one
hundred eighty (180) day period to the extent required for the General Partner
and HHTI to cause additional REIT Shares to be issued to provide financing to be
used to make such payment of the Cash Amount. Notwithstanding the foregoing, the
General Partner and HHTI and the Partnership agree to use their best efforts to
cause the closing of the acquisition of redeemed Partnership Units hereunder to
occur as quickly as reasonably possible.
(d) Each certificate, if any, evidencing REIT Shares that may
be issued in redemption of Partnership Units under Section 8.05 above (the
"Redemption Shares") shall bear a restrictive legend in substantially the
following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or
any state securities law. No transfer of the Shares
represented by this certificate shall be valid or effective
unless (A) such transfer is made pursuant to an effective
registration statement under the Securities Act of 1933, as
amended (the "Act"), or (B) the holder of the securities
proposed to be transferred shall have delivered to the company
either a no-action letter from the Securities and Exchange
Commission or an opinion of counsel (who may be an employee of
such holder) experienced in securities matters to the effect
that such proposed transfer is exempt from the registration
requirements of the Act which opinion shall be reasonably
satisfactory to the Company."
(e) Notwithstanding any other provision of this Agreement, the
General Partner shall place appropriate restrictions on the ability of the
Limited Partners to exercise their Redemption Rights as and if deemed necessary
to ensure that the partnership does not constitute a "publicly traded
partnership" under Section 7704 of the Code.
8.06 Registration.
(a) Shelf Registration. Within two weeks of any First
Redemption Date, HHTI agrees to file with the Commission a shelf registration
statement under Rule 415 of the Securities Act, or any similar rule that may be
adopted by the Commission (the "Shelf Registration"), with respect to all of the
Redemption Shares that are first eligible for redemption on such date. HHTI will
use its best efforts to have the Shelf Registration declared effective under the
Securities Act as soon as practicable after such filing and to keep the Shelf
Registration continuously effective until the earlier of (i) the date when all
of the Redemption Shares registered thereby are sold, or (ii) the date on which
all of the holders of Redemption Shares registered thereunder may sell such
Redemption Shares without registration under the Securities Act pursuant to Rule
144(k) under the Securities Act. HHTI further agrees to supplement or make
amendments to the Shelf Registration, if required by the rules, regulations or
instructions applicable to the registration form utilized by the Company or by
the Securities Act or rules and regulations thereunder for the Shelf
Registration. Notwithstanding the foregoing, if for any reason the effectiveness
of the Shelf Registration is delayed or suspended or its ceases to be available
for sales of Redemption Shares thereunder, the Shelf Registration period shall
be extended by the aggregate number of days of such delays, suspension or
unavailability.
(b) Registration and Qualification Procedures. HHTI is
required by the provisions of Section 8.06(a) hereof to use its best efforts to
have a Shelf Registration relating to the Redemption Shares declared effective
under the Securities Act as soon as practicable after each applicable First
Redemption Date. Accordingly, HHTI, as soon as practical after a First
Redemption Date, shall with respect to the Redemption Shares first eligible for
redemption on such date:
(i) prepare and file with the
Commission a registration statement, including amendments thereof and
supplements relating thereto, with respect to such Redemption Shares, in
connection with which HHTI will give each holder of such Redemption Shares,
their underwriters, if any, and their counsel and accountants a reasonable
opportunity to participate in the preparation thereof and will give such persons
reasonable access to its books, records, officers and independent public
accountants;
(ii) use its best efforts to cause
the registration statement to be declared effective by the Commission;
(iii) keep the registration statement
effective and the related prospectus current throughout the Shelf Registration
period; provided, however, that HHTI shall have no obligation to file any
amendment or supplement at its own expense or the Partnership's expense more
than ninety (90) days after the effective date of the registration statement;
(iv) furnish to each holder of such Redemption
Shares such numbers of copies of prospectuses, and supplements or amendments
thereto, and such other documents as such holder reasonably requests;
(v) register or qualify such
Redemption Shares covered by the registration statement under the
securities or blue sky laws of such jurisdictions within the United States as
any holder of the such Redemption Shares shall reasonably request, and do such
other reasonable acts and things as may be required of it to enable such holders
to consummate the sale or other disposition in such jurisdictions of such
Redemption Shares; provided, however, that HHTI shall not be required to (i)
qualify as a foreign corporation or consent to a general and unlimited service
or process in any jurisdictions in which it would not otherwise be required to
be qualified or so consent or (ii) qualify as a dealer in securities;
(vi) furnish, at the request of the
holders of such Redemption Shares, on the date such Redemption Shares are
delivered to the underwriters for sale pursuant to such registration, or, if
such Redemption Shares are not being sold through underwriters, on the date the
Shelf Registration relating to such Redemption Shares becomes effective, (A) a
securities opinion of counsel representing HHTI for the purposes of such
registration covering such legal matters as are customarily included in such
opinions and (B) letters of the firm of independent public accountants that
certified the financial statements included in the registration statement,
addressed to the underwriters, covering substantially the same matters as are
customarily covered in accountant's letters delivered to underwriters in
underwritten public offerings of securities and such other financial matters as
such holders (or the underwriters, if any) may reasonably request;
(vii) otherwise use its best efforts to
comply with all applicable rules and regulations of the Commission, and make
available to its shareholders as soon as reasonably practicable, but not later
than sixteen (16) months after the effective date of the Shelf Registration, an
earnings statement covering a period of at least twelve (12) months beginning
after the effective date of the Shelf Registration, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act;
(viii) enter into and perform an
underwriting agreement relating to the related Redemption Shares with the
managing underwriter, if any, selected as provided herein, containing customary
(A) terms of offer and sale of the securities, payment provisions, underwriting
discounts and commissions and (B) representations, warranties, covenants,
indemnities, terms and conditions; and
(ix) keep the holders of such
Redemption Shares advised as to the initiation and progress of the
registration.
(c) Allocation of Expenses. The Partnership shall pay all
expenses in connection with the Shelf Registration, including without limitation
(i) all expenses incident to filing with the National Association of Securities
Dealers, Inc., (ii) registration fees, (iii) printing expenses, (iv) accounting
and legal fees and expenses, except to the extent holders of Redemption Shares
elect to engage accountants or attorneys in addition to the accountants and
attorneys engaged by HHTI, (v) accounting expenses incident to or required by
any such registration or qualification and (vi) expenses of complying with the
securities or blue sky laws of any jurisdictions in connection with such
registration or qualification; provided, however, the Partnership shall not be
liable for (A) any discounts or commissions to any underwriter or broker
attributable to the sale of Redemption Shares, or (B) any fees or expenses
incurred by holders of Redemption Shares in connection with such registration
which, according to the written instructions of any regulatory authority, the
Partnership is not permitted to pay.
(d) Indemnification.
(i) In connection with the Shelf
Registration, HHTI and the Partnership agree to indemnify holders of
Redemption Shares within the meaning of Section 15 of the Securities Act,
against all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation) caused by any untrue, or alleged untrue,
statement of a material fact contained in the Shelf Registration, preliminary
prospectus or prospectus (as amended or supplemented if HHTI shall have
furnished any amendments or supplements thereto) or caused by any omission, or
alleged omission, to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or expenses are caused by any untrue
statement, alleged untrue statement, omission or alleged omission based upon
information furnished to HHTI expressly for use therein. HHTI and each officer,
director and controlling person of HHTI shall be indemnified by each holder of
Redemption Shares covered by the Shelf Registration for all such losses, claims,
damages, liabilities and expenses (including reasonable costs of investigation)
caused by any such untrue, or alleged untrue, statement or any such omission, or
alleged omission, based upon information furnished to HHTI expressly for use
therein in a writing signed by the holder.
(ii) Promptly upon receipt by a party
indemnified under this Section 8.06(d) of notice of the commencement of any
action against such indemnified party in respect of which indemnity or
reimbursement may be sought against any indemnifying party under this Section
8.06(d), such indemnified party shall notify HHTI in writing of the commencement
of such action, but the failure to so notify HHTI shall not relieve it of any
liability which it may have to any indemnified party otherwise than under this
Section 8.06(d) unless such failure shall materially adversely affect the
defense of such action. In case notice of commencement of any such action shall
be given to HHTI as above provided, HHTI shall be entitled to participate in
and, to the extent it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense of such action at its own expense,
with counsel chosen by it and reasonably satisfactory to such indemnified party.
The indemnified party shall have the right to employ separate counsel in any
such action and participate in the defense thereof, but the fees and expenses of
such counsel (other than reasonable costs of investigation) shall be paid by the
indemnified party unless (i) HHTI or the Partnership agrees to pay the same,
(ii) HHTI fails to assume the defense of such action with counsel reasonably
satisfactory to the indemnified party or (iii) the named parties to any such
action (including any impleaded parties) have been advised to such counsel that
representation of such indemnified party and HHTI by the same counsel would be
inappropriate under applicable standards of professional conduct (in which case
HHTI shall not have the right to assume the defense of such action on behalf of
such indemnified party). No indemnifying party shall be liable for any
settlement entered into without its consent.
(e) Contribution.
(i) If for any reason the
indemnification provisions contemplated by Section 8.06(d) are either
unavailable or insufficient to hold harmless an indemnified party in respect of
any losses, claims, damages or liabilities referred to therein, then the party
that would otherwise be required to provide indemnification or the indemnifying
party (in either case, for purposes of this Section 8.06(e), the "Indemnifying
Party") in respect of such losses, claims, damages or liabilities, shall
contribute to the amount paid or payable by the party that would otherwise be
entitled to indemnification or the indemnified party (in either case, for
purposes of this Section 8.06(e), the "Indemnified Party") as a result of such
losses, claims, damages, liabilities or expense, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and the
Indemnified Party, as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact related to information supplied by the Indemnifying Party or
Indemnified Party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include
any legal or other fees or expenses reasonably incurred by such party. In no
event shall any holder of Redemption Shares covered by the Shelf Registration be
required to contribute an amount greater than the dollar amount of the proceeds
received by such holder from the sale of Redemption Shares pursuant to the
registration giving rise to the liability.
(ii) The parties hereto agree that it would not
be just and equitable if contribution pursuant to this Section 8.06(e) were
determined by pro rata allocation (even if the holders or any underwriters or
all of them were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. No person or entity
determined to have committed a fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person or entity who was not guilty of such fraudulent misrepresentation.
(iii) The contribution provided for in this
Section 8.06(e) shall survive the termination of this Agreement and shall remain
in full force and effect regardless of any investigation made by or on behalf of
any Indemnified Party.
(f) Listing on Securities Exchange. If HHTI shall list or
maintain the listing of any shares of Common Stock on any securities exchange or
national market system, it will at its expense and as necessary to permit the
registration and sale of the Redemption Shares hereunder, list thereon, maintain
and, when necessary, increase such listing to include such Redemption Shares.
8.07 Outside Activities of Limited Partners. Except as otherwise
provided in this Agreement or as otherwise agreed to by the Partners, any
Limited Partner or its Affiliate may engage in or possess an interest in other
business ventures of every nature and description, independently or with others,
including, but not limited to, enterprises engaged in the same business as the
Partnership, and neither the Partnership nor the other Partners shall have any
right by virtue of this Agreement in or to such independent ventures or to the
income or profits derived therefrom.
ARTICLE IX
TRANSFERS OF PARTNERSHIP INTERESTS
9.01 Purchase for Investment.
(a) Each Limited Partner hereby represents and warrants to the
General Partner and to the Partnership that the acquisition of his Partnership
Interest is made as a principal for his account for investment purposes only and
not with a view to the resale or distribution of such Partnership Interest.
(b) Each Limited Partner agrees that he will not sell, assign
or otherwise transfer his Partnership Interest or any fraction thereof, whether
voluntarily or by operation of law or at judicial sale or otherwise, to any
Person who does not make the representations and warranties to the General
Partner set forth in Section 9.01(a) above and similarly agree not to sell,
assign or transfer such Partnership Interest or fraction thereof to any Person
who does not similarly represent, warrant and agree.
9.02 Restrictions on Transfer of Limited Partnership Interests.
(a) Except as otherwise provided in Section 9.02(d) hereof, no
Limited Partner may offer, sell, assign, hypothecate, pledge or otherwise
transfer his Limited Partnership Interest, in whole or in part, whether
voluntarily or by operation of law or at judicial sale or otherwise
(collectively, a "Transfer") without the written consent of the General Partner,
which consent may be withheld in the sole discretion of the General Partner. The
General Partner may require, as a condition of any Transfer, that the transferor
assume all costs incurred by the Partnership in connection therewith.
(b) No Limited Partner may effect a Transfer of his Limited
Partnership Interest, in whole or in part, if, in the opinion of legal counsel
for the Partnership, such proposed Transfer would require the registration of
the Limited Partnership Interest under the Securities Act of 1933, as amended,
or would otherwise violate any applicable federal or state securities or "Blue
Sky" law (including investment suitability standards).
(c) No transfer by a Limited Partner of his Partnership Units,
in whole or in part, may be made to any Person if (i) in the opinion of legal
counsel for the Partnership, the transfer would result in the Partnership's
being treated as an association taxable as a corporation (other than a qualified
REIT subsidiary within the meaning of Section 856(i) of the Code), or (ii) such
transfer is effectuated through an "established securities market" or a
"secondary market" (or the substantial equivalent thereof) within the meaning of
Section 7704 of the Code.
(d) Section 9.02(a) shall not apply to the following
transactions, except that the General Partner may require that the transferor
assume all costs incurred by the Partnership in connection therewith:
(i) any Transfer by a Limited Partner
pursuant to the exercise of its Redemption Right under Section 8.05 hereof;
(ii) any Transfer by a Limited
Partner that is a corporation or other business entity to any of its
Affiliates or subsidiaries or to any successor in interest of such Limited
Partner; or
(iii) any donative Transfer by an
individual Limited Partner to his immediate family members or any trust in
which the individual or his immediate family members own, collectively, 100% of
the beneficial interests. For purposes of this Section 9.02(d)(iii), the term
"immediate family member" shall be deemed to include only an individual Limited
Partner's spouse children and grandchildren.
(e) Any Transfer in contravention of any of the provisions of
this Article IX shall be void and ineffectual and shall not be binding upon, or
recognized by, the Partnership.
9.03 Admission of Substitute Limited Partner.
(a) Subject to the other provisions of this Article IX, an
assignee of the Limited Partnership Interest of a Limited Partner (which shall
be understood to include any purchaser, transferee, donee, or other recipient of
any disposition of such Limited Partnership Interest) shall be deemed admitted
as a Limited Partner of the Partnership only upon the satisfactory completion of
the following:
(i) The assignee shall have accepted
and agreed to be bound by the terms and provisions of this Agreement by
executing a counterpart or an amendment thereof, including a revise Exhibit A,
and such other documents or instruments as the General Partner may require in
order to effect the admission of such Person as a Limited Partner.
(ii) To the extent required, an
amended Certificate evidencing the admission of such Person as a Limited
Partner shall have been signed, acknowledged and filed for record in accordance
with the Act.
(iii) The assignee shall have
delivered a letter containing the representation set forth in Section
9.01(a) hereof and the agreement set forth in Section 9.01(b) hereof.
(iv) If the assignee is a
corporation, partnership, limited liability company or trust, the assignee
shall have provided the General Partner with evidence satisfactory to counsel
for the Partnership of the assignee's authority to become a Limited Partner
under the terms and provisions of this Agreement.
(v) The assignee shall have executed a
power of attorney containing the terms and provisions set forth in Section
8.02 hereof.
(vi) The assignee shall have paid all reasonable
legal fees of the Partnership and the General Partner and filing and publication
costs in connection with his substitution as a Limited Partner.
(vii) The assignee has obtained the
prior written consent of General Partner to its admission as a Substitute
Limited Partner, which consent may be given or denied in the exercise of General
Partner's sole and absolute discretion.
(b) For the purpose of allocating profits and losses and
distributing cash received by the Partnership, a Substitute Limited Partner
shall be treated as having become, and appearing in the records of the
Partnership as, a Partner upon the filing of the Certificate described in
Section 9.03(a)(ii) hereof or, if no such filing is required, the later of the
date specified in the transfer documents or the date on which the General
Partner has received all necessary instruments of transfer and substitution.
(c) The General Partner shall cooperate with the Person
seeking to become a Substitute Limited Partner by preparing the documentation
required by this Section and making all official filings and publications. The
Partnership shall take all such action as promptly as practicable after the
satisfaction of the conditions in this Article IX to the admission of such
Person as a Limited Partner of the Partnership.
9.04 Rights of Assignees of Partnership Interests.
(a) Subject to the provisions of Section 9.01 and 9.02 hereof,
except as required by operation of law, the Partnership shall not be obligated
for any purposes whatsoever to recognize the assignment by any Limited Partner
of his Partnership Interest until the Partnership has received notice thereof.
(b) Any Person who is the assignee of all or any portion of a
Limited Partner's Partnership Interest, but does not become a Substitute Limited
Partner and desires to make a further assignment of such Limited Partnership
Interest, shall be subject to all of the provisions to this Article IX to the
same extent and in the same manner as any Limited Partner desiring to make an
assignment of his Limited Partnership Interest.
9.05 Effect of Bankruptcy, Death, Incompetence or Termination of a
Limited Partner. The occurrence of an Event of Bankruptcy as to a Limited
Partner, the death of a Limited Partner or a final adjudication that a Limited
Partner is incompetent (which term shall include, but not be limited to,
insanity) shall not cause the termination or dissolution of the Partnership, and
the business of the Partnership shall continue if an order for relief in a
bankruptcy proceeding is entered against a Limited Partner, the trustee or
receiver of his estate or, if he dies, his executor, administrator or trustee,
or, if he is finally adjudicated incompetent, his committee, guardian or
conservator, shall have the rights of such Limited Partner for the purpose of
settling or managing his estate property and such power as the bankrupt,
deceased or incompetent Limited Partner possessed to assign all or any part of
his Partnership Interest and to join with the assignee in satisfying conditions
precedent to the admission of the assignee as a Substitute Limited Partner.
9.06 Joint Ownership of Interests. A Partnership Interest may be
acquired by two individuals as joint tenants with right of survivorship,
provided that such individuals either are married or are related and share the
same home as tenants in common. The written consent or vote of both owners of
any such jointly held Partnership Interest shall be required to constitute the
action of the owners of such Partnership Interest; provided, however, that the
written consent of only one joint owner will be required if the Partnership has
been provided with evidence satisfactory to the counsel for the Partnership that
the actions of a single joint owner can bind both owners under the applicable
laws of the state of residence of such joint owners. Upon the death of one owner
of a Partnership Interest held in a joint tenancy with a right of survivorship,
the Partnership Interest shall become owned solely by the survivor as a Limited
Partner and not as an assignee. The Partnership need not recognize the death of
one of the owners of a jointly-held Partnership Interest until it shall have
received notice of such death. Upon notice to the General Partner from either
owner, the General Partner shall cause the Partnership Interest to be divided
into two equal Partnership Interests, which shall thereafter be owned separately
by each of the former owners.
ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS
10.01 Books and Records. At all times during the continuance of the
Partnership the Partners shall keep or cause to be kept at the Partnership's
specified office true and complete books of account in accordance with generally
accepted accounting principles, including: (a) a current list of the full name
and last known business address of each Partner, (b) a copy of the Certificate
of Limited Partnership and all certificates of amendment thereto, (c) copies of
the Partnership's federal, state and local income tax returns and reports, (d)
copies of the Agreement and any financial statements of the Partnership for the
three most recent years and (e) all documents and information required under the
Act. Any Partner or his duly authorized representative, upon paying the cost of
collection, duplication and mailing, shall be entitled to inspect or copy such
records during ordinary business hours.
10.02 Custody of Partnership Funds; Bank Accounts.
(a) All funds of the Partnership not otherwise invested shall
be deposited in one or more accounts maintained in such banking or brokerage
institutions as the General Partner shall determine, and withdrawals shall be
made only on such signature or signatures as the General Partner may, from time
to time, determine.
(b) All deposits and other funds not needed in the operation
of the business of the Partnership may be invested by the General Partner in
investment grade instruments (or investment companies whose portfolio consists
primarily thereof), government obligations, certificates of deposit, bankers'
acceptances and municipal notes and bonds. The funds of the Partnership shall
not be commingled with the funds of any other Person except for such commingling
as may necessarily result from an investment in those investment companies
permitted by this Section 10.02(b).
10.03 Fiscal and Taxable Year. The fiscal and taxable year of the
Partnership shall be the calendar year.
10.04 Annual Tax Information and Report. Within 75 days after the end
of each fiscal year of the Partnership, the General Partner shall furnish to
each person who was a Limited Partner at any time during such year the tax
information necessary to file such Limited Partner's individual tax returns as
shall be reasonably required by law.
10.05 Tax Matters Partner; Tax Elections; Special Basis Adjustments.
(a) The General Partner shall be the Tax Matters Partner of
the Partnership within the meaning of Section 6231(a)(7) of the Code. As Tax
Matters Partner, the General Partner shall have the right and obligation to take
all actions authorized and required, respectively, by the Code for the Tax
Matters Partner subject to Section 5.01(f) of this Agreement. The General
Partner shall have the right to retain professional assistance in respect of any
audit of the Partnership by the Service and all out-of-pocket expenses and fees
incurred by the General Partner on behalf of the Partnership as Tax Matters
Partner shall constitute Partnership expenses. In the event the General Partner
receives notice of a final partnership adjustment under Section 6223(a)(2) of
the Code, the General Partner shall either (i) file a court petition for
judicial review of such final adjustment within the period provided under
Section 6226(a) of the Code, a copy of which petition shall be mailed to all
Limited Partners on the date such petition is filed, or (ii) mail a written
notice to all Limited Partners, within such period, that describes the General
Partner's reasons for determining not to file such a petition.
(b) All elections required or permitted to be made by the
Partnership under the Code shall be made by the General Partner in its sole
discretion; provided, however, that the Partnership's election to use the
traditional method as specified by Section 5.01(f) of this Agreement shall not
be revoked without the consent of the holders of 75% of the Percentage Interests
of the Limited Partners (excluding the General Partner).
(c) In the event of a transfer of all or any part of the
Partnership Interest of any Partner, the Partnership, at the option of the
General Partner, may elect pursuant to Section 754 of the Code to adjust the
basis of the Properties. Notwithstanding anything contained in Article IV of
this Agreement, any adjustments made pursuant to Section 754 shall affect only
the successor in interest to the transferring Partner and in no event shall be
taken into account in establishing, maintaining or computing Capital Accounts
for the other Partners for any purpose under this Agreement. Each Partner will
furnish the Partnership with all information necessary to give effect to such
election.
10.06 Reports to Limited Partners.
(a) The books of the Partnership shall be audited annually as
of the end of each fiscal year of the Partnership by accountants selected by the
General Partner, who shall be the same accountants responsible for the
examination of the General Partner's books. The General Partner shall determine
and prepare an annual balance sheet, a statement of partners' capital as of the
end of such year, as well as statements of cash flow and income, all in
accordance with generally accepted accounting principles and accompanied by an
independent auditor's report (collectively, the "Financial Statements"),
together with all supplementary schedules and information prepared by the
accountants related thereto. As a note to such Financial Statements, the General
Partner shall prepare a schedule of all loans to the Partnership. Such schedule
shall demonstrate that loans have been made, used, carried on the books of the
Partnership (and repaid, if applicable) in accordance with the provisions of
this Agreement. Within 90 days after the end of each fiscal year, the General
Partner shall transmit the Financial Statements to the Limited Partners. The
General Partner also shall prepare quarterly unreviewed Financial Statements and
shall transmit such statements to the Limited Partners within 45 days of the end
of each fiscal quarter of the Partnership.
(b) Any Partner shall further have the right to a private
audit of the books and records of the Partnership, provided such audit is made
for Partnership purposes, at the expense of the Partner desiring it and is made
during normal business hours.
ARTICLE XI
AMENDMENT OF AGREEMENT
The General Partner, without the consent of the Limited Partners, may
amend this Agreement in any respect to the benefit of and not adverse to the
interests of the Limited Partners; provided, however, that any other amendments
to the Agreement shall require the consent of Limited Partners (other than the
General Partner) holding more than 50% of the Percentage Interests of the
Limited Partners (other than the General Partner).
ARTICLE XII
GENERAL PROVISIONS
12.01 Notices. All communications required or permitted under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or upon deposit in the United States mail, registered,
postage prepaid return receipt requested, to the Partners at the addresses set
forth in Exhibit B attached hereto; provided, however, that any Partner may
specify a different address by notifying the General Partner in writing of such
different address. Notices to the Partnership shall be delivered at or mailed to
its specified office.
12.02 Survival of Rights. Subject to the provisions hereof limiting
transfers, this Agreement shall be binding upon and inure to the benefit of the
Partners and the Partnership and their respective legal representatives,
successors, transferees and assigns.
12.03 Additional Documents. Each Partner agrees to perform all further
acts and execute, swear to, acknowledge and deliver all further documents which
may be reasonable, necessary, appropriate or desirable to carry out the
provisions of this Agreement or the Act.
12.04 Severability. If any provision of this Agreement shall be
declared illegal, invalid, or unenforceable in any jurisdiction, then such
provision shall be deemed to be severable from this Agreement (to the extent
permitted by law) and in any event such illegality, invalidity or
unenforceability shall not affect the remainder hereof.
12.05 Entire Agreement. This Agreement and exhibits attached hereto
constitute the entire Agreement of the Partners and supersede all prior written
agreements and prior and contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof.
12.06 Pronouns and Plurals. When the context in which words are used in
the Agreement indicates that such is the intent, words in the singular number
shall include the plural and the masculine gender shall include the neuter or
female gender as the context may require.
12.07 Headings. The Article headings or sections in this Agreement are
for convenience only and shall not be used in construing the scope of this
Agreement or any particular Article.
12.08 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original copy and all of
which together shall constitute one and the same instrument binding on all
parties hereto, notwithstanding that all parties shall not have signed the same
counterpart.
12.09 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Virginia.
IN WITNESS WHEREOF, the parties hereto have hereunder affixed their
signatures to this Second Amended and Restated Agreement of Limited Partnership,
all as of the _____ day of ___________, 1997.
<TABLE>
<CAPTION>
WITNESS: GENERAL PARTNER:
<S> <C>
HUMPHREY HOSPITALITY REIT TRUST,
a Maryland real estate investment trust
_____________________________ By: _____________________________
James I. Humphrey, Jr.
President
LIMITED PARTNERS:
- ----------------------------- --------------------------------
James I. Humphrey, Jr.
HUMPHREY ASSOCIATES, INC.
_____________________________ By: ______________________________
James I. Humphrey, Jr.
President
FARMVILLE LODGING ASSOCIATES, LLC
_____________________________ By: ______________________________
James I. Humphrey, Jr.
Authorized Member
HUMPHREY-KEY LARGO ASSOCIATES, L.P.
By: Humphrey Development, Inc.
_____________________________ By: _______________________
James I. Humphrey, Jr.
President
</TABLE>
<PAGE>
SPECIAL CONSENT
Humphrey Hospitality Trust, Inc. hereby executes this Special Consent
for the purpose of acknowledging and agreeing to its rights and obligations as
set forth in the Second Amended and Restated Agreement of Limited Partnership of
Humphrey Hospitality Limited Partnership.
WITNESS/ATTEST: HUMPHREY HOSPITALITY TRUST, INC., a Virginia corporation
_____________________________ By: ______________________________
James I. Humphrey, Jr.
President
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Agreed Value
of Non-Cash
Partner Cash Capital Partnership Percentage
and Address Contribution Contribution Units Interest
<S> <C>
General
Partner:
Humphrey Hospitality $24,356,487 3,481,700 84.12%
REIT Trust
12301 Old Columbia Pike
Silver Spring, MD 20904
Limited Partners:
James I. Humphrey, Jr. $3,130,921 522,587 12.63%
12301 Old Columbia Pike
Silver Spring, MD 20904
Humphrey Associates, Inc. $ 31,628 5,279 0.13%
12301 Old Columbia Pike
Silver Spring, MD 20904
Farmville Lodging Associates, LLC $ 740,001 95,484 2.30%
12301 Old Columbia Pike
Silver Spring, MD 20904
Humphrey-Key Largo Associates, $ 370,000 34,023 0.82%
L.P.
12301 Old Columbia Pike
Silver Spring, MD 20904
---------- --------- ---------- ----------
$24,356,487 $4,272,550 $4,139,073 100.00000%
=========== ========== ========== ==========
</TABLE>
Except as amended hereby, the terms and provisions of the Partnership
Agreement which are incorporated herein by this reference are hereby reaffirmed
and shall remain in full force and effect and shall be binding upon the parties
hereto.
This Agreement may be executed in several counterparts and all so
executed shall constitute one agreement binding on all parties hereto.
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF REDEMPTION RIGHT
In accordance with Section ____ of the Second Amended and Restated
Agreement of Limited Partnership of Humphrey Hospitality Limited Partnership
(the "Agreement"), the undersigned hereby irrevocably (i) presents for
redemption _____ Partnership Units in Humphrey Hospitality Limited Partnership
in accordance with the terms of the Agreement and the Redemption Right referred
to in Section 8.05 thereof, and surrenders such Limited Partnership Units and
all right, title and interest therein, and directs that the Cash Amount or REIT
Shares (as defined in the Agreement) as determined by the General Partner
deliverable upon exercise of the Redemption Right be delivered to the address
specified below, and if REIT Shares are to be delivered, such REIT Shares be
registered or placed in the name(s) and at the address(es) specified below.
Dated: ______________________
Name of Limited Partner:
---------------------------------------------
(Signature of Limited Partner)
---------------------------------------------
(Mailing Address)
---------------------------------------------
(City) (State) (Zip Code)
Signature Guaranteed by:
----------------------------------------------
If REIT Shares are to be issued, issue to:
Name:
Please insert Social Security or identifying number:
Exhibit 10.30
LEASE AGREEMENT
DATED AS OF ______________
BETWEEN
HUMPHREY HOSPITALITY LIMITED PARTNERSHIP
AS LESSOR
AND
HUMPHREY HOSPITALITY MANAGEMENT, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C>
ARTICLE I.................................................................... 1
1.1 Leased Property............................................ 1
1.2 Term....................................................... 2
ARTICLE II................................................................... 2
Definitions......................................................... 2
ARTICLE III.................................................................. 14
3.1 Rent....................................................... 14
3.2 Confirmation of Percentage Rent............................ 15
3.3 Additional Charges......................................... 16
3.4 Lease Provision............................................ 17
3.5 Conversion of Property..................................... 17
3.6 Annual Budget.............................................. 17
3.7 Books and Records.......................................... 18
ARTICLE IV................................................................... 18
4.1 Payment of Impositions..................................... 18
4.2 Notice of Impositions...................................... 20
4.3 Adjustment of Impositions.................................. 20
4.5 Insurance Premiums......................................... 20
ARTICLE V.................................................................... 20
5.1 No Termination, Abatement, etc............................. 20
5.2 Abatement Procedures....................................... 21
ARTICLE VI................................................................... 21
6.1 Ownership of the Leased Property........................... 21
6.2 Lessee's Personal Property................................. 22
6.3 Lessor's Lien.............................................. 22
ARTICLE VII.................................................................. 23
7.1 Condition of the Leased Property........................... 23
7.2 Use of the Leased Property................................. 23
7.3 Lessor to Grant Easements, etc............................. 24
ARTICLE VIII................................................................. 25
8.1 Compliance with Legal and Insurance Requirements,
etc................................................................. 25
8.2 Legal Requirement Covenants................................ 25
8.3 Environmental Covenants.................................... 26
ARTICLE IX................................................................... 28
9.1 Capital Improvements, Maintenance and Repair............... 28
9.2 Encroachments, Restrictions, Etc........................... 30
ARTICLE X.................................................................... 31
10.1 Alterations................................................ 31
10.2 Salvage.................................................... 31
10.3 Joint Use Agreements....................................... 31
<PAGE>
ARTICLE XI................................................................... 32
Liens............................................................... 32
ARTICLE XII.................................................................. 32
Permitted Contests.................................................. 32
ARTICLE XIII................................................................. 33
13.1 General Insurance Requirements............................. 33
13.2 Replacement Cost........................................... 35
13.3 Worker's Compensation...................................... 35
13.4 Waiver of Subrogation...................................... 35
13.5 Form Satisfactory, etc..................................... 36
13.6 Change in Limits........................................... 36
13.7 Blanket Policy............................................. 36
13.9 Reports On Insurance Claims................................ 37
ARTICLE XIV.................................................................. 37
14.1 Insurance Proceeds......................................... 37
14.2 Reconstruction in the Event of Damage or
Destruction Covered by Insurance.................................... 38
14.3 Reconstruction in the Event of Damage or
Destruction Not Covered by Insurance................................ 39
14.4 Lessee's Property.......................................... 39
14.5 Damage Near End of Term.................................... 40
14.6 Waiver..................................................... 40
ARTICLE XV................................................................... 40
15.1 Definitions................................................ 40
15.2 Parties' Rights and Obligations............................ 40
15.3 Total Taking............................................... 40
15.4 Allocation of Award........................................ 41
15.5 Partial Taking............................................. 41
15.6 Temporary Taking........................................... 41
15.7 Lessee's Offer............................................. 42
ARTICLE XVI.................................................................. 42
16.1 Events of Default.......................................... 42
16.2 Surrender.................................................. 44
16.3 Damages.................................................... 44
16.4 Waiver..................................................... 45
16.5 Application of Funds....................................... 45
ARTICLE XVII................................................................. 46
Lessor's Right to Cure Lessee's Default............................. 46
ARTICLE XVIII................................................................ 46
Provisions Relating to Purchase of the Leased Property.............. 46
ARTICLE XIX.................................................................. 47
19.1 Personal Property Limitation............................... 47
ii
<PAGE>
19.2 Sublease Rent Limitation................................... 47
19.3 Sublease Tenant Limitation................................. 48
19.4 Lessee Ownership Limitation................................ 48
19.5 Lessee Officer and Employee Limitation..................... 48
ARTICLE XX................................................................... 48
Holding Over........................................................ 48
ARTICLE XXI.................................................................. 49
Risk of Loss........................................................ 49
ARTICLE XXII................................................................. 49
Indemnification..................................................... 49
ARTICLE XXIII................................................................ 50
23.1 Subletting and Assignment.................................. 50
23.2 Attornment................................................. 51
ARTICLE XXIV................................................................. 51
Officer's Certificates; Financial Statements; Lessor's
Estoppel Certificates and Covenants................................. 51
ARTICLE XXV.................................................................. 53
Lessor's Right to Inspect........................................... 53
ARTICLE XXVI................................................................. 53
No Waiver........................................................... 53
ARTICLE XXVII................................................................ 53
Remedies Cumulative................................................. 53
ARTICLE XXVIII............................................................... 53
Acceptance of Surrender............................................. 53
ARTICLE XXIX................................................................. 53
No Merger of Title.................................................. 54
ARTICLE XXX.................................................................. 54
Conveyance by Lessor................................................ 54
Other Interests..................................................... 54
ARTICLE XXXI................................................................. 54
Quiet Enjoyment..................................................... 54
ARTICLE XXXII................................................................ 55
Notices............................................................. 55
ARTICLE XXXIII............................................................... 55
Appraisers.......................................................... 55
iii
<PAGE>
ARTICLE XXXIV................................................................ 56
34.1 Lessor May Grant Liens..................................... 56
34.2 Lessee's Right to Cure..................................... 57
34.3 Breach by Lessor........................................... 57
ARTICLE XXXV................................................................. 57
35.1 Miscellaneous.............................................. 58
35.2 Transition Procedures...................................... 58
35.3 Waiver of Presentment, etc................................. 59
ARTICLE XXXVI................................................................ 59
Memorandum of Lease................................................. 59
ARTICLE XXXVII............................................................... 59
Lessor's Option to Purchase Assets of Lessee........................ 59
ARTICLE XXXVIII.............................................................. 60
Lessor's Option to Terminate Lease.................................. 60
ARTICLE XXXIX................................................................ 60
Compliance with Franchise Agreement................................. 60
ARTICLE XL................................................................... 61
40.1 Room Set-Aside............................................. 61
40.2 Capital Expenditures....................................... 61
40.3 Prohibited Expenditures.................................... 62
</TABLE>
iv
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT (hereinafter called "Lease"), made as of the _____
day of _________ 1994, by and between HUMPHREY HOSPITALITY LIMITED PARTNERSHIP,
a Virginia limited partnership (hereinafter called "Lessor"), and HUMPHREY
HOSPITALITY MANAGEMENT, INC., a Maryland corporation (hereinafter called
"Lessee"), provides as follows.
W I T N E S S E T H:
Contemporaneously with the execution hereof, Lessor acquired the
"Leased Property".
In furtherance of the consummation of such transaction, Lessor and
Lessee wish to enter into this Lease.
NOW, THEREFORE, Lessor, in consideration of the payment of rent by
Lessee to Lessor, the covenants and agreements to be performed by Lessee, and
upon the terms and conditions hereinafter stated, does hereby rent and lease
unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased
Property.
ARTICLE I
1.1 Leased Property. The leased property (the "Leased
Property") is comprised of Lessor's interest in the following:
(a) the land described in Exhibit "A" attached hereto
and by reference incorporated herein (the "Land");
(b) all buildings, structures and other improvements of every
kind including, but not limited to, alleyways and connecting tunnels, sidewalks,
utility pipes, conduits and lines (on-site and offsite), parking areas and
roadways appurtenant to such buildings and structures presently situated upon
the Land (collectively, the "Leased Improvements");
(c) all easements, rights and appurtenances relating to
the Land or the Leased Improvements;
(d) all equipment, machinery, fixtures, and other items of
property required for or incidental to the use of the Leased Improvements as a
hotel, including all components thereof, now and hereafter permanently affixed
to or incorporated into the Leased Improvements, including, without limitation,
all furnaces, boilers, heaters, electrical equipment, heating, plumbing,
lighting, ventilating, refrigerating, incineration, air and water pollution
control, waste disposal, air-cooling and air-conditioning systems and apparatus,
sprinkler systems and fire and theft protection
1
<PAGE>
equipment, all of which to the greatest extent permitted by law are hereby
deemed by the parties hereto to constitute real estate, together with all
replacements, modifications, alterations and additions thereto (collectively,
the "Fixtures");
(e) all furniture and furnishings and all other items of
personal property (excluding Inventory and personal property owned by Lessee)
located on, and used in connection with, the operation of the Leased
Improvements as a hotel, together with all replacements, modifications,
alterations and additions thereto; and
(f) all existing leases of space within the Leased Property
(including any security deposits or collateral held by Lessor pursuant thereto).
THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION
OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF
PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL
COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS OF RECORD
INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS,
MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH
WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE
SURVEY THEREOF.
1.2 Term. The term of the Lease (the "Term") shall commence on the date
hereof (the "Commencement Date") and shall end on the tenth anniversary of the
last day of the month in which the Commencement Date occurs unless the Lessee
chooses to renew the Lease for an additional five years, unless sooner
terminated in accordance with the provisions hereof.
ARTICLE II
Definitions. For all purposes of this Lease, except as otherwise
expressly provided or unless the context otherwise requires, (a) the terms
defined in this Article have the meanings assigned to them in this Article and
include the plural as well as the singular, (b) all accounting terms not
otherwise defined herein have the meanings assigned to them in accordance with
generally accepted accounting principles as are at the time applicable, (c) all
references in this Lease to designated "Articles," "Sections" and other
subdivisions are to the designated Articles, Sections and other subdivisions of
this Lease and (d) the words "herein," "hereof" and "hereunder" and other words
of similar import refer to this Lease as a whole and not to any particular
Article, Section or other subdivision:
Additional Charges: As defined in Section 3.3.
2
<PAGE>
Affiliate: As used in this Lease the term "Affiliate" of a person shall
mean (a) any person that, directly or indirectly, controls or is controlled by
or is under common control with such person, (b) any other person that owns,
beneficially, directly or indirectly, five percent or more of the outstanding
capital stock, shares or equity interests of such person, or (c) any officer,
director, employee, partner or trustee of such person or any person controlling,
controlled by or under common control with such person (excluding trustees and
persons serving in similar capacities who are not otherwise an Affiliate of such
person). The term "person" means and includes individuals, corporations, general
and limited partnerships, limited liability companies, stock companies or
associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts, or other entities and governments and
agencies and political subdivisions thereof. For the purposes of this
definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
through the ownership of voting securities, partnership interests or other
equity interests.
Annual Budget: As used in this Lease, the term "Annual Budget" shall
mean an operating and capital budget prepared by Lessee and delivered to Lessor
in accordance with Section 3.6.
Annual Revenues Computation: As defined in Section 3.1(b).
Award: As defined in Section .
Base Rate: The rate of interest announced publicly by Citibank, N.A.,
in New York, New York, from time to time, as such bank's base rate. If no such
rate is announced or becomes discontinued, then such other rate as Lessor may
reasonably designate.
Base Rent: As defined in Section 3.1(a).
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that
is not a day on which national banks in the City of New York, New York, or in
the municipality wherein the Leased Property is located, are closed.
CERCLA: The Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
Code: The Internal Revenue Code of 1986, as amended.
Commencement Date: As defined in Section of the Lease.
3
<PAGE>
Condemnation, Condemnor: As defined in Section .
Consolidated Financials: For any fiscal year or other accounting period
for Lessee and its consolidated subsidiaries, statements of earnings and
retained earnings and of changes in financial position for such period and for
the period from the beginning of the respective fiscal year to the end of such
period and the related balance sheet as at the end of such period, together with
the notes thereto, all in reasonable detail and setting forth in comparative
form the corresponding figures for the corresponding period in the preceding
fiscal year, and prepared in accordance with generally accepted accounting
principles and audited by independent certified public accountants acceptable to
Lessor in its sole discretion.
Consolidated Net Worth: At any time, the sum of the following for
Lessee and any consolidated subsidiaries, on a consolidated basis determined in
accordance with generally accepted accounting principles:
(a) the amount of capital or stated capital (after deducting
the cost of any shares held in its treasury), plus
(b) the amount of capital surplus and retained earnings (or, in the
case of a capital or retained earnings deficit, minus the amount of such
deficit), minus
(c) the sum of the following (without duplication of deductions with
respect to items already deducted in arriving at surplus and retained earnings):
(1) unamortized debt discount and expense; and (2) any write-up in the book
value of assets resulting from a revaluation thereof subsequent to the date of
the most recent Consolidated Financials prior to the date thereof, except any
net write-up in value of foreign currency in accordance with generally accepted
accounting principles.
Consumer Price Index: The "Consumer Price Index" published by
the Bureau of Labor Statistics of the United States Department of
Labor, U.S. City Average, All Items for Urban Wage Earners and
Clerical Workers (1982-1984=100).
Date of Taking: As defined in Section .
Encumbrance: As defined in Section 34.1.
Environmental Authority: Any department, agency or other body
or component of any Government that exercises any form of
jurisdiction or authority under any Environmental Law.
4
<PAGE>
Environmental Authorization: Any license, permit, order, approval,
consent, notice, registration, filing or other form of permission or
authorization required under any Environmental Law.
Environmental Laws: All applicable federal, state, local and foreign
laws and regulations relating to pollution of the environment (including without
limitation, ambient air, surface water, ground water, land surface or subsurface
strata), including without limitation laws and regulations relating to
emissions, discharges, Releases or threatened Releases of Hazardous Materials or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials. Environmental
Laws include but are not limited to CERCLA, FIFRA, RCRA, SARA and TSCA.
Environmental Liabilities: Any and all obligations to pay the amount of
any judgment or settlement, the cost of complying with any settlement, judgment
or order for injunctive or other equitable relief, the cost of compliance or
corrective action in response to any notice, demand or request from an
Environmental Authority, the amount of any civil penalty or criminal fine, and
any court costs and reasonable amounts for attorney's fees, fees for witnesses
and experts, and costs of investigation and preparation for defense of any claim
or any Proceeding, regardless of whether such Proceeding is threatened, pending
or completed, that may be or have been asserted against or imposed upon Lessor,
Lessee, any Predecessor, the Leased Property or any property used therein and
arising out of:
(a) Failure of Lessee, Lessor, any Predecessor or the Leased
Property to comply at any time with all Environmental Laws;
(b) Presence of any Hazardous Materials on, in, under, at or
in any way affecting the Leased Property;
(c) A Release at any time of any Hazardous Materials on, in, at, under
or in any way affecting the Leased Property;
(d) Identification of Lessee, Lessor or any Predecessor as a
potentially responsible party under CERCLA or under any Environmental Law
similar to CERCLA;
(e) Presence at any time of any above-ground and/or underground storage
tanks, as defined in RCRA or in any applicable Environmental Law on, in, at or
under the Leased Property or any adjacent site or facility; or
(f) Any and all claims for injury or damage to persons or property
arising out of exposure to Hazardous Materials originating
5
<PAGE>
or located at the Leased Property, or resulting from operation
thereof or any adjoining property.
Event of Default: As defined in Section
Facility: The hotel and/or other facility offering lodging and
other services or amenities being operated or proposed to be
operated on the Leased Property.
Fair Market Rental: The fair market rental of the Leased Property means
the rental which a willing tenant not compelled to rent would pay a willing
landlord not compelled to lease for the use and occupancy of such Leased
Property pursuant to the Lease for the term in question, (a) assuming that
Lessee is not in default thereunder and (b) determined in accordance with the
appraisal procedures set forth in Article XX or in such other manner as shall be
mutually acceptable to Lessor and Lessee.
Fair Market Value: The fair market value of the Leased Property means
an amount equal to the price that a willing buyer not compelled to buy would pay
a willing seller not compelled to sell for such Leased Property, (a) assuming
the same is unencumbered by this Lease, (b) determined in accordance with the
appraisal procedures set forth in Article XXXIII or in such other manner as
shall be mutually acceptable to Lessor and Lessee, (c) assuming that such seller
must pay customary closing costs and title premiums, and (d) taking into account
the positive or negative effect on the value of the Leased Property attributable
to the interest rate, amortization schedule, maturity date, prepayment penalty
and other terms and conditions of any encumbrance that is assumed by the
transferee. In addition, in determining the Fair Market Value with respect to
damaged or destroyed Leased Property such value shall be determined as if such
Leased Property had not been so damaged or destroyed.
FIFRA: The Federal Insecticide, Fungicide, and Rodenticide
Act, as amended.
Fiscal Year: The 12-month period from January 1 to
December 31.
Fixtures: As defined in Section .
Franchise Agreement: Any franchise agreement or license
agreement with a franchisor under which the Facility is operated.
Furniture and Equipment: For purposes of this Lease, the terms
"furniture and equipment" shall mean collectively all carpet, furniture,
furnishings, wall coverings, fixtures and hotel equipment and systems located
at, or used in connection with, the
6
<PAGE>
Facility, together with all replacements therefor and additions thereto,
including, without limitation, (i) all equipment and systems required for the
operation of kitchens, bars, if any, restaurants, if any, and laundry and dry
cleaning facilities, (ii) dining room wagons, materials handling equipment,
cleaning and engineering equipment, (iii) telephone and computerized accounting
systems, and (iv) vehicles.
Government: The United States of America, any state, district or
territory thereof, any foreign nation, any state, district, department,
territory or other political division thereof, or any political subdivision of
any of the foregoing.
Gross Operating Expenses: For purposes of this Lease, the term "Gross
Operating Expenses" shall mean all of the following with respect to the
Facility: reasonable and customary salaries and employee expense and payroll
taxes (including salaries, wages, bonuses and other compensation of all
employees at the Facility, and benefits including life, medical and disability
insurance and retirement benefits), expenditures described in Section 9.1,
operational supplies, utilities, insurance to be provided by Lessee under the
terms of this Agreement, governmental fees and assessments, food, beverages,
laundry service expense, the cost of Inventories and fixed asset supplies,
license fees, advertising, marketing, reservation systems and any and all other
operating expenses as are reasonably necessary for the proper and efficient
operation of the Facility incurred by Lessee in accordance with the provisions
hereof (excluding, however, (i) federal, state and municipal excise, sales and
use taxes collected directly from patrons and guests or as a part of the sales
price of any goods, services or displays, such as gross receipts, admissions,
cabaret or similar or equivalent taxes paid over to federal, state or municipal
governments, (ii) the cost of insurance to be provided under Article XIII, (iii)
expenditures by Lessor pursuant to Article XIII and (iv) payments on any
Mortgage or other mortgage or security instrument on the Facility); all
determined in accordance with generally accepted accounting principles and the
Uniform System. No part of Lessee's central office overhead or general or
administrative expense (as opposed to that of the Facility) shall be deemed to
be a part of Gross Operating Expenses, as herein provided. Reasonable
out-of-pocket expenses of Lessee incurred for the account of or in connection
with the Facility operations, including but not limited to postage, telephone
charges and reasonable travel expenses of employees, officers and other
representatives and consultants of Lessee and its Affiliates, shall be deemed to
be a part of Gross Operating Expenses and such persons shall be afforded
reasonable accommodations, food, beverages, laundry, valet and other such
services by and at the Facility without charge to such persons or Lessee.
7
<PAGE>
Gross Operating Profit shall mean, for any Fiscal Year, the
excess of Gross Revenues for such Fiscal Year over Gross Operating
Expenses for such Fiscal Year.
Gross Revenues: All revenues, receipts, and income of any kind derived
directly or indirectly by Lessee from or in connection with the Facility
(including rentals or other payments from tenants, lessees, licensees or
concessionaires but not including their gross receipts unless such party is an
Affiliate of the Lessee in which case the gross receipts shall be included)
whether on a cash basis or credit, paid or collected, determined in accordance
with generally accepted accounting principles and the Uniform System, excluding,
however: (i) funds furnished by Lessor, (ii) federal, state and municipal
excise, sales, and use taxes collected directly from patrons and guests or as a
part of the sales price of any goods, services or displays, such as gross
receipts, admissions, cabaret or similar or equivalent taxes and paid over to
federal, state or municipal governments, (iii) gratuities, (iv) proceeds of
insurance and condemnation, (v) proceeds from sales other than sales in the
ordinary course of business, (vi) all loan proceeds from financing or
refinancings of the Facility or interests therein or components thereof, (vii)
judgments and awards, except any portion thereof arising from normal business
operations of the hotel, and (viii) items constituting "allowances" under the
Uniform System.
Hazardous Materials: All chemicals, pollutants, contaminants,
wastes and toxic substances, including without limitation:
(a) Solid or hazardous waste, as defined in RCRA or in any
Environmental Law;
(b) Hazardous substances, as defined in CERCLA or in any
Environmental Law;
(c) Toxic substances, as defined in TSCA or in any
Environmental Law;
(d) Insecticides, fungicides, or rodenticides, as defined in
FIFRA or in any Environmental Law; and
(e) Gasoline or any other petroleum product or byproduct,
polychlorinated biphenols, asbestos and urea formaldehyde.
Impositions: Collectively, all taxes (including, without limitation,
all ad valorem, sales and use, single business, gross receipts, transaction
privilege, rent or similar taxes as the same relate to or are imposed upon
Lessee or its business conducted upon the Leased Property) other than Real
Estate Taxes and Personal Property Taxes, assessments (including, without
limitation, all
8
<PAGE>
assessments for public improvements or benefit, whether or not commenced or
completed prior to the date hereof and whether or not to be completed within the
Term), ground rents, water, sewer or other rents and charges, excises, tax
inspection, authorization and similar fees and all other governmental charges,
in each case whether general or special, ordinary or extraordinary, or foreseen
or unforeseen, of every character in respect of the Leased Property or the
business conducted thereon by Lessee (including all interest and penalties
thereon caused by any failure in payment by Lessee), which at any time prior to,
during or with respect to the Term hereof may be assessed or imposed on or with
respect to or be a lien upon (a) Lessor's interest in the Leased Property, (b)
the Leased Property, or any part thereof or any rent therefrom or any estate,
right, title or interest therein, or (c) any occupancy, operation, use or
possession of, or sales from, or activity conducted on or in connection with the
Leased Property, or the leasing or use of the Leased Property or any part
thereof by Lessee. Nothing contained in this definition of Impositions shall be
construed to require Lessee to pay (1) any tax based on net income (whether
denominated as a franchise or capital stock or other tax) imposed on Lessor or
any other person, or (2) any net revenue tax of Lessor or any other person, or
(3) any tax imposed with respect to the sale, exchange or other disposition by
Lessor of any Leased Property or the proceeds thereof, or (4) any single
business, gross receipts (other than a tax on any rent received by Lessor from
Lessee), transaction, privilege or similar taxes as the same relate to or are
imposed upon Lessor, except to the extent that any tax, assessment, tax levy or
charge that Lessee is obligated to pay pursuant to the first sentence of this
definition and that is in effect at any time during the Term hereof is totally
or partially repealed, and a tax, assessment, tax levy or charge set forth in
clause (1) or (2) is levied, assessed or imposed expressly in lieu thereof.
Indemnified Party: Either of a Lessee Indemnified Party or a
Lessor Indemnified Party.
Indemnifying Party: Any party obligated to indemnify an
Indemnified Party pursuant to Section 8.3 or Article XXII.
Insurance Requirements: All terms of any insurance policy
required by this Lease and all requirements of the issuer of any
such policy.
Inventory: All "Inventories of Merchandise" and "Inventories
of Supplies" as defined in the Uniform System, including, but not
limited to, linens and other non-depreciable personal property.
Land: As defined in Article .
9
<PAGE>
Lease: This Lease.
Leased Improvements; Leased Property: Each as defined in
Article I.
Legal Requirements: All federal, state, county, municipal and other
governmental statutes, laws, rules, orders, regulations, ordinances, judgments,
decrees and injunctions affecting either the Leased Property or the maintenance,
construction, use or alteration thereof (whether by Lessee or otherwise),
whether or not hereafter enacted and in force, including (a) all laws, rules or
regulations pertaining to the environment, occupational health and safety and
public health, safety or welfare, and (b) any laws, rules or regulations that
may (1) require repairs, modifications or alterations in or to the Leased
Property or (2) in any way adversely affect the use and enjoyment thereof; and
all permits, licenses and authorizations and regulations relating thereto and
all covenants, agreements, restrictions and encumbrances contained in any
instruments, either of record or known to Lessee (other than encumbrances
created by Lessor without the consent of Lessee), at any time in force affecting
the Leased Property.
Lending Institution: Any insurance company, credit company, federally
insured commercial or savings bank, national banking association, savings and
loan association, employees welfare, pension or retirement fund or system,
corporate profit sharing or pension trust, college or university, or real estate
investment trust, including any corporation qualified to be treated for federal
tax purposes as a real estate investment trust, such trust having a net worth of
at least $10,000,000.
Lessee: The Lessee designated on this Lease and its
respective permitted successors and assigns.
Lessee Indemnified Party: Lessee, any Affiliate of Lessee, any other
Person against whom any claim for indemnification may be asserted hereunder as a
result of a direct or indirect ownership interest (including a stockholder's
interest) in Lessee, the officers, directors, stockholders, employees, agents
and representatives of Lessee and any corporate stockholder, agent, or
representative of Lessee, and the respective heirs, personal representatives,
successors and assigns of any such officer, director, stockholder, employee,
agent or representative.
Lessee's Personal Property: As defined in Section 6.2.
Lessor: The Lessor designated on this Lease and its
respective successors and assigns.
10
<PAGE>
Lessor Indemnified Party: Lessor, any Affiliate of Lessor, any other
Person against whom any claim for indemnification may be asserted hereunder as a
result of a direct or indirect ownership interest (including a stockholder's or
partnership interest) in Lessor, the officers, directors, stockholders,
employees, agents and representatives of the general partner of Lessor and any
partner, agent, or representative of Lessor, and the respective heirs, personal
representatives, successors and assigns of any such officer, director, partner,
stockholder, employee, agent or representative.
Minimum Price: The sum of (a) the equity in the Leased Property at the
time of acquisition of the Leased Property by Lessor (i.e., that portion of the
purchase price of the Leased Property paid by Lessor in cash or exchange for
partnership interests in the Lessor) plus (b) other capital expenditures on the
Leased Property made by Lessor after the date hereof plus (c) the unpaid
principal balance of all encumbrances against the Leased Property at the time of
purchase of the Leased Property by Lessee, less (x) all proceeds received by
Lessor from any financing or refinancing of the Leased Property after the date
hereof (after payment of any debt refinanced and net of any costs and expenses
incurred in connection with such financing or refinancing, including, without
limitation, loan points, commitment fees and commissions and legal fees) and (y)
the net amount (after deduction of all reasonable legal fees and other costs and
expenses, including without limitation expert witness fees, incurred by Lessor
in connection with obtaining any such proceeds or award) of all insurance
proceeds received by Lessor and awards received by Lessor from any partial
Taking of the Leased Property that are not applied to restoration.
Notice: A notice given pursuant to Article .
Officer's Certificate: A certificate of Lessee reasonably acceptable to
Lessor, signed by the chief financial officer or another officer authorized so
to sign by the board of directors or by-laws of Lessee, or any other person
whose power and authority to act has been authorized by delegation in writing by
any such officer.
Overdue Rate: On any date, a rate equal to the Base Rate plus 5% per
annum, but in no event greater than the maximum rate then permitted under
applicable law.
Other Revenues: Gross revenue from the operation of the
Facility excluding:
(a) Room Revenues;
11
<PAGE>
(b) the amount of all credit, rebates or refunds to
customers, guests or patrons;
(c) all sales taxes or any other taxes imposed on such revenues.
Payment Date: Any due date for the payment of any installment
of Base Rent.
Percentage Rent: As defined in Section 3.1(b).
Person: Any Government, natural person, corporation,
partnership or other legal entity.
Personal Property Taxes: All personal property taxes imposed on the
furniture, furnishings or other items of personal property located on, and used
in connection with, the operation of the Leased Improvements as a hotel (other
than Inventory and other personal property owned by the Lessee), together with
all replacement, modifications, alterations and additions thereto.
Predecessor: Any Person whose liabilities arising under any
Environmental Law have or may have been retained or assumed by Lessee, either
contractually or by operation of law, relating to the Leased Property.
Primary Intended Use: As defined in Section .
Proceeding: Any judicial action, suit or proceeding (whether civil or
criminal), any administrative proceeding (whether formal or informal), any
investigation by a governmental authority or entity (including a grand jury),
and any arbitration, mediation or other non-judicial process for dispute
resolution.
Quarterly Revenues Computation: As defined in Section 3.1(b).
RCRA: The Resource Conservation and Recovery Act, as amended.
Real Estate Taxes: All real estate taxes, including general and special
assessments, if any, which are imposed upon the Land and any improvements
thereon.
Rejectable Offer Price: An amount equal to the greater of
(a) the Fair Market Value, determined as of the applicable purchase
date, or (b) the Minimum Price.
Release: A "Release" as defined in CERCLA or in any
Environmental Law, unless such Release has been properly authorized
and permitted in writing by all applicable Environmental
12
<PAGE>
Authorities or is allowed by such Environmental Law without authorizations or
permits.
Rent: Collectively, the Base Rent, Percentage Rent, and
Additional Charges.
Room Revenues: Gross revenue from the rental of guest rooms,
whether to individuals, groups or transients, at the Facility,
excluding the following:
(a) the amount of all credits, rebates or refunds to
customers, guests or patrons;
(b) all sales taxes or any other taxes imposed on the rental of such
guest rooms; and
(c) any fees collected for amenities including, but not limited to:
telephone, laundry, movies or concessions.
SARA: The Superfund Amendments and Reauthorization Act of
1986, as amended.
State: The State or Commonwealth of the United States in
which the Leased Property is located.
Subsidiaries: Corporations in which Lessee owns, directly or
indirectly, more than 50% of the voting stock or control, as
applicable (individually, a "Subsidiary").
Taking: A taking or voluntary conveyance during the Term hereof of all
or part of the Leased Property, or any interest therein or right accruing
thereto or use thereof, as the result of, or in settlement of, any Condemnation
or other eminent domain proceeding affecting the Leased Property whether or not
the same shall have actually been commenced.
Term: As defined in Section .
TSCA: The Toxic Substances Control Act, as amended.
Unavoidable Delays: Delays due to strikes, lock-outs, labor unrest,
inability to procure materials, power failure, acts of God, governmental
restrictions, enemy action, civil commotion, fire, unavoidable casualty or other
causes beyond the control of the party responsible for performing an obligation
hereunder, provided that lack of funds shall not be deemed a cause beyond the
control of either party hereto unless such lack of funds is caused by the
failure of the other party hereto to perform any obligations of such party under
this Lease or any guaranty of this Lease.
13
<PAGE>
Uneconomic for its Primary Intended Use: A state or condition of the
Facility (after the application of any insurance proceeds if any) such that, in
the good faith judgment of Lessee, reasonably exercised and evidenced by the
resolution of the board of directors or other governing body of Lessee, the
Facility cannot be operated on a commercially practicable basis for its Primary
Intended Use, taking into account, among other relevant factors, the number of
usable rooms and projected revenues, such that Lessee intends to, and shall,
complete the cessation of operations from the Facility.
Uniform System: Shall mean the Uniform System of Accounts for Hotels
(8th Revised Edition, 1986) as published by the Hotel Association of New York
City, Inc., as same may hereafter be revised.
Unsuitable for its Primary Intended Use: A state or condition of the
Facility (after the application of insurance proceeds if any) such that, in the
good faith judgment of Lessee, reasonably exercised and evidenced by the
resolution of the board of directors or other governing body of Lessee, due to
casualty damage or loss through Condemnation, the Facility cannot function as an
integrated hotel facility consistent with standards applicable to a well
maintained and operated hotel.
ARTICLE III
3.1 Rent. Lessee covenants and agrees to pay to Lessor in lawful money
of the United States of America which shall be legal tender for the payment of
public and private debts, in immediately available funds without deduction or
offset, at Lessor's address set forth in Article hereof or at such other place
or to such other Person as Lessor from time to time may designate in a Notice,
all Base Rent, Percentage Rent and Additional Charges, during the Term, as
follows:
(a) Base Rent: The annual sum of $_______, payable in arrears
in equal, consecutive monthly installments, on or before the tenth day of each
calendar month of the Term ("Base Rent"); provided, however, that the first and
last monthly payments of Base Rent shall be pro rated as to any partial month;
and
(b) Percentage Rent: Commencing on __________, Lessee shall
pay percentage rent ("Percentage Rent") (i) monthly in arrears an amount equal
to __% of all monthly Other Revenue, (ii) quarterly in arrears an amount equal
to __% of all quarterly Room Revenues (iii) semi-annually in arrears an amount
equal to __% of all semi-annual Room Revenues and (iv) annually in arrears an
amount equal to __% of all annual Room Revenues in excess of $________. For the
purpose of determining the quarterly,
14
<PAGE>
semiannual and annual percent rent as of December 31, 19__, the related Other
Revenue and Room Revenues will be determined for the entire related period
despite the fact that the Lessor did not own that hotel during all of such
period.
(c) Officer's Certificates. An Officer's Certificate shall be
delivered to Lessor monthly setting forth the calculation of the related monthly
Percentage Rent payments and the quarterly percentage Rent payment within 30
days after the end of each such period of each Fiscal Year (or part thereof) in
the Term. The Officers Certificate setting forth Percentage Rent payments made
in the second quarter of each Fiscal Year shall also set forth the calculation
of the semi-annual Percentage Rent for the first two quarters, and the Officer
Certificate setting forth Percentage Rent payments made in the fourth quarter of
each Fiscal Year shall also set forth the calculation of the semiannual
Percentage Rent for the third and fourth quarters and the calculation of the
annual Percentage Rent for that year. The Percentage Rent payments for the
periods to which the Officer's Certificates relate shall accompany such
Officer's Certificate. Such quarterly payments shall be based on the formula set
forth in Section 3.1(b).
The obligation to pay Percentage Rent shall survive the expiration or
earlier termination of the Term, and a final reconciliation, taking into
account, among other relevant adjustments, any adjustments which are accrued
after such expiration or termination date but which related to Percentage Rent
accrued prior to such termination date, and Lessee's good faith best estimate of
the amount of any unresolved contractual allowances, shall be made not later
than two years after such expiration or termination date, but Lessee shall
advise Lessor within 60 days after such expiration or termination date of
Lessee's best estimate at that time of the approximate amount of such
adjustments, which estimate shall not be binding on Lessee or have any legal
effect whatsoever. The accrual of Percentage Rent shall cease with the
termination of the Lease.
3.2 Confirmation of Percentage Rent. Lessee shall utilize, or cause to
be utilized, an accounting system for the Leased Property in accordance with its
usual and customary practices, and in accordance with generally accepted
accounting principles consistently applied and the Uniform System, that will
accurately record all data necessary to compute Percentage Rent, and Lessee
shall retain, for at least four years after the expiration of each Fiscal Year
(and in any event until the reconciliation described in Section 3.1(c) for such
Fiscal Year has been made), reasonably adequate records conforming to such
accounting system showing all data necessary to compute Percentage Rent for the
applicable Fiscal Years. Lessor, at its expense (except as provided
hereinbelow), shall have the right from time to time by its accountants or
15
<PAGE>
representatives to audit the information that formed the basis for the data set
forth in any Officer's Certificate provided under Section 3.1(c) and, in
connection with such audits, to examine all Lessee's records (including
supporting data and sales and excise tax returns) reasonably required to verify
Percentage Rent, subject to any prohibitions or limitations on disclosure of any
such data under Legal Requirements. If any such audit discloses a deficiency in
the payment of Percentage Rent, and either Lessee agrees with the result of such
audit or the matter is otherwise determined or compromised, Lessee shall
forthwith pay to Lessor the amount of the deficiency, as finally agreed or
determined, together with interest at the Overdue Rate from the date when said
payment should have been made to the date of payment thereof; provided, however,
that as to any audit that is commenced more than two years after the date
Percentage Rent for any Fiscal Year is reported by Lessee to Lessor, the
deficiency, if any, with respect to such Percentage Rent shall bear interest at
the Overdue Rate only from the date such determination of deficiency is made
unless such deficiency is the result of gross negligence or willful misconduct
on the part of Lessee, in which case interest at the Overdue Rate will accrue
from the date such payment should have been made to the date of payment thereof.
If any such audit discloses that the Revenue Computations for any Fiscal Year
exceeds that reported by Lessee by more than 3%, Lessee shall pay the cost of
such audit and examination. Any proprietary information obtained by Lessor
pursuant to the provisions of this Section shall be treated as confidential,
except that such information may be used, subject to appropriate confidentiality
safeguards, in any litigation between the parties and except further that Lessor
may disclose such information to prospective lenders. The obligations of Lessee
contained in this Section shall survive the expiration or earlier termination of
this Lease.
3.3 Additional Charges. In addition to the Base Rent and Percentage
Rents, (a) Lessee also will pay and discharge as and when due and payable all
other amounts, liabilities, obligations and Impositions that Lessee assumes or
agrees to pay under this Lease, and (b) in the event of any failure on the part
of Lessee to pay any of those items referred to in clause (a) of this Section
3.3, Lessee also will promptly pay and discharge every fine, penalty, interest
and cost that may be added for non-payment or late payment of such items (the
items referred to in clauses (a) and (b) of this Section 3.3 being additional
rent hereunder and being referred to herein collectively as the "Additional
Charges"), and Lessor shall have all legal, equitable and contractual rights,
powers and remedies provided either in this Lease or by statute or otherwise in
the case of non-payment of the Additional Charges as in the case of non-payment
of the Base Rent. The Lessee's obligations regarding the payment of Impositions
are set out in Section 4.2. If any installment of Base Rent, Percentage Rent or
16
<PAGE>
Additional Charges (but only as to those Additional Charges that are payable
directly to Lessor) shall not be paid on its due date, Lessee will pay Lessor on
demand, as Additional Charges, a late charge (to the extent permitted by law)
computed at the Overdue Rate on the amount of such installment, from the due
date of such installment to the date of payment thereof. To the extent that
Lessee pays any Additional Charges to Lessor pursuant to any requirement of this
Lease, Lessee shall be relieved of its obligation to pay such Additional Charges
to the entity to which they would otherwise be due and Lessor shall pay same
from monies received from Lessee.
3.4 Lease Provision. The Rent shall be paid so that this Lease shall
yield to Lessor the full amount of the installments of Base Rent, Percentage
Rent and Additional Charges throughout the Term, all as more fully set forth in
Article , but subject to any other provisions of this Lease that expressly
provide for adjustment or abatement of Rent or other charges or expressly
provide that certain expenses or maintenance shall be paid or performed by
Lessor.
3.5 Conversion of Property. If, during the Term, Lessee desires to
provide food and beverage operations at the Facility (other than complimentary
continental breakfast), Lessee shall give notice of such desire to Lessor.
Lessor and Lessee shall then commence negotiations to adjust Rent to reflect the
proposed change to the operation of the Facility, each acting reasonably and in
good faith. All other terms of this Lease will remain substantially the same.
During negotiations, which shall not extend beyond 60 days, Lessee shall not
"convert" the Facility and shall continue fulfilling its obligations under the
existing terms of this Lease. If no agreement is reached after such 60-day
period, Lessee shall withdraw such notice and this Lease shall continue in full
force. Once the "conversion" is approved or the Lessor has approved such
operations, the Lessee may lease such converted facilities. If the Lessee
desires to relet such facilities, the Lessor shall approve the terms of such
lease unless its terms are the same or more advantageous to the Lessor than
those of the prior lease.
3.6 Annual Budget. Not later than fifteen (15) days prior to the
commencement of each Fiscal Year beginning with the Fiscal Year commencing
January 1, 1995, Lessee shall submit the Annual Budget to Lessor. The Annual
Budget shall be subject to the approval of the Lessor unless Net Operating
Income for such Fiscal Year, as of December 1, exceeds Net Operating Income for
the prior Fiscal Year by an amount greater than the amount change of the
Consumer Price Index during such period. The Annual budget shall contain the
following:
17
<PAGE>
(a) Lessee's reasonable estimate of Gross Revenues (including
room rates and Room Revenues), Gross Operating Expenses, and Gross Operating
Profits for the forthcoming Fiscal Year itemized on schedules on a quarterly
basis as approved by Lessor and Lessee, as same may be revised or replaced from
time to time by Lessee and Approved by Lessor, together with the assumptions, in
narrative form, forming the basis of such schedules.
(b) An estimate of the amounts to be spent for the repair,
replacement, or refurbishment of Furniture and Equipment.
(c) An estimate of any amounts Lessor will be required to
provide in the forthcoming Fiscal Year for required or desirable items that
would be classified as capital items by generally accepted accounting
principles, and projections of the amounts that may be required in the two
succeeding Fiscal Years for such items.
(d) A cash flow projection.
(e) A narrative description of the program for advertising and
marketing the Facility for the forthcoming Fiscal Year containing a detailed
budget itemization of the proposed advertising expenditures by category and the
assumptions, in narrative form, forming the basis of such budget itemization.
3.7 Books and Records. Lessee shall keep full and adequate books of
account and other records reflecting the results of operation of the Facility on
an accrual basis, all in accordance with the Uniform System and generally
accepted accounting principles and the obligations of Lessee under this Lease.
The books of account and all other records relating to or reflecting the
operation of the Facility shall be kept either at the Facility or at Lessee's
offices in Silver Springs, Maryland, and shall be available to Lessor and its
representatives and its auditors or accountants, at all reasonable times for
examination, audit, inspection, and transcription. All of such books and records
pertaining to the Facility including, without limitation, books of account,
guest records and front office records, at all times shall be the property of
Lessor and shall not be removed from the Facility or Lessee's offices without
the approval of Lessor.
ARTICLE IV
4.1 Payment of Impositions. Subject to Article XII relating to
permitted contests, Lessee will pay, or cause to be paid, all Impositions (other
than Real Estate Taxes and Personal Property Taxes, which shall be paid by
Lessor) before any fine, penalty, interest or cost may be added for non-payment,
such payments to be made directly to the taxing or other authorities where
feasible,
18
<PAGE>
and will promptly furnish to Lessor copies of official receipts or other
satisfactory proof evidencing such payments. Lessee's obligation to pay such
Impositions shall be deemed absolutely fixed upon the date such Impositions
become a lien upon the Leased Property or any part thereof. If any such
Imposition may, at the option of the taxpayer, lawfully be paid in installments
(whether or not interest shall accrue on the unpaid balance of such Imposition),
Lessee may exercise the option to pay the same (and any accrued interest on the
unpaid balance of such Imposition) in installments and in such event, shall pay
such installments during the Term hereof (subject to Lessee's right of contest
pursuant to the provisions of Article ) as the same respectively become due and
before any fine, penalty, premium, further interest or cost may be added
thereto. Lessor, at its expense, shall, to the extent required or permitted by
applicable law, prepare and file all tax returns in respect of Lessor's net
income, gross receipts, sales and use, single business, transaction privilege,
rent, ad valorem, franchise taxes, Real Estate Taxes, Personal Property Taxes
and taxes on its capital stock, and Lessee, at its expense, shall, to the extent
required or permitted by applicable laws and regulations, prepare and file all
other tax returns and reports in respect of any Imposition as may be required by
governmental authorities. If any refund shall be due from any taxing authority
in respect of any Imposition paid by Lessee, the same shall be paid over to or
retained by Lessee if no Event of Default shall have occurred hereunder and be
continuing. If an Event of Default shall have occurred and be continuing, any
such refund shall be paid over to or retained by Lessor. Any such funds retained
by Lessor due to an Event of Default shall be applied as provided in Article .
Lessor and Lessee shall, upon request of the other, provide such data as is
maintained by the party to whom the request is made with respect to the Leased
Property as may be necessary to prepare any required returns and reports. Lessee
shall file all Personal Property Tax returns in such jurisdictions where it is
legally required to so file. Lessor, to the extent it possesses the same, and
Lessee, to the extent it possesses the same, will provide the other party, upon
request, with cost and depreciation records necessary for filing returns for any
property classified as personal property. Where Lessor is legally required to
file Personal Property Tax returns, Lessee shall provide Lessor with copies of
assessment notices in sufficient time for Lessor to file a protest. Lessor may,
upon notice to Lessee, at Lessor's option and at Lessor's sole expense, protest,
appeal, or institute such other proceedings (in its or Lessee's name) as Lessor
may deem appropriate to effect a reduction of real estate or personal property
assessments for those Impositions to be paid by Lessor, and Lessee, at Lessor's
expense as aforesaid, shall fully cooperate with Lessor in such protest, appeal,
or other action. Lessor hereby agrees to indemnify, defend, and hold harmless
Lessee from and against any claims, obligations, and liabilities against or
19
<PAGE>
incurred by Lessee in connection with such cooperation. Billings for
reimbursement of Personal Property Taxes by Lessee to Lessor shall be
accompanied by copies of a bill therefor and payments thereof which identify the
personal property with respect to which such payments are made. Lessor, however,
reserves the right to effect any such protest, appeal or other action and, upon
notice to Lessee, shall control any such activity, which shall then go forward
at Lessor's sole expense. Upon such notice, Lessee, at Lessor's expense, shall
cooperate fully with such activities.
4.2 Notice of Impositions. Lessor shall give prompt Notice to Lessee of
all Impositions payable by Lessee hereunder of which Lessor at any time has
knowledge, provided that Lessor's failure to give any such Notice shall in no
way diminish Lessee's obligations hereunder to pay such Impositions, but such
failure shall obviate any default hereunder for a reasonable time after Lessee
receives Notice or has otherwise acquired knowledge of any Imposition which it
is obligated to pay during the first taxing period applicable thereto.
4.3 Adjustment of Impositions. Impositions imposed in respect of the
tax-fiscal period during which the Term terminates shall be adjusted and
prorated between Lessor and Lessee, whether or not such Imposition is imposed
before or after such termination, and Lessee's obligation to pay its prorated
share thereof after termination shall survive such termination.
4.4 Maintenance. Lessee will be solely responsible for obtaining and
maintaining utility services to the Leased Property and will pay or cause to be
paid all charges for electricity, gas, oil, water, sewer and other utilities
used in the Leased Property during the Term.
4.5 Insurance Premiums. To the extent provided in Section 13.1(b),
Lessee will pay or cause to be paid all premiums for the insurance coverages
required to be maintained by it under Article .
ARTICLE V
5.1 No Termination, Abatement, etc. Except as otherwise specifically
provided in this Lease, and except for loss of the Franchise Agreement solely by
reason of any action or inaction by Lessor, Lessee, to the extent permitted by
law, shall remain bound by this Lease in accordance with its terms and shall
neither take any action without the written consent of Lessor to modify,
surrender or terminate the same, nor seek nor be entitled to any abatement,
deduction, deferment or reduction of the Rent, or setoff against the Rent, nor
shall the obligations of Lessee be otherwise
20
<PAGE>
affected by reason of (a) any damage to, or destruction of, any Leased Property
or any portion thereof from whatever cause or any Taking of the Leased Property
or any portion thereof, (b) the lawful or unlawful prohibition of, or
restriction upon, Lessee's use of the Leased Property, or any portion thereof,
or the interference with such use by any Person, corporation, partnership or
other entity, or by reason of eviction by paramount title, (c) any claim which
Lessee has or might have against Lessor by reason of any default or breach of
any warranty by Lessor under this Lease or any other agreement between Lessor
and Lessee, or to which Lessor and Lessee are parties, (d) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation, dissolution,
winding up or other proceedings affecting Lessor or any assignee or transferee
of Lessor, or (e) for any other cause whether similar or dissimilar to any of
the foregoing other than a discharge of Lessee from any such obligations as a
matter of law. Lessee hereby specifically waives all rights, arising from any
occurrence whatsoever, which may now or hereafter be conferred upon it by law to
(1) modify, surrender or terminate this Lease or quit or surrender the Leased
Property or any portion thereof, or (2) entitle Lessee to any abatement,
reduction, suspension or deferment of the Rent or other sums payable by Lessee
hereunder, except as otherwise specifically provided in this Lease. The
obligations of Lessee hereunder shall be separate and independent covenants and
agreements and the Rent and all other sums payable by Lessee hereunder shall
continue to be payable in all events unless the obligations to pay the same
shall be terminated pursuant to the express provisions of this Lease or by
termination of this Lease other than by reason of an Event of Default.
5.2 Abatement Procedures. In the event of a partial Taking as described
in Section , the Lease shall not terminate, but the Base Rent shall be abated in
the manner and to the extent that is fair, just and equitable to both Lessee and
Lessor, taking into consideration, among other relevant factors, the number of
usable rooms, the amount of square footage, or the revenues affected by such
partial Taking. If Lessor and Lessee are unable to agree upon the amount of such
abatement within 30 days after such partial Taking, the matter may be submitted
by either party to a court of competent jurisdiction for resolution.
ARTICLE VI
6.1 Ownership of the Leased Property. Lessee acknowledges that the
Leased Property is the property of Lessor and that Lessee has only the right to
the possession and use of the Leased Property upon the terms and conditions of
this Lease.
21
<PAGE>
6.2 Lessee's Personal Property. Lessee will acquire and maintain
throughout the Term such Inventory as is required to operate the Leased Property
in the manner contemplated by this Lease. Lessee may (and shall as provided
hereinbelow), at its expense, install, affix or assemble or place on any parcels
of the Land or in any of the Leased Improvements, any items of personal property
(including Inventory) owned by Lessee. Lessee, at the commencement of the Term,
and from time to time thereafter, shall provide Lessor with an accurate list of
all such items of Lessee's personal property (collectively, the "Lessee's
Personal Property"). Lessee may, subject to the first sentence of this Section
6.2 and the conditions set forth below, remove any of Lessee's Personal Property
set forth on such list at any time during the Term or upon the expiration or any
prior termination of the Term. All of Lessee's Personal Property, other than
Inventory, not removed by Lessee within ten days following the expiration or
earlier termination of the Term shall be considered abandoned by Lessee and may
be appropriated, sold, destroyed or otherwise disposed of by Lessor without
first giving Notice thereof to Lessee, without any payment to Lessee and without
any obligation to account therefor. Lessee will, at its expense, restore the
Leased Property to the condition required by Section , including repair of all
damage to the Leased Property caused by the removal of Lessee's Personal
Property, whether effected by Lessee or Lessor. Upon the expiration or earlier
termination of the Term, Lessor or its designee shall have the option to
purchase all Inventory on hand at the Leased Property at the time of such
expiration or termination for a sale price equal to the fair market value of
such Inventory. Lessee may make such financing arrangements, title retention
agreements, leases or other agreements with respect to the Lessee's Personal
Property as it sees fit provided that Lessee first advises Lessor of any such
arrangement and such arrangement expressly provides that in the event of
Lessee's default thereunder, Lessor (or its designee) may assume Lessee's
obligations and rights under such arrangement.
6.3 Lessor's Lien. To the fullest extent permitted by applicable law,
Lessor is granted a lien and security interest on all Lessee's Personal Property
now or hereinafter placed in or upon the Leased Property, and such lien and
security interest shall remain attached to such Lessee's Personal Property until
payment in full of all Rent and satisfaction of all of Lessee's obligations
hereunder; provided, however, Lessor shall subordinate its lien and security
interest to that of any non-Affiliate of Lessee which finances such Lessee's
Personal Property or any non-Affiliate conditional seller of such Lessee's
Personal Property, the terms and conditions of such subordination to be
satisfactory to Lessor in the exercise of reasonable discretion. Lessee shall,
upon the request of Lessor, execute such financing statements or other
22
<PAGE>
documents or instruments reasonably requested by Lessor to perfect the lien and
security interests herein granted.
ARTICLE VII
7.1 Condition of the Leased Property. Lessee acknowledges receipt and
delivery of possession of the Leased Property. Lessee has examined and otherwise
has knowledge of the condition of the Leased Property and has found the same to
be satisfactory for its purposes hereunder. Lessee is leasing the Leased
Property "as is" in its present condition. Lessee waives any claim or action
against Lessor in respect of the condition of the Leased Property. LESSOR MAKES
NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED
PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR
CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF
THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL
SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED
PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT. Provided,
however, to the extent permitted by law, Lessor shall allow Lessee the benefit
of all of Lessor's rights to proceed against any predecessor in title other than
Lessee (or an Affiliate of Lessee which conveyed the Property to Lessor) for
breaches of warranties or representations or for latent defects in the Leased
Property. Lessor shall fully cooperate with Lessee in the prosecution of any
such claim, in Lessor's or Lessee's name, all at Lessee's sole cost and expense.
Lessee hereby agrees to indemnify, defend and hold harmless Lessor from and
against any claims, obligations and liabilities against or incurred by Lessor in
connection with such cooperation.
7.2 Use of the Leased Property.
(a) Lessee covenants that it will obtain and to maintain all
approvals needed to use and operate the Leased Property and the Facility under
applicable local, state and federal law.
(b) Lessee shall use or cause to be used the Leased Property
only as a hotel facility, and for such other uses as may be necessary or
incidental to such use (the "Primary Intended Use"). Lessee shall not use the
Leased Property or any portion thereof for any other use without the prior
written consent of Lessor, which consent may be granted, denied or conditioned
in Lessor's sole discretion. No use shall be made or permitted to be made of the
Leased Property, and no acts shall be done, which will cause the cancellation or
increase the premium of any insurance policy covering the Leased Property or any
part thereof (unless another adequate policy satisfactory to Lessor is available
and Lessee pays any premium increase), nor shall Lessee sell or permit
23
<PAGE>
to be kept, used or sold in or about the Leased Property any article which may
be prohibited by law or fire underwriter's regulations. Lessee shall, at its
sole cost, comply with all of the requirements pertaining to the Leased Property
of any insurance board, association, organization or company necessary for the
maintenance of insurance, as herein provided, covering the Leased Property and
Lessee's Personal Property.
(c) Subject to the provisions of Articles and , Lessee
covenants and agrees that during the Term it will (1) operate continuously the
Leased Property as a hotel facility, (2) keep in full force and effect and
comply with all the provisions of the Franchise Agreement (except that Lessee
shall have no obligation to complete any improvements to the Leased Property
required by the franchisor unless the Lessor funds the cost thereof), (3) not
terminate or amend the Franchise Agreement without the consent of Lessor, (4)
maintain appropriate certifications and licenses for such use and (5) will seek
to maximize the Gross Revenues generated therefrom consistent with sound
business practices.
(d) Lessee shall not commit or suffer to be committed any
waste on the Leased Property, or in the Facility, nor shall Lessee cause or
permit any nuisance thereon.
(e) Lessee shall neither suffer nor permit the Leased Property
or any portion thereof, or Lessee's Personal Property, to be used in such a
manner as (1) might reasonably tend to impair Lessor's (or Lessee's, as the case
may be) title thereto or to any portion thereof, or (2) may reasonably make
possible a claim or claims of adverse usage or adverse possession by the public,
as such, or of implied dedication of the Leased Property or any portion thereof,
except as necessary in the ordinary and prudent operation of the Facility on the
Leased Property.
7.3 Lessor to Grant Easements, etc. Lessor will, from time to time, so
long as no Event of Default has occurred and is continuing, at the request of
Lessee and at Lessee's cost and expense (but subject to the approval of Lessor,
which approval shall not be unreasonably withheld or delayed), (a) grant
easements and other rights in the nature of easements with respect to the Leased
Property to third parties, (b) release existing easements or other rights in the
nature of easements which are for the benefit of the Leased Property, (c)
dedicate or transfer unimproved portions of the Leased Property for road,
highway or other public purposes, (d) execute petitions to have the Leased
Property annexed to any municipal corporation or utility district, (e) execute
amendments to any covenants and restrictions affecting the Leased Property and
(f) execute and deliver to any person any instrument appropriate to confirm or
effect such grants, releases,
24
<PAGE>
dedications, transfers, petitions and amendments (to the extent of its interests
in the Leased Property), but only upon delivery to Lessor of an Officer's
Certificate stating that such grant, release, dedication, transfer, petition or
amendment does not interfere with the proper conduct of the business of Lessee
on the Leased Property and does not materially reduce the value of the Leased
Property.
ARTICLE VIII
8.1 Compliance with Legal and Insurance Requirements, etc. Subject to
Section 8.3(b) below and Article relating to permitted contests, Lessee, at its
expense, will promptly (a) comply with all applicable Legal Requirements and
Insurance Requirements in respect of the use, operation, maintenance, repair and
restoration of the Leased Property, and (b) procure, maintain and comply with
all appropriate licenses and other authorizations required for any use of the
Leased Property and Lessee's Personal Property then being made, and for the
proper erection, installation, operation and maintenance of the Leased Property
or any part thereof.
8.2 Legal Requirement Covenants. Subject to Section 8.3(b) below,
Lessee covenants and agrees that the Leased Property and Lessee's Personal
Property shall not be used for any unlawful purpose, and that Lessee shall not
permit or suffer to exist any unlawful use of the Leased Property by others.
Lessee shall acquire and maintain all appropriate licenses, certifications,
permits and other authorizations and approvals needed to operate the Leased
Property in its customary manner for the Primary Intended Use, and any other
lawful use conducted on the Leased Property as may be permitted from time to
time hereunder. Lessee further covenants and agrees that Lessee's use of the
Leased Property and maintenance, alteration, and operation of the same, and all
parts thereof, shall at all times conform to all Legal Requirements, unless the
same are finally determined by a court of competent jurisdiction to be unlawful
(and Lessee shall cause all such sub-tenants, invitees or others to so comply
with all Legal Requirements). Lessee may, however, upon prior Notice to Lessor,
contest the legality or applicability of any such Legal Requirement or any
licensure or certification decision if Lessee maintains such action in good
faith, with due diligence, without prejudice to Lessor's rights hereunder, and
at Lessee's sole expense. If by the terms of any such Legal Requirement
compliance therewith pending the prosecution of any such proceeding may legally
be delayed without the incurrence of any lien, charge or liability of any kind
against the Facility or Lessee's leasehold interest therein and without
subjecting Lessee or Lessor to any liability, civil or criminal, for failure so
to comply therewith, Lessee may delay
25
<PAGE>
compliance therewith until the final determination of such proceeding. If any
lien, charge or civil or criminal liability would be incurred by reason of any
such delay, Lessee, on the prior written consent of Lessor, which consent shall
not be unreasonably withheld, may nonetheless contest as aforesaid and delay as
aforesaid provided that such delay would not subject Lessor to criminal
liability and Lessee both (a) furnishes to Lessor security reasonably
satisfactory to Lessor against any loss or injury by reason of such contest or
delay and (b) prosecutes the contest with due diligence and in good faith.
8.3 Environmental Covenants. Lessor and Lessee (in addition to, and not
in diminution of, Lessee's covenants and undertakings in Sections 8.1 and 8.2
hereof) covenant and agree as follows:
(a) At all times hereafter until the later of (i) such time as
all liabilities, duties or obligations of Lessee to the Lessor under the Lease
have been satisfied in full and (ii) such time as Lessee completely vacates the
Leased Property and surrenders possession of the same to Lessor, Lessee shall
fully comply with all Environmental Laws applicable to the Leased Property and
the operations thereon. Lessee agrees to give Lessor prompt written notice of
(1) all Environmental Liabilities; (2) all pending, threatened or anticipated
Proceedings, and all notices, demands, requests or investigations, relating to
any Environmental Liability or relating to the issuance, revocation or change in
any Environmental Authorization required for operation of the Leased Property;
(3) all Releases at, on, in, under or in any way affecting the Leased Property,
or any Release known by Lessee at, on, in or under any property adjacent to the
Leased Property; and (4) all facts, events or conditions that could reasonably
lead to the occurrence of any of the above-referenced matters.
(b) Lessor hereby agrees to defend, indemnify and save
harmless any and all Lessee Indemnified Parties from and against any and all
Environmental Liabilities other than Environmental Liabilities which were caused
by the acts or grossly negligent failures to act of Lessee.
(c) Lessee hereby agrees to defend, indemnify and save
harmless any and all Lessor Indemnified Parties from and against any and all
Environmental Liabilities which were caused by the acts or grossly negligent
failures to act of Lessee.
(d) If any Proceeding is brought against any Indemnified Party
in respect of an Environmental Liability with respect to which such Indemnified
Party may claim indemnification under either Section 8.3(b) or (c), the
Indemnifying Party, upon request, shall at its sole expense resist and defend
such Proceeding, or cause the same to be resisted and defended by counsel
designated by the
26
<PAGE>
Indemnified Party and approved by the Indemnifying Party, which approval shall
not be unreasonably withheld; provided, however, that such approval shall not be
required in the case of defense by counsel designated by any insurance company
undertaking such defense pursuant to any applicable policy of insurance. Each
Indemnified Party shall have the right to employ separate counsel in any such
Proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel will be at the sole expense of such Indemnified Party unless
such counsel has been approved by the Indemnifying Party, which approval shall
not be unreasonably withheld. The Indemnifying Party shall not be liable for any
settlement of any such Proceeding made without its consent, which shall not be
unreasonably withheld, but if settled with the consent of the Indemnifying
Party, or if settled without its consent (if its consent shall be unreasonably
withheld), or if there be a final, nonappealable judgment for an adversary party
in any such Proceeding, the Indemnifying Party shall indemnify and hold harmless
the Indemnified Parties from and against any liabilities incurred by such
Indemnified Parties by reason of such settlement or judgement.
(e) At any time any Indemnified Party has reason to believe
circumstances exist which could reasonably result in an Environmental Liability,
upon reasonable prior written notice to Lessee stating such Indemnified Party's
basis for such belief, an Indemnified Party shall be given immediate access to
the Leased Property (including, but not limited to, the right to enter upon,
investigate, drill wells, take soil borings, excavate, monitor, test, cap and
use available land for the testing of remedial technologies), Lessee's
employees, and to all relevant documents and records regarding the matter as to
which a responsibility, liability or obligation is asserted or which is the
subject of any Proceeding; provided that such access may be conditioned or
restricted as may be reasonably necessary to ensure compliance with law and the
safety of personnel and facilities or to protect confidential or privileged
information. All Indemnified Parties requesting such immediate access and
cooperation shall endeavor to coordinate such efforts to result in as minimal
interruption of the operation of the Leased Property as practicable.
(f) The indemnification rights and obligations provided for in
this Article VIII shall be in addition to any indemnification rights and
obligations provided for elsewhere in this Lease.
(g) The indemnification rights and obligations provided for in
this Article VIII shall survive the termination of this Agreement.
27
<PAGE>
For purposes of this Section 8.3, all amounts for which any
Indemnified Party seeks indemnification shall be computed net of (a) any actual
income tax benefit resulting therefrom to such Indemnified Party, (b) any
insurance proceeds received (net of tax effects) with respect thereto, and (c)
any amounts recovered (net of tax effects) from any third parties based on
claims the Indemnified Party has against such third parties which reduce the
damages that would otherwise be sustained; provided that in all cases, the
timing of the receipt or realization of insurance proceeds or income tax
benefits or recoveries from third parties shall be taken into account in
determining the amount of reduction of damages. Each Indemnified Party agrees to
use its reasonable efforts to pursue, or assign to Lessee or Lessor, as the case
may be, any claims or rights it may have against any third party which would
materially reduce the amount of damages otherwise incurred by such Indemnified
Party.
Notwithstanding anything to the contrary contained in this
Agreement, if Lessor shall become entitled to the possession of the Leased
Property by virtue of the termination of the Lease or repossession of the Leased
Property, then Lessor may assign its indemnification rights under Section 8.3 of
this Agreement (but not any other rights hereunder) to any Person to whom the
Lessor subsequently transfers the Leased Property, subject to the following
conditions and limitations, each of which shall be deemed to be incorporated
into the terms of such assignment, whether or not specifically referred to
therein:
(1) The indemnification rights referred to in this
section may be assigned only if a known Environmental
Liability then exists or if a Proceeding is then pending or,
to the knowledge of Lessee or Lessor, then threatened with
respect to the Leased Property;
(2) Such indemnification rights shall be limited to
Environmental Liabilities relating to or specifically
affecting the Leased Property; and
(3) Any assignment of such indemnification rights
shall be limited to the immediate transferee of Lessor, and
shall not extend to any such transferee's successors or
assigns.
ARTICLE IX
9.1 Capital Improvements, Maintenance and Repair.
(a) Subject to Section 9.1(b), Lessee will keep the
Leased Property and all private roadways, sidewalks and curbs
28
<PAGE>
appurtenant thereto that are under Lessee's control, including windows and plate
glass, parking lots, mechanical, electrical and plumbing systems and equipment
(including conduit and ductware), and non-load bearing interior walls, in good
order and repair, except for ordinary wear and tear (whether or not the need for
such repairs occurred as a result of Lessee's use, any prior use, the elements
or the age of the Leased Property, or any portion thereof), and, except as
otherwise provided in Articles or , with reasonable promptness, make all
necessary and appropriate repairs thereto of every kind and nature, whether
interior or exterior, ordinary or extraordinary, foreseen or unforeseen or
arising by reason of a condition existing prior to the commencement of the Term
of this Lease (concealed or otherwise), or required by any governmental agency
having jurisdiction over the Leased Property, except as to the structural
elements of the Leased Improvements and underground utilities.
(b) Notwithstanding any other provision of this Lease, unless
the need for compliance with Section 9.1(a) is caused by Lessee's negligence or
willful misconduct or that of its employees or agents, Lessee shall not be
required to bear the costs of complying with Section 9.1(a) with respect to
items classified as either (i) capital items under U.S. generally accepted
accounting principles or (ii) Fixtures or Furniture and Equipment in, on, or
under the Facility or its components, except to the extent (X) that amounts are
available therefor from Lessor under Article XL or otherwise or (Y) required
under Articles XIV and XV on the conditions set forth therein.
(c) Article sets forth the only obligations of Lessor to fund
the cost of any repairs, replacements, alterations, restorations or renewals of
any nature or description to the Leased Property, whether ordinary or
extraordinary, foreseen or unforeseen, or to make any expenditure whatsoever
with respect thereto, in connection with this Lease, or to maintain the Leased
Property in any way. Lessee hereby waives, to the extent permitted by law, the
right to make repairs at the expense of Lessor pursuant to any law in effect at
the time of the execution of this Lease or hereafter enacted. Lessor shall have
the right to give, record and post, as appropriate, notices of nonresponsibility
under any mechanic's lien laws now or hereafter existing.
(d) Lessee shall be permitted to prosecute claims against
Lessor's predecessors in title for breach of any representation or warranty or
for any latent defects in the Leased Property to be maintained by Lessee unless
Lessor is already diligently pursuing such a claim. All repairs shall, to the
extent reasonably achievable, be at least equivalent in quality to the original
work. Lessee will not take or omit to take any action, the taking or omission of
which might materially impair the value
29
<PAGE>
or the usefulness of the Leased Property or any part thereof for
its Primary Intended Use.
(e) Nothing contained in this Lease and no action or inaction
by Lessor shall be construed as (1) constituting the request of Lessor,
expressed or implied, to any contractor, subcontractor, laborer, materialman or
vendor to or for the performance of any labor or services or the furnishing of
any materials or other property for the construction, alteration, addition,
repair or demolition of or to the Leased Property or any part thereof, or (2)
giving Lessee any right, power or permission to contract for or permit the
performance of any labor or services or the furnishing of any materials or other
property in such fashion as would permit the making of any claim against Lessor
in respect thereof or to make any agreement that may create, or in any way be
the basis for any right, title, interest, lien, claim or other encumbrance upon
the estate of Lessor in the Leased Property, or any portion thereof without the
express approval of the Lessor, provided however that the Lessee may impose a
lien on the leasehold interest without the approval of the Lessor.
(f) Lessee will, upon the expiration or prior termination of
the Term, vacate and surrender the Leased Property to Lessor in the condition in
which the Leased Property was originally received from Lessor, except as
repaired, rebuilt, restored, altered or added to as permitted or required by the
provisions of this Lease and except for ordinary wear and tear (subject to the
obligation of Lessee to maintain the Leased Property in accordance with Section
9.1(a) above during the entire Term of the Lease), or damage by casualty or
Condemnation (subject to the obligations of Lessee to restore or repair as set
forth in the Lease).
9.2 Encroachments, Restrictions, Etc. If any of the Leased
Improvements, at any time, materially encroach upon any property, street or
right-of-way adjacent to the Leased Property, or violate the agreements or
conditions contained in any lawful restrictive covenant or other agreement
affecting the Leased Property, or any part thereof, or impair the rights of
others under any easement or right-of-way to which the Leased Property is
subject, then promptly upon the request of Lessor or at the behest of any person
affected by any such encroachment, violation or impairment, Lessee shall, at its
expense, subject to its right to contest the existence of any encroachment,
violation or impairment and, in such case, in the event of an adverse final
determination, either (a) obtain valid and effective waivers or settlements of
all claims, liabilities and damages resulting from each such encroachment,
violation or impairment, whether the same shall affect Lessor or Lessee or (b)
make such changes in the Leased Improvements, and take such other actions, as
Lessee in the good faith exercise of its judgment
30
<PAGE>
deems reasonably practicable to remove such encroachment, and to end such
violation or impairment, including, if necessary, the alteration of any of the
Leased Improvements, and in any event take all such actions as may be necessary
in order to be able to continue the operation of the Leased Improvements for the
Primary Intended Use substantially in the manner and to the extent the Leased
Improvements were operated prior to the assertion of such violation, impairment
or encroachment. Any such alteration shall be made in conformity with the
applicable requirements of Article . Lessee's obligations under this Section
shall be in addition to and shall in no way discharge or diminish any obligation
of any insurer under any policy of title or other insurance held by Lessor.
ARTICLE X
10.1 Alterations. After receiving approval of Lessor, which approval
shall not be unreasonably withheld, Lessee shall have the right to make such
additions, modifications or improvements to the Leased Property from time to
time as Lessee deems desirable for its permitted uses and purposes, provided
that such action will not significantly alter the character or purposes or
significantly detract from the value or operating efficiency thereof and will
not significantly impair the revenue-producing capability of the Leased Property
or adversely affect the ability of the Lessee to comply with the provisions of
this Lease. The cost of such additions, modifications or improvements to the
Leased Property shall be paid by Lessee, and all such additions, modifications
and improvements shall, without payment by Lessor at any time, be included under
the terms of this Lease and upon expiration or earlier termination of this Lease
shall pass to and become the property of Lessor.
10.2 Salvage. All materials which are scrapped or removed in connection
with the making of repairs required by Articles or shall be or become the
property of Lessor or Lessee depending on which party is paying for or providing
the financing for such work.
10.3 Joint Use Agreements. If Lessee constructs additional improvements
that are connected to the Leased Property or share maintenance facilities, HVAC,
electrical, plumbing or other systems, utilities, parking or other amenities,
the parties shall enter into a mutually agreeable cross-easement or joint use
agreement, the form of which has been approved in advance by Lessor, to make
available necessary services and facilities in connection with such additional
improvements, to protect each of their respective interests in the properties
affected, and to provide for separate ownership, use, and/or financing of such
improvements.
31
<PAGE>
ARTICLE XI
Liens. Subject to the provision of Article relating to permitted
contests, Lessee will not directly or indirectly create or allow to remain and
will promptly discharge at its expense any lien, encumbrance, attachment, title
retention agreement or claim upon the Leased Property or any attachment, levy,
claim or encumbrance in respect of the Rent, not including, however, (a) this
Lease, (b) the matters, if any, included as exceptions in the title policy
insuring Lessor's interest in the Leased Property, (c) restrictions, liens and
other encumbrances which are consented to in writing by Lessor or any easements
granted pursuant to the provisions of Section of this Lease, (d) liens for those
taxes upon Lessor which Lessee is not required to pay hereunder, (e) subleases
permitted by Article hereof, (f) liens for Impositions or for sums resulting
from noncompliance with Legal Requirements so long as (1) the same are not yet
payable or are payable without the addition of any fine or penalty or (2) such
liens are in the process of being contested as permitted by Article , (g) liens
of mechanics, laborers, materialmen, suppliers or vendors for sums either
disputed or not yet due provided that (1) the payment of such sums shall not be
postponed under any related contract for more than 60 days after the completion
of the action giving rise to such lien and such reserve or other appropriate
provisions as shall be required by law or generally accepted accounting
principles shall have been made therefor and (2) any such liens are in the
process of being contested as permitted by Article hereof, (h) any liens which
are the responsibility of Lessor pursuant to the provisions of Article of this
Lease.
ARTICLE XII
Permitted Contests. Lessee shall have the right to contest the amount
or validity of any Imposition to be paid by Lessee or any Legal Requirement or
Insurance Requirement or any lien, attachment, levy, encumbrance, charge or
claim ("Claims") not otherwise permitted by Article , by appropriate legal
proceedings in good faith and with due diligence (but this shall not be deemed
or construed in any way to relieve, modify or extend Lessee's covenants to pay
or its covenants to cause to be paid any such charges at the time and in the
manner as in this Article provided), on condition, however, that such legal
proceedings shall not operate to relieve Lessee from its obligations hereunder
and shall not cause the sale or risk the loss of any portion of the Leased
Property, or any part thereof, or cause Lessor or Lessee to be in default under
any mortgage, deed of trust, security deed or other agreement encumbering the
Leased Property or any interest therein. Upon the request of Lessor, Lessee
shall either (a) provide a bond
32
<PAGE>
or other assurance reasonably satisfactory to Lessor that all Claims which may
be assessed against the Leased Property together with interest and penalties, if
any, thereon will be paid, or (b) deposit within the time otherwise required for
payment with a bank or trust company as trustee upon terms reasonably
satisfactory to Lessor, as security for the payment of such Claims, money in an
amount sufficient to pay the same, together with interest and penalties in
connection therewith, as to all Claims which may be assessed against or become a
Claim on the Leased Property, or any part thereof, in said legal proceedings.
Lessee shall furnish Lessor and any lender of Lessor with reasonable evidence of
such deposit within five days of the same. Lessor agrees to join in any such
proceedings at Lessee's expense if the same be required to legally prosecute
such contest of the validity of such Claims; provided, however, that Lessor
shall not thereby be subjected to any liability for the payment of any costs or
expenses in connection with any proceedings brought by Lessee; and Lessee
covenants to indemnify and save harmless Lessor from any such costs or expenses.
Lessee shall be entitled to any refund of any Claims and such charges and
penalties or interest thereon which have been paid by Lessee or paid by Lessor
and for which Lessor has been fully reimbursed. In the event that Lessee fails
to pay any Claims when due or to provide the security therefor as provided in
this paragraph and to diligently prosecute any contest of the same, Lessor may,
upon ten days advance Notice to Lessee, pay such charges together with any
interest and penalties and the same shall be repayable by Lessee to Lessor as
Additional Charges at the next Payment Date provided for in this Lease.
Provided, however, that should Lessor reasonably determine that the giving of
such Notice would risk loss to the Leased Property or cause damage to Lessor,
then Lessor shall give such Notice as is practical under the circumstances.
Lessor reserves the right to contest any of the Claims at its expense not
pursued by Lessee. Lessor and Lessee agree to cooperate in coordinating the
contest of any claims.
ARTICLE XIII
13.1 General Insurance Requirements.
(a) Coverages. During the Term of this Lease, Lessee shall at all times
keep the Leased Property insured with the kinds and amounts of insurance
described below provided, however, that the Lessor shall be responsible for
payment of any insurance requested by it pursuant to paragraph (IX) of Section
13.1(a) of this Lease if not of a type customarily arrived by similar business
and properties. This insurance shall be written by companies licensed and
authorized to issue insurance in the State. The policies must name Lessor as the
insured or as an additional named insured, as the case may be. Losses shall be
payable to Lessor or Lessee as
33
<PAGE>
provided in this Lease. Any loss adjustment shall require the written consent of
Lessor and Lessee, each acting reasonably and in good faith. Evidence of
insurance shall be deposited with Lessor. The policies on the Leased Property,
including the Leased Improvements, Fixtures and Lessee's Personal Property,
shall include:
(i) Building insurance on the "Special Form" (formerly "All
Risk" form) (which may include earthquake and flood in reasonable amounts as
determined by Lessor) in an amount not less than 100% of the then full
replacement cost thereof (as defined in Section ) or such other amount which is
acceptable to Lessor, and personal property insurance on the "Special Form" in
the full amount of the replacement cost thereof;
(ii) Insurance for loss or damage (direct and indirect) from
steam boilers, pressure vessels or similar apparatus, now or hereafter installed
in the Facility, in the minimum amount of $5,000,000 or in such lesser or
greater amounts as are then customary or as may be reasonably requested by
Lessor from time to time;
(iii) Loss of income insurance on the "Special Form", in the
amount of one year of Base Rent for the benefit of Lessor, and business
interruption insurance on the "Special Form" in the amount of one year of gross
profit, for the benefit of Lessor or Lessee;
(iv) Commercial general liability insurance, with amounts not
less than $10,000,000 covering each of the following: bodily injury, death, or
property damage liability per occurrence, personal and advertising injury,
general aggregate, products and completed operations, with respect to Lessor,
and "all risk legal liability" (including liquor law or "dram shop" liability,
if liquor or alcoholic beverages are served on the Leased Property) with respect
to Lessor and Lessee;
(v) Insurance covering such other hazards and in such amounts
as may be customary for comparable properties in the area of the Leased Property
and is available from insurance companies, insurance pools or other appropriate
companies authorized to do business in the State at rates which are economically
practicable in relation to the risks covered as may be reasonably requested by
Lessor;
(vi) Fidelity bonds with limits and deductibles as may be
reasonably requested by Lessor, covering Lessee's employees in job
classifications normally bonded under prudent hotel management practices in the
United States or otherwise required by law;
34
<PAGE>
(vii) Workmen's compensation insurance to the extent necessary
to protect Lessor and the Leased Property against Lessee's workman's
compensation claims;
(viii) Vehicle liability insurance for owned, non-owned, and
hired vehicles, in the amount of $1,000,000; and
(ix) Such other insurance as Lessor may reasonably request for
facilities such as the Leased Property and the operation thereof.
(b) Responsibility for Premiums. Lessee shall keep in force the
foregoing insurance coverages at its expense; provided, however, that Lessor
shall reimburse Lessee for any premium or premiums paid by Lessee for the
coverages required under Sections 13.1(a)(i), except to the extent that the
premium or premiums relate to coverages for property owned by the Lessee, and
13.1(a)(ii), as well as any other casualty coverages required by Lessor.
13.2 Replacement Cost. The term "full replacement cost" as used herein
shall mean the actual replacement cost of the Leased Property requiring
replacement from time to time including an increased cost of construction
endorsement, if available, and the cost of debris removal. In the event either
party believes that full replacement cost (the then-replacement cost less such
exclusions) has increased or decreased at any time during the Lease Term, it
shall have the right to have such full replacement cost re-determined.
13.3 Worker's Compensation. Lessee, at its sole cost, shall at all
times maintain adequate worker's compensation insurance coverage for all persons
employed by Lessee on the Leased Property. Such worker's compensation insurance
shall be in accordance with the requirements of applicable local, state and
federal law.
13.4 Waiver of Subrogation. All insurance policies carried by Lessor or
Lessee covering the Leased Property, the Fixtures, the Facility or Lessee's
Personal Property, including, without limitation, contents, fire and casualty
insurance, shall expressly waive any right of subrogation on the part of the
insurer against the other party. The parties hereto agree that their policies
will include such waiver clause or endorsement so long as the same are
obtainable without extra cost, and in the event of such an extra charge the
other party, at its election, may pay the same, but shall not be obligated to do
so. Each party agrees to seek recovery from any applicable insurance coverage
available to such party prior to seeking recovery against the other.
35
<PAGE>
13.5 Form Satisfactory, etc. All of the policies of insurance referred
to in this Article shall be written in a form, with deductibles and by insurance
companies satisfactory to Lessor and also shall meet and satisfy the
requirements of any ground lessor, lender or franchisor having any interest in
the Leased Premises. Subject to the right to reimbursement or credit specified
in Section 13.1, Lessee shall pay all of the premiums therefor, and deliver such
policies or certificates thereof to Lessor prior to their effective date (and,
with respect to any renewal policy, 30 days prior to the expiration of the
existing policy), and in the event of the failure of Lessee either to effect
such insurance as herein called for or to pay the premiums therefor, or to
deliver such policies or binding certificates thereof to Lessor at the times
required, Lessor shall be entitled, but shall have no obligation, to effect such
insurance and pay the premiums therefor, and Lessee shall reimburse Lessor for
any premium or premiums paid by Lessor for the coverages required under this
Section (other than the premiums required to be paid or reimbursed to Lessee by
Lessor in accordance with Section 13.1(b)) upon written demand therefor, and
Lessee's failure to repay the same within 30 days after Notice of such failure
from Lessor shall constitute an Event of Default within the meaning of Section
16.1(d). Each insurer mentioned in this Article shall agree, by endorsement to
the policy or policies issued by it, or by independent instrument furnished to
Lessor, that it will give to Lessor 30 days' written notice before the policy or
policies in question shall be materially altered, allowed to expire or canceled.
13.6 Change in Limits. If either Lessor or Lessee at any time deems the
limits of the personal injury or property damage under the comprehensive public
liability insurance then carried to be either excessive or insufficient, Lessor
and Lessee shall endeavor in good faith to agree on the proper and reasonable
limits for such insurance to be carried and such insurance shall thereafter be
carried with the limits thus agreed on until further change pursuant to the
provisions of this Section.
13.7 Blanket Policy. Notwithstanding anything to the contrary contained
in this Article , Lessee or Lessor may bring the insurance provided for herein
within the coverage of a so-called blanket policy or policies of insurance
carried and maintained by Lessee or Lessor; provided, however, that the coverage
afforded to Lessor and Lessee will not be reduced or diminished or otherwise be
different from that which would exist under a separate policy meeting all other
requirements of this Lease by reason of the use of such blanket policy of
insurance, and provided further that the requirements of this Article are
otherwise satisfied.
13.8 Separate Insurance. Lessee shall not on Lessee's own
initiative or pursuant to the request or requirement of any third
36
<PAGE>
party, take out separate insurance concurrent in form or contributing in the
event of loss with that required in this Article to be furnished, or increase
the amount of any then existing insurance by securing an additional policy or
additional policies, unless all parties having an insurable interest in the
subject matter of the insurance, including in all cases Lessor, are included
therein as additional insureds, and the loss is payable under such additional
separate insurance in the same manner as losses are payable under this Lease.
Lessee shall immediately notify Lessor that Lessee has obtained any such
separate insurance or of the increasing of any of the amounts of the then
existing insurance.
13.9 Reports On Insurance Claims. Lessee shall promptly investigate and
make a complete and timely written report to the appropriate insurance company
as to all accidents, claims for damage relating to the ownership, operation, and
maintenance of the Facility, any damage or destruction to the Facility and the
estimated cost of repair thereof and shall prepare any and all reports required
by any insurance company in connection therewith. All such reports shall be
timely filed with the insurance company as required under the terms of the
insurance policy involved, and a final copy of such report shall be furnished to
Lessor. Lessee shall be authorized to adjust, settle, or compromise any
insurance loss, or to execute proofs of such loss, in the aggregate amount of
$5,000 or less, with respect to any single casualty or other event.
ARTICLE XIV
14.1 Insurance Proceeds. Subject to the provisions of Section 14.6, and
the senior rights of any lender, all proceeds payable by reason of any loss or
damage to the Leased Property, or any portion thereof, and insured under any
policy of insurance required by Article of this Lease shall be paid to Lessor
and held in trust by Lessor in an interest-bearing account, shall be made
available, if applicable, for reconstruction or repair, as the case may be, of
any damage to or destruction of the Leased Property, or any portion thereof,
and, if applicable, shall be paid out by Lessor from time to time for the
reasonable costs of such reconstruction or repair upon satisfaction of
reasonable terms and conditions specified by Lessor. Any excess proceeds of
insurance remaining after the completion of the restoration or reconstruction of
the Leased Property shall be paid to Lessee. If neither Lessor nor Lessee is
required or elects to repair and restore, and the Lease is terminated without
purchase by Lessee as described in Section 14.2, all such insurance proceeds
shall be retained by Lessor. All salvage resulting from any risk covered by
insurance shall belong to Lessor.
37
<PAGE>
14.2 Reconstruction in the Event of Damage or Destruction
Covered by Insurance.
(a) Except as provided in Section , if during the Term the
Leased Property is totally or partially destroyed by a risk covered by the
insurance described in Article and the Facility thereby is rendered Unsuitable
for its Primary Intended Use, Lessee shall, at Lessee's option, either (1)
restore the Facility to substantially the same condition as existed immediately
before the damage or destruction and otherwise in accordance with the terms of
the Lease, or (2) offer to acquire the Leased Property from Lessor for a
purchase price equal to the Rejectable Offer Price of the Leased Property. If
Lessee restores the Facility, the insurance proceeds shall be paid out by Lessor
from time to time for the reasonable costs of such restoration upon satisfaction
of reasonable terms and conditions, and any excess proceeds remaining after such
restoration shall be paid to Lessee. If Lessee acquires the Leased Property,
Lessee shall receive the insurance proceeds. If Lessor does not accept Lessee's
offer so to purchase the Leased Property within 90 days, Lessee may withdraw its
offer to purchase the Leased Property and, if so withdrawn, Lessee may terminate
the Lease with respect to the Leased Property without further liability
hereunder and Lessor shall be entitled to retain all insurance proceeds.
(b) Except as provided in Section , if during the Term the
Leased Property is partially destroyed by a risk covered by the insurance
described in Article , but the Facility is not thereby rendered Unsuitable for
its Primary Intended Use, Lessee shall restore the Facility to substantially the
same condition as existed immediately before the damage or destruction and
otherwise in accordance with the terms of the Lease. Such damage or destruction
shall not terminate this Lease; provided, however, that if Lessee cannot within
a reasonable time obtain all necessary government approvals, including building
permits, licenses and conditional use permits, after diligent efforts to do so,
to perform all required repair and restoration work and to operate the Facility
for its Primary Intended Use in substantially the same manner as that existing
immediately prior to such damage or destruction and otherwise in accordance with
the terms of the Lease, Lessee may make a written offer to Lessor to purchase
the Leased Property for a purchase price equal to the Rejectable Offer Price of
the Leased Property determined without regard to such damage or destruction. If
Lessee makes such offer and Lessor does not accept the same within 30 days after
Lessee delivers its offer to Lessor, Lessee shall withdraw such offer, in which
event this Lease shall remain in full force and effect and Lessee shall
immediately proceed to restore the Facility to substantially the same condition
as existed immediately before such damage or destruction and otherwise in
accordance with the terms of the
38
<PAGE>
Lease. If Lessee restores the Facility, the insurance proceeds shall be paid out
by Lessor from time to time for the reasonable costs of such restoration upon
satisfaction of reasonable terms and conditions specified by Lessor, and any
excess proceeds remaining after such restoration shall be paid to Lessee.
(c) If the cost of the repair or restoration exceeds the
amount of proceeds received by Lessor from the insurance required under Article
, Lessee shall be obligated to contribute any excess amounts needed to restore
the Facility prior to commencing work thereon. Such difference shall be paid by
Lessee to Lessor promptly after Lessee receives Lessor's written invoice
therefor, to be held in trust, together with any other insurance proceeds, for
application to the cost of repair and restoration.
(d) If Lessor accepts Lessee's offer to purchase the Leased
Property under this Article, this Lease shall terminate as to the Leased
Property upon payment of the purchase price, and Lessor shall remit to Lessee
all insurance proceeds pertaining to the Leased Property being held in trust by
Lessor.
14.3 Reconstruction in the Event of Damage or Destruction Not
Covered by Insurance.
Except as provided in Section , if during the Term the Facility is totally or
materially destroyed by a risk not covered by the insurance described in Article
, whether or not such damage or destruction renders the Facility Unsuitable for
its Primary Intended Use, Lessee at its option shall either, (a) at Lessee's
sole cost and expense, restore the Facility to substantially the same condition
it was in immediately before such damage or destruction and such damage or
destruction shall not terminate this Lease, or (b) make a written offer to
purchase the Leased Property for a purchase price equal to the Rejectable Offer
Price of the Leased Property without regard to such damage or destruction. If
Lessor does not accept Lessee's offer so to purchase the Leased Property within
90 days after Lessee delivers its offer to Lessor, Lessee may withdraw its offer
to purchase the Leased Property and, if so withdrawn, Lessee may terminate the
Lease with respect to the Leased Property without further liability hereunder.
If such damage or destruction is not material, Lessee shall, at Lessee's sole
cost and expense, restore the Facility to substantially the same condition as
existed immediately before the damage or destruction and otherwise in accordance
with the terms of the Lease, and such damage or destruction shall not terminate
the Lease.
14.4 Lessee's Property. All insurance proceeds payable by
reason of any loss of or damage to any of Lessee's Personal
Property shall be paid to Lessee; provided, however, no such
39
<PAGE>
payments shall diminish or reduce the insurance payments otherwise payable to or
for the benefit of Lessor hereunder.
14.5 Damage Near End of Term. Notwithstanding any provisions of Section
or appearing to the contrary, if damage to or destruction of the Facility
rendering it unsuitable for its Primary Intended Use occurs during the last 24
months of the Term, then either party shall have the right to terminate this
Lease by giving written notice to the other within 30 days after the date of
damage or destruction, whereupon all accrued Rent shall be paid immediately, and
this Lease shall automatically terminate five days after the date of such
notice.
14.6 Waiver. Lessee hereby waives any statutory rights of termination
that may arise by reason of any damage or destruction of the Facility that
Lessor is obligated to restore or may restore under any of the provisions of
this Lease.
ARTICLE XV
15.1 Definitions.
(a) "Condemnation" means a Taking resulting from (1) the
exercise of any governmental power, whether by legal proceedings or otherwise,
by a Condemnor, and (2) a voluntary sale or transfer by Lessor to any Condemnor,
either under threat of condemnation or while legal proceedings for condemnation
are pending.
(b) "Date of Taking" means the date the Condemnor has the
right to possession of the property being condemned.
(c) "Award" means all compensation, sums or anything of value
awarded, paid or received on a total or partial Condemnation.
(d) "Condemnor" means any public or quasi-public authority, or
private corporation or individual, having the power of Condemnation.
15.2 Parties' Rights and Obligations. If during the Term there is any
Condemnation of all or any part of the Leased Property or any interest in this
Lease, the rights and obligations of Lessor and Lessee shall be determined by
this Article .
15.3 Total Taking. If title to the fee of the whole of the Leased
Property is condemned by any Condemnor, subject to the provisions of Section ,
this Lease shall cease and terminate as of the Date of Taking by the Condemnor.
If title to the fee of less than the whole of the Leased Property is so taken or
condemned, which nevertheless renders the Leased Property
40
<PAGE>
Unsuitable or Uneconomic for its Primary Intended Use, Lessee and Lessor shall
each have the option, by notice to the other, at any time prior to the Date of
Taking, to terminate this Lease as of the Date of Taking. Upon such date, if
such Notice has been given, this Lease shall thereupon cease and terminate. All
Base Rent, Percentage Rent and Additional Charges paid or payable by Lessee
hereunder shall be apportioned as of the Date of Taking, and Lessee shall
promptly pay Lessor such amounts. In the event of any such termination, the
provisions of Section shall apply.
15.4 Allocation of Award. The total Award made with respect to the
Leased Property or for loss of rent, or for Lessor's loss of business beyond the
Term, shall be solely the property of and payable to Lessor. Any Award made for
loss of Lessee's business during the remaining Term, if any, for the taking of
Lessee's Personal Property, or for removal and relocation expenses of Lessee in
any such proceedings shall be the sole property of and payable to Lessee. In any
Condemnation proceedings Lessor and Lessee shall each seek its Award in
conformity herewith, at its respective expense; provided, however, Lessee shall
not initiate, prosecute or acquiesce in any proceedings that may result in a
diminution of any Award payable to Lessor.
15.5 Partial Taking. If title to less than the whole of the Leased
Property is condemned, and the Leased Property is still suitable for its Primary
Intended Use, and not Uneconomic for its Primary Intended Use, or if Lessee or
Lessor is entitled but neither elects to terminate this Lease as provided in
Section , Lessee at the expense of the Lessor shall with all reasonable dispatch
restore the untaken portion of any Leased Improvements so that such Leased
Improvements constitute a complete architectural unit of the same general
character and condition (as nearly as may be possible under the circumstances)
as the Leased Improvements existing immediately prior to the Condemnation. In
the event of any Condemnation as described in this Section 15.5, the entire
amount of the Award shall be paid to the Lessor.
15.6 Temporary Taking. If the whole or any part of the Leased Property
or of Lessee's interest under this Lease is condemned by any Condemnor for its
temporary use or occupancy, this Lease shall not terminate by reason thereof,
Lessee, however, shall be released from its obligations to pay, in the manner
and at the terms herein specified, the pro rata amounts of Base Rent based on
the number of rooms affected by such Condemnation and the total rooms in the
Leased Property and Additional Charges. Except only to the extent that Lessee
may be prevented from so doing pursuant to the terms of the order of the
Condemnor, Lessee shall continue to perform and observe all of the other terms,
covenants, conditions and obligations hereof on the part of the Lessee to be
performed and observed, as though such Condemnation had not occurred. In the
41
<PAGE>
event of any Condemnation as described this Section , the entire amount of any
Award made for such Condemnation allocable to the Term of this Lease, whether
paid by way of damages, rent or otherwise, shall be paid to Lessor. Lessor
covenants that upon the termination of any such period of temporary use or
occupancy it will, at its sole cost and expense, restore the Leased Property as
nearly as may be reasonably possible to the condition in which the same was
immediately prior to such Condemnation, unless such period of temporary use or
occupancy extends beyond the expiration of the Term, in which case Lessor shall
not be required to make such restoration.
15.7 Lessee's Offer. In the event of the termination of this Lease as
provided in Section , Lessee shall offer to acquire the Leased Property from
Lessor for a purchase price equal to the Rejectable Offer Price of the Leased
Property without regard to such taking and, if accepted, Lessee shall receive
the entire Award. If Lessor does not accept Lessee's offer to purchase the
Leased Property, Lessee shall withdraw its offer to purchase the Leased Property
and, if so withdrawn, Lessee may terminate the Lease with respect to the Leased
Property without further liability hereunder, except for payment of Rent as
provided in the penultimate sentence of Section or for matters which by their
express terms survive termination of this Lease, and Lessor shall be entitled to
retain the Award except as provided in Section .
ARTICLE XVI
16.1 Events of Default. If any one or more of the following events
(individually, an "Event of Default") occurs:
(a) if an Event of Default occurs under any other lease
between Lessor and Lessee, any Affiliate of Lessee or Solomons Beacon Inn
Limited Partnership; or
(b) if Lessee fails to make payment of the Base Rent or
Additional Charges within ten days after the same becomes due and payable;
(c) if Lessee fails to make payment of Percentage Rent when
the same becomes due and payable and such condition continues for a period of 20
days after the same becomes due and payable;
(d) if Lessee fails to observe or perform any other term,
covenant or condition of this Lease and such failure is not cured by Lessee
within a period of 30 days after receipt by the Lessee of Notice thereof from
Lessor, unless such failure cannot with due diligence be cured within a period
of 30 days, in which case it shall not be deemed an Event of Default if Lessee
proceeds
42
<PAGE>
promptly and with due diligence to cure the failure and diligently completes the
curing thereof provided, however, in no event shall such cure period extend
beyond 90 days after such Notice; or
(e) if the Lessee shall file a petition in bankruptcy or
reorganization for an arrangement pursuant to any federal or state bankruptcy
law or any similar federal or state law, or shall be adjudicated a bankrupt or
shall make an assignment for the benefit of creditors or shall admit in writing
its inability to pay its debts generally as they become due, or if a petition or
answer proposing the adjudication of the Lessee as a bankrupt or its
reorganization pursuant to any federal or state bankruptcy law or any similar
federal or state law shall be filed in any court and the Lessee shall be
adjudicated a bankrupt and such adjudication shall not be vacated or set aside
or stayed within 60 days after the entry of an order in respect thereof, or if a
receiver of the Lessee or of the whole or substantially all of the assets of the
Lessee shall be appointed in any proceeding brought by the Lessee or if any such
receiver, trustee or liquidator shall be appointed in any proceeding brought
against the Lessee and shall not be vacated or set aside or stayed within 120
days after such appointment; or
(f) if Lessee is liquidated or dissolved, or begins
proceedings toward such liquidation or dissolution, or, in any manner, permits
the sale or divestiture of substantially all of its assets; or
(g) if the estate or interest of Lessee in the Leased Property
or any part thereof is voluntarily or involuntarily transferred, assigned,
conveyed, levied upon or attached in any proceeding (unless Lessee is contesting
such lien or attachment in good faith in accordance with Article hereof); or
(h) if, except as a result of damage, destruction or a partial
or complete Condemnation, Lessee voluntarily ceases operations on the Leased
Property; or
(i) if an event of default has been declared by the franchisor
under the Franchise Agreement with respect to the Facility on the Leased
Premises or such Franchise Agreement has been terminated as a result of any
action or failure to act by the Lessee;
then, and in any such event, Lessor may exercise one or more
remedies available to it herein or at law or in equity, including but not
limited to its right to terminate this Lease by giving Lessee not less than ten
days' Notice of such termination except in the case of a default under Sections
16.1(e),(f), or (g), in which case notice shall not be required.
43
<PAGE>
If litigation is commenced with respect to any alleged default
under this Lease, the prevailing party in such litigation shall receive, in
addition to its damages incurred, such sum as the court shall determine as its
reasonable attorneys' fees, and all costs and expenses incurred in connection
therewith.
No Event of Default (other than a failure to make a payment of
money) shall be deemed to exist under clause (d) during any time for up to one
year the curing thereof is prevented by an Unavoidable Delay, provided that upon
the cessation of such Unavoidable Delay, Lessee remedies such default or Event
of Default without further delay.
16.2 Surrender. If an Event of Default occurs (and the event giving
rise to such Event of Default has not been cured within the curative period
relating thereto as set forth in Section ) and is continuing, whether or not
this Lease has been terminated pursuant to Section , Lessee shall, if requested
by Lessor so to do, immediately surrender and assign to Lessor or Lessor's
designee the Leased Property including, without limitation, any and all books,
records, files, licenses, permits and keys relating thereto, and quit the same
and Lessor may enter upon and repossess the Leased Property by reasonable force,
summary proceedings, ejectment or otherwise, and may remove Lessee and all other
persons and any and all personal property from the Leased Property, subject to
rights of any hotel guests and to any requirement of law. Lessee hereby waives
any and all requirements of applicable laws for service of notice to re-enter
the Leased Property. Lessor shall be under no obligation to, but may if it so
chooses, relet the Leased Property or otherwise mitigate Lessor's damages.
16.3 Damages. Neither (a) the termination of this Lease, (b) the
repossession of the Leased Property, (c) the failure of Lessor to relet the
Leased Property, nor (d) the reletting of all or any portion thereof, shall
relieve Lessee of its liability and obligations hereunder, all of which shall
survive any such termination, repossession or reletting. In the event of any
such termination, Lessee shall forthwith pay to Lessor all Rent due and payable
with respect to the Leased Property to and including the date of such
termination.
Lessee shall forthwith pay to Lessor, at Lessor's option, as
and for liquidated and agreed current damages for Lessee's default, either:
(1) Without termination of Lessee's right to possession of the
Leased Property, each installment of Rent (including Percentage Rent as
determined below) and other sums payable by Lessee to Lessor under the Lease as
the same becomes due and payable, which Rent and other sums shall bear interest
at the
44
<PAGE>
Overdue Rate, and Lessor may enforce, by action or otherwise, any
other term or covenant of this Lease; or
(2) the sum of:
(A) the unpaid Rent which had been
earned at the time of termination, repossession or
reletting, and
(B) the worth at the time of termination,
repossession or reletting of the amount by which the
unpaid Rent for the balance of the Term after the
time of termination, repossession or reletting,
exceeds the amount of such rental loss that Lessee
proves could be reasonably avoided and as reduced for
rentals received after the time of termination,
repossession or reletting, if and to the extent
required by applicable law, the worth at the time of
termination, repossession or reletting of the amount
referred to in this subparagraph (B) is computed by
discounting such amount at the discount rate of the
Federal Reserve Bank of New York at the time of award
plus 1%, and
(C) any other amount necessary to compensate
Lessor for all the detriment proximately caused by
Lessee's failure to perform its obligations under
this Lease or which in the ordinary course of things,
would be likely to result therefrom.
Percentage Rent for the purposes of this Section shall be a sum equal to (i) the
average of the annual amounts of the Percentage Rent for the three Fiscal Years
immediately preceding the Fiscal Year in which the termination, re-entry or
repossession takes place, or (ii) if three Fiscal Years shall not have elapsed,
the average of the Percentage Rent during the preceding Fiscal Years during
which the Lease was in effect, or (iii) if one Fiscal Year has not elapsed, the
amount derived by annualizing the Percentage Rent from the effective date of
this Lease.
16.4 Waiver. If this Lease is terminated pursuant to Section , Lessee
waives, to the extent permitted by applicable law, (a) any right to a trial by
jury in the event of summary proceedings to enforce the remedies set forth in
this Article , and (b) the benefit of any laws now or hereafter in force
exempting property from liability for rent or for debt and Lessor waives any
right to "pierce the corporate veil" of Lessee other than to the extent funds
shall have been inappropriately paid any Affiliate of Lessee following a default
resulting in an Event of Default.
45
<PAGE>
16.5 Application of Funds. Any payments received by Lessor under any of
the provisions of this Lease during the existence or continuance of any Event of
Default shall be applied to Lessee's obligations in the order that Lessor may
determine or as may be prescribed by the laws of the State.
ARTICLE XVII
Lessor's Right to Cure Lessee's Default. If Lessee fails to make any
payment or to perform any act required to be made or performed under this Lease
including, without limitation, Lessee's failure to comply with the terms of any
Franchise Agreement other than a failure to complete improvements required by
the franchisor because the Lessor has not provided Lessee with the funds
therefor, and fails to cure the same within the relevant time periods provided
in Section , Lessor, without waiving or releasing any obligation of Lessee, and
without waiving or releasing any obligation or default, may (but shall be under
no obligation to) at any time thereafter make such payment or perform such act
for the account and at the expense of Lessee, and may, to the extent permitted
by law, enter upon the Leased Property for such purpose and, subject to Section
, take all such action thereon as, in Lessor's opinion, may be necessary or
appropriate therefor. Before entering the Leased Property for the purposes
provided in this Article XVII, Lessor shall notify the Lessee of its intention
to enter the Leased Property unless such Notice would be impractical. No such
entry shall be deemed an eviction of Lessee. All sums so paid by Lessor and all
costs and expenses (including, without limitation, reasonable attorneys' fees
and expenses, in each case to the extent permitted by law) so incurred, together
with a late charge thereon (to the extent permitted by law) at the Overdue Rate
from the date on which such sums or expenses are paid or incurred by Lessors,
shall be paid by Lessee to Lessor on demand. The obligations of Lessee and
rights of Lessor contained in this Article shall survive the expiration or
earlier termination of this Lease.
ARTICLE XVIII
Provisions Relating to Purchase of the Leased Property. If Lessee
purchases the Leased Property from Lessor pursuant to any of the terms of this
Lease, the closing of the purchase shall occur 90 days after Lessor accepts
Lessee's offer to purchase the Leased Property, unless the provision of the
Lease under which such offer was made specifies a different closing date, in
which case the date set forth in such provision shall be the closing date. At
such closing, Lessor shall, upon receipt from Lessee of the applicable purchase
price, together with full payment of any unpaid Rent due
46
<PAGE>
and payable with respect to any period ending on or before the date of the
purchase, deliver to Lessee an appropriate limited or special warranty deed or
other conveyance conveying the entire interest of Lessor in and to the Leased
Property to Lessee free and clear of all encumbrances other than (a) those that
Lessee has agreed hereunder to pay or discharge, (b) those mortgage liens, if
any, that Lessee has agreed in writing to accept and to take title subject to,
(c) those liens and encumbrances subject to which the Leased Property was
conveyed to Lessor, (d) encumbrances, easements, licenses or rights of way
required to be imposed on the Leased Property under Section , (e) any other
encumbrances permitted to be imposed on the Leased Property under the provisions
of Section that are assumable at no cost to Lessee or to which Lessee may take
subject without cost to Lessee and (f) any taxes not yet due and payable; and
(g) those encumbrances created, requested or consented to by Lessee. The
difference between the applicable purchase price and the total of the
encumbrances assumed or taken subject to shall be paid in cash to Lessor or as
Lessor may direct, in federal or other immediately available funds, except as
otherwise mutually agreed by Lessor and Lessee. All expenses of such conveyance,
including, without limitation, the cost of title examination or title insurance,
if desired by Lessee, Lessee's attorneys' fees incurred in connection with such
conveyance and release, and transfer taxes and recording fees, shall be paid by
Lessee. Lessor shall pay its attorney's fees. This Article XVIII is subject to
the prior rights of any lender whose lien is secured by the Leased Premises.
ARTICLE XIX
19.1 Personal Property Limitation. Anything contained in this Lease to
the contrary notwithstanding, the average of the adjusted tax bases of the items
of personal property that are leased to the Lessee under this Lease at the
beginning and at the end of any Fiscal Year shall not exceed 15% of the average
of the aggregate adjusted tax bases of the Leased Property at the beginning and
at the end of such Fiscal Year. This Section is intended to ensure that the Rent
qualifies as "rents from real property," within the meaning of Section 856(d) of
the Code, or any similar or successor provisions thereto, and shall be
interpreted in a manner consistent with such intent.
19.2 Sublease Rent Limitation. Anything contained in this Lease to the
contrary notwithstanding, Lessee shall not sublet the Leased Property on any
basis such that the rental to be paid by the sublessee thereunder would be
based, in whole or in part, on either (a) the income or profits derived by the
business activities of the sublessee, or (b) any other formula such that any
portion of the Rent would fail to qualify as "rents from real property" within
the
47
<PAGE>
meaning of Section 856(d) of the Code, or any similar or successor
provision thereto.
19.3 Sublease Tenant Limitation. Anything contained in this Lease to
the contrary notwithstanding, Lessee shall not sublease the Leased Property or
any portions thereof to any Person in which Humphrey Hospitality Trust, Inc.
owns, directly or indirectly, a 10% or more interest, within the meaning of
Section 856(d)(2)(B) of the Code, or any similar or successor provisions
thereto.
19.4 Lessee Ownership Limitation. Anything contained in this Lease to
the contrary notwithstanding, neither Lessee or an Affiliate of the Lessee shall
acquire, directly or indirectly, a 10% or more interest in Humphrey Hospitality
Trust, Inc. within the meaning of Section 856(d)(2)(B) of the Code, or any
similar or successor provision thereto.
19.5 Lessee Officer and Employee Limitation. Anything contained in this
Lease to the contrary notwithstanding, none of the officers or employees of the
Lessee (or any Person who furnishes or renders services to the tenants of the
Leased Property, or manages or operates the Leased Property) shall be officers
or employees of Humphrey Hospitality Trust, Inc. In addition, if a Person serves
as both (a) a director of the Lessee (or any Person who furnishes or renders
services to the tenants of the Leased Property, or manages or operates the
Leased Property) and (b) a trustee and officer (or employee) of Humphrey
Hospitality Trust, Inc. that Person shall not receive any compensation for
serving as a director of the Lessee (or any Person who furnishes or renders
services to the tenants of the Leased Property, or manages or operates the
Leased Property). Furthermore, if a Person serves as both (a) a trustee of
Humphrey Hospitality Trust, Inc. and (b) a director and officer (or employee) of
the Lessee (or any Person who furnishes or renders services to the tenants of
the Leased Property, or manages or operates the Leased Property), that Person
shall not receive any compensation for serving as a trustee of Humphrey
Hospitality Trust, Inc.
ARTICLE XX
Holding Over. If Lessee for any reason remains in possession of the
Leased Property after the expiration or earlier termination of the Term, such
possession shall be as a tenant at sufferance during which time Lessee shall pay
as rental each month two times the aggregate of (a) one-twelfth of the aggregate
Base Rent and Percentage Rent payable with respect to the last Fiscal Year of
the Term, (b) all Additional Charges accruing during the applicable month and
(c) all other sums, if any, payable by Lessee under this Lease with respect to
the Leased Property. During such period, Lessee shall be obligated to perform
and observe all of the terms,
48
<PAGE>
covenants and conditions of this Lease, but shall have no rights hereunder other
than the right, to the extent given by law to tenancies at sufferance, to
continue its occupancy and use of the Leased Property. Nothing contained herein
shall constitute the consent, express or implied, of Lessor to the holding over
of Lessee after the expiration or earlier termination of this Lease.
ARTICLE XXI
Risk of Loss. During the Term, the risk of loss or of decrease in the
enjoyment and beneficial use of the Leased Property in consequence of the damage
or destruction thereof by fire, the elements, casualties, thefts, riots, wars or
otherwise, or in consequence of foreclosures, attachments, levies or executions
(other than those caused by Lessor and those claiming from, through or under
Lessor) is assumed by Lessee, and, in the absence of gross negligence, willful
misconduct or breach of this Lease by Lessor pursuant to Section , Lessor shall
in no event be answerable or accountable therefor, nor shall any of the events
mentioned in this Section entitle Lessee to any abatement of Rent except as
specifically provided in this Lease.
ARTICLE XXII
Indemnification. Notwithstanding the existence of any insurance, and
without regard to the policy limits of any such insurance or self-insurance, but
subject to the last sentence of Section 13.4 if any insurance coverage is
applicable, Section and Article VIII, Lessee will protect, indemnify, hold
harmless and defend Lessor Indemnified Parties from and against all liabilities,
obligations, claims, damages, penalties, causes of action, costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses), to the
extent permitted by law, imposed upon or incurred by or asserted against Lessor
Indemnified Parties by reason of: (a) any accident, injury to or death of
persons or loss of or damage to property occurring on or about the Leased
Property or adjoining sidewalks, including without limitation any claims under
liquor liability, "dram shop" or similar laws, (b) any past, present or future
use, misuse, non-use, condition, management, maintenance or repair by Lessee or
any of its agents, employees or invitees of the Leased Property or Lessee's
Personal Property or any litigation, proceeding or claim by governmental
entities or other third parties to which a Lessor Indemnified Party is made a
party or participant related to such use, misuse, non-use, condition,
management, maintenance, or repair thereof by Lessee or any of its agents,
employees or invitees, including any failure of Lessee or any of its agents,
employees or invitees to perform any obligations under this Lease or imposed by
applicable law (other
49
<PAGE>
than arising out of Condemnation proceedings), (c) any Impositions that are the
obligations of Lessee pursuant to the applicable provisions of this Lease, (d)
any failure on the part of Lessee to perform or comply with any of the terms of
this Lease, and (e) the non-performance of any of the terms and provisions of
any and all existing and future subleases of the Leased Property to be performed
by the landlord thereunder and (f) the gross negligent acts and omissions and
wilful misconduct of Lessee.
Lessor shall indemnify, save harmless and defend Lessee Indemnified
Parties from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses imposed upon or incurred by or
asserted against Lessee Indemnified Parties as a result of the gross negligence
or willful misconduct of Lessor arising in connection with this Lease. The
Lessor's obligations to indemnify Lessee Indemnified Parties shall be limited to
the value of Lessor's equity interest in the Facilities. Nothing herein shall be
construed as requiring Lessor to indemnify a Lessee Indemnified Party against
its own grossly negligent acts and omissions and wilful misconduct.
Any amounts that become payable by an Indemnifying Party under this
Section shall be paid within ten days after liability therefor on the part of
the Indemnifying Party is determined by litigation or otherwise, and if not
timely paid, shall bear a late charge (to the extent permitted by law) at the
Overdue Rate from the date of such determination to the date of payment. An
Indemnifying Party, at its expense, shall contest, resist and defend any such
claim, action or proceeding asserted or instituted against the Indemnified
Party. The Indemnified Party, at its expense, shall be entitled to participate
in any such claim, action, or proceeding, and neither the Indemnifying Party nor
the Indemnified Party may compromise or otherwise dispose of the same without
the consent of the Indemnified Party or the Indemnifying Party, which may not be
unreasonably withheld. Nothing herein shall be construed as indemnifying a
Lessor Indemnified Party against its own grossly negligent acts or omissions or
willful misconduct.
Lessee's or Lessor's liability for a breach of the provisions of this
Article shall survive any termination of this Lease.
ARTICLE XXIII
23.1 Subletting and Assignment. Subject to the provisions of Article
and Section and any other express conditions or limitations set forth herein,
Lessee may not without the consent of Lessor, which consent may be withheld in
Lessor's sole discretion, (a) assign this Lease or sublet all or any part of the
Leased Property or (b) sublet any retail or restaurant portion of the
50
<PAGE>
Leased Improvements in the normal course of the Primary Intended Use; provided
that any subletting to any party other than an Affiliate of Lessee shall not
individually as to any one such subletting, or in the aggregate, materially
diminish the actual or potential Percentage Rent payable under this Lease. In
the case of a subletting, the sublessee shall comply with the provisions of
Section , and in the case of an assignment, the assignee shall assume in writing
and agree to keep and perform all of the terms of this Lease on the part of
Lessee to be kept and performed and shall be, and become, jointly and severally
liable with Lessee for the performance thereof. Notwithstanding the above,
Lessee may assign the Lease to Humphrey Hotels, Inc. without the consent of
Lessor; provided that any such assignee assumes in writing and agrees to keep
and perform all of the terms of the Lease on the part of the Lessee to be kept
and performed and shall be and become jointly and severally liable with Lessee
for the performance thereof. In case of either an assignment or subletting made
during the Term, Lessee shall remain primarily liable, as principal rather than
as surety, for the prompt payment of the Rent and for the performance and
observance of all of the covenants and conditions to be performed by Lessee
hereunder. An original counterpart of each such sublease and assignment and
assumption, duly executed by Lessee and such sublessee or assignee, as the case
may be, in form and substance satisfactory to Lessor, shall be delivered
promptly to Lessor.
23.2 Attornment. Lessee shall insert in each sublease permitted under
Section 23.1 provisions to the effect that (a) such sublease is subject and
subordinate to all of the terms and provisions of this Lease and to the rights
of Lessor hereunder, (b) if this Lease terminates before the expiration of such
sublease, the sublessee thereunder will, at Lessor's option, attorn to Lessor
and waive any right the sublessee may have to terminate the sublease or to
surrender possession thereunder as a result of the termination of this Lease,
and (c) if the sublessee receives a written Notice from Lessor or Lessor's
assignees, if any, stating that an uncured Event of Default exists under this
Lease, the sublessee shall thereafter be obligated to pay all rentals accruing
under said sublease directly to the party giving such Notice, or as such party
may direct. All rentals received from the sublessee by Lessor or Lessor's
assignees, if any, as the case may be, shall be credited against the amounts
owing by Lessee under this Lease.
ARTICLE XXIV
Officer's Certificates; Financial Statements; Lessor's
Estoppel Certificates and Covenants.
(a) At any time and from time to time upon not less than 30
days Notice by Lessor, Lessee will furnish to Lessor an
51
<PAGE>
Officer's Certificate certifying that this Lease is unmodified and in full force
and effect (or that this Lease is in full force and effect as modified and
setting forth the modifications), the date to which the Rent has been paid,
whether to the knowledge of Lessee there is any existing default or Event of
Default hereunder by Lessor or Lessee, and such other information as may be
reasonably requested by Lessor. Any such certificate furnished pursuant to this
Section may be relied upon by Lessor, any lender and any prospective purchaser
of the Leased Property.
(b) Lessee will furnish the following statements to Lessor:
(1) with reasonable promptness, such
information respecting the financial condition and
affairs of Lessee, including audited financial
statements prepared by the same certified independent
accounting firm that prepares the returns for Lessor
or such other accounting firm as may be approved by
Lessor, as Lessor may request from time to time; and
(2) the most recent Consolidated Financials
of Lessee within 45 days after each quarter of any
Fiscal Year (or, in the case of the final quarter in
any Fiscal Year, the most recent audited Consolidated
Financials of Lessee within 90 days); and
(3) on or about the 15th day of each month,
a detailed profit and loss statement for the Leased
Property for the preceding month, a balance sheet for
the Leased Property as of the end of the preceding
month, and a detailed accounting of revenues for the
Leased Property for the preceding month, each in form
acceptable to Lessor.
(c) At any time and from time to time upon not less than 10
days Notice by Lessee, Lessor will furnish to Lessee or to any person designated
by Lessee an estoppel certificate certifying that this Lease is unmodified and
in full force and effect (or that this Lease is in full force and effect as
modified and setting forth the modifications), the date to which Rent has been
paid, whether to the knowledge of Lessor there is any existing default or Event
of Default on Lessee's part hereunder, and such other information as may be
reasonably requested by Lessee.
(d) Lessee covenants that during the Term it will maintain a
ratio of total debt-to-Consolidated Net Worth of 25% or
52
<PAGE>
less, exclusive of capitalized leases on an annual basis as of
June 30, 1994.
ARTICLE XXV
Lessor's Right to Inspect. Lessee shall permit Lessor and its
authorized representatives as frequently as reasonably requested by Lessor to
inspect the Leased Property and Lessee's accounts and records pertaining thereto
and make copies thereof, during usual business hours upon reasonable advance
notice, subject only to any business confidentiality requirements reasonably
requested by Lessee.
ARTICLE XXVI
No Waiver. No failure by Lessor or Lessee to insist upon the strict
performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof, and no acceptance of full or partial payment
of Rent during the continuance of any such breach, shall constitute a waiver of
any such breach or of any such term. To the extent permitted by law, no waiver
of any breach shall affect or alter this Lease, which shall continue in full
force and effect with respect to any other then existing or subsequent breach.
ARTICLE XXVII
Remedies Cumulative. To the extent permitted by law, each legal,
equitable or contractual right, power and remedy of Lessor or Lessee now or
hereafter provided either in this Lease or by statute or otherwise shall be
cumulative and concurrent and shall be in addition to every other right, power
and remedy and the exercise or beginning of the exercise by Lessor or Lessee of
any one or more of such rights, powers and remedies shall not preclude the
simultaneous or subsequent exercise by Lessor or Lessee of any or all of such
other rights, powers and remedies.
ARTICLE XXVIII
Acceptance of Surrender. No surrender to Lessor of this Lease or of the
Leased Property or any part thereof, or of any interest therein, shall be valid
or effective unless agreed to and accepted in writing by Lessor and no act by
Lessor or any representative or agent of Lessor, other than such a written
acceptance by Lessor, shall constitute an acceptance of any such surrender.
53
<PAGE>
ARTICLE XXIX
No Merger of Title. There shall be no merger of this Lease or of the
leasehold estate created hereby by reason of the fact that the same person or
entity may acquire, own or hold, directly or indirectly: (a) this Lease or the
leasehold estate created hereby or any interest in this Lease or such leasehold
estate and (b) the fee estate in the Leased Property.
ARTICLE XXX
Conveyance by Lessor. If Lessor or any successor owner of the Leased
Property conveys the Leased Property in accordance with the terms hereof other
than as security for a debt, and the grantee or transferee of the Leased
Property expressly assumes all obligations of Lessor hereunder arising or
accruing from and after the date of such conveyance or transfer, Lessor or such
successor owner, as the case may be, shall thereupon be released from all future
liabilities and obligations of Lessor under this Lease arising or accruing from
and after the date of such conveyance or other transfer as to the Leased
Property and all such future liabilities and obligations shall thereupon be
binding upon the new owner.
Other Interests. This Lease and Lessee's interest hereunder shall at
all times be subject and subordinate to the lien and security title of any deeds
to secure debt, deeds of trust, mortgages, or other interests heretofore or
hereafter granted by Lessor or which otherwise encumber or affect the Leased
Property and to any and all advances to be made thereunder and to all renewals,
modifications, consolidations, replacements, substitutions, and extensions
thereof (all of which are herein called the "Mortgage"). In confirmation of such
subordination, however, Lessee shall, at Lessor's request, promptly execute,
acknowledge and deliver any instrument which may be required to evidence
subordination to any Mortgage and attornment to the holder thereof, conditioned
upon receipt of a nondisturbance clause. In the event of Lessee's failure to
deliver such subordination and if the Mortgage does not change any term of the
Lease, Lessor may, in addition to any other remedies for breach of covenant
hereunder, execute, acknowledge, and deliver the instrument as the agent or
attorney-in-fact of Lessee, and Lessee hereby irrevocably constitutes Lessor its
attorney-in-fact for such purpose, Lessee acknowledging that the appointment is
coupled with an interest and is irrevocable. Lessee hereby waives and releases
any claim it might have against Lessor or any other party for any actions
lawfully taken by the holder of any Mortgage.
ARTICLE XXXI
54
<PAGE>
Quiet Enjoyment. So long as Lessee pays all Rent as the same becomes
due and complies with all of the terms of this Lease and performs its
obligations hereunder, in each case within the applicable grace periods, if any,
Lessee shall peaceably and quietly have, hold and enjoy the Leased Property for
the Term hereof, free of any claim or other action by Lessor or anyone claiming
by, through or under Lessor, but subject to all liens and encumbrances subject
to which the Leased Property was conveyed to Lessor or hereafter consented to by
Lessee or provided for herein. Notwithstanding the foregoing, Lessee shall have
the right by separate and independent action to pursue any claim it may have
against Lessor as a result of a breach by Lessor of the covenant of quiet
enjoyment contained in this Section.
ARTICLE XXXII
Notices. All notices, demands, requests, consents approvals and other
communications ("Notice" or "Notices") hereunder shall be in writing and
personally served or mailed (by registered or certified mail, return receipt
requested and postage prepaid), if to Lessor at 12301 Old Columbia Pike, Silver
Spring, Maryland 33487, and if to Lessee at 12301 Old Columbia Pike, Silver
Spring, Maryland 33487, or to such other address or addresses as either party
may hereafter designate. Personally delivered Notice shall be effective upon
receipt, and Notice given by mail shall be complete at the time of deposit in
the U.S. Mail system, but any prescribed period of Notice and any right or duty
to do any act or make any response within any prescribed period or on a date
certain after the service of such Notice given by mail shall be extended five
days.
ARTICLE XXXIII
Appraisers. If it becomes necessary to determine the Fair Market Value
or Fair Market Rental of the Leased Property for any purpose of this Lease, the
party required or permitted to give Notice of such required determination shall
include in the Notice the name of a person selected to act as appraiser on its
behalf. Within 20 days after Notice, Lessor (or Lessee, as the case may be)
shall by Notice to Lessee (or Lessor, as the case may be) appoint a second
person as appraiser on its behalf. The appraisers thus appointed, each of whom
must be a member of the American Institute of Real Estate Appraisers (or any
successor organization thereto) with at least five years experience in the State
appraising property similar to the Leased Property, shall, within 45 days after
the date of the Notice appointing the first appraiser, proceed to appraise the
Leased Property to determine the Fair Market Value or Fair Market Rental thereof
as of the relevant date
55
<PAGE>
(giving effect to the impact, if any, of inflation from the date of their
decision to the relevant date); provided, however, that if only one appraiser
shall have been so appointed, then the determination of such appraiser shall be
final and binding upon the parties. To the extent consistent with sound
appraisal practice as then existing at the time of any such appraisal, such
appraisal shall be made on a basis consistent with the basis on which the Leased
Property was appraised for purposes of determining its Fair Market Value at the
time the Leased Property was acquired by Lessor. If two appraisers are appointed
and if the difference between the amounts so determined does not exceed 5% of
the lesser of such amounts, then the Fair Market Value or Fair Market Rental
shall be an amount equal to 50% of the sum of the amounts so determined. If the
difference between the amounts so determined exceeds 5% of the lesser of such
amounts, then such two appraisers shall have 20 days to appoint a third
appraiser. If no such appraiser shall have been appointed within such 20 days or
within 90 days of the original request for a determination of Fair Market Value
or Fair Market Rental, whichever is earlier, either Lessor or Lessee may apply
to any court having jurisdiction to have such appointment made by such court.
Any appraiser appointed by the original appraisers or by such court shall be
instructed to determine the Fair Market Value or Fair Market Rental within 45
days after appointment of such appraiser. The determination of the appraiser
which differs most in the terms of dollar amount from the determinations of the
other two appraisers shall be excluded, and 50% of the sum of the remaining two
determinations shall be final and binding upon Lessor and Lessee as the Fair
Market Value or Fair Market Rental of the Leased Property, as the case may be.
This provision for determining by appraisal shall be specifically enforceable to
the extent such remedy is available under applicable law, and any determination
hereunder shall be final and binding upon the parties except as otherwise
provided by applicable law. Lessor and Lessee shall each pay the fees and
expenses of the appraiser appointed by it and each shall pay one-half of the
fees and expenses of the third appraiser and one-half of all other costs and
expenses incurred in connection with each appraisal.
ARTICLE XXXIV
34.1 Lessor May Grant Liens. Without the consent of Lessee, Lessor may,
subject to the terms and conditions set forth below in this Section , from time
to time, directly or indirectly, create or otherwise cause to exist any lien,
encumbrance or title retention agreement ("Encumbrance") upon the Leased
Property, or any portion thereof or interest therein, whether to secure any
borrowing or other means of financing or refinancing. Any such Encumbrance shall
(a) contain the right to prepay (whether or not subject to a prepayment
penalty); (b) provide that it is subject to
56
<PAGE>
the rights of Lessee under this Lease and (c) contain the Agreement by the
holder of the Encumbrance that it will (1) give Lessee the same notice, if any,
given to Lessor of any default or acceleration of any obligation underlying any
such Encumbrance or any sale in foreclosure under such Encumbrance, (2) permit
Lessee to cure any such default on Lessor's behalf within any applicable cure
period, and Lessee shall be reimbursed by Lessor for any and all costs incurred
in effecting such cure, including without limitation out-of-pocket costs
incurred to effect any such cure (including reasonable attorneys' fees) and (3)
permit Lessee to appear by its representative and to bid at any sale in
foreclosure made with respect to any such Encumbrance. Upon the request of
Lessor, Lessee shall subordinate this Lease to the lien of a new mortgage on the
Leased Property and agree to attorn to the new mortgagee, on the condition that
the proposed mortgagee executes a non-disturbance agreement recognizing this
Lease, and agreeing, for itself and its successors and assigns, to comply with
the provisions of this Article XXXIV.
34.2 Lessee's Right to Cure. Subject to the provisions of Section , if
Lessor breaches any covenant to be performed by it under this Lease, Lessee,
after Notice to and demand upon Lessor, without waiving or releasing any
obligation hereunder, and in addition to all other remedies available to Lessee,
may (but shall be under no obligation at any time thereafter to) make such
payment or perform such act for the account and at the expense of Lessor. All
sums so paid by Lessee and all costs and expenses (including, without
limitation, reasonable attorneys' fees) so incurred, together with interest
thereon at the Overdue Rate from the date on which such sums or expenses are
paid or incurred by Lessee, shall be paid by Lessor to Lessee on demand or,
following entry of a final, nonappealable judgment against Lessor for such sums,
may be offset by Lessee against the Rent payments next accruing or coming due.
The rights of Lessee hereunder to cure and to secure payment from Lessor in
accordance with this Section shall survive the termination of this Lease with
respect to the Leased Property.
34.3 Breach by Lessor. It shall be a breach of this Lease if Lessor
fails to observe or perform any term, covenant or condition of this Lease on its
part to be performed and such failure continues for a period of 30 days after
Notice thereof from Lessee, unless such failure cannot with due diligence be
cured within a period of 30 days, in which case such failure shall not be deemed
to continue if Lessor, within such 30-day period, proceeds promptly and with due
diligence to cure the failure and diligently completes the curing thereof. The
time within which Lessor shall be obligated to cure any such failure also shall
be subject to extension of time due to the occurrence of any Unavoidable Delay.
57
<PAGE>
ARTICLE XXXV
35.1 Miscellaneous. Anything contained in this Lease to the contrary
notwithstanding, all claims against, and liabilities of, Lessee or Lessor
arising prior to any date of termination of this Lease shall survive such
termination. If any term or provision of this Lease or any application thereof
is invalid or unenforceable, the remainder of this Lease and any other
application of such term or provisions shall not be affected thereby. If any
late charges or any interest rate provided for in any provision of this Lease
are based upon a rate in excess of the maximum rate permitted by applicable law,
the parties agree that such charges shall be fixed at the maximum permissible
rate. Neither this Lease nor any provision hereof may be changed, waived,
discharged or terminated except by a written instrument in recordable form
signed by Lessor and Lessee. All the terms and provisions of this Lease shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns. The headings in this Lease are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof. This
Lease shall be governed by and construed in accordance with the laws of the
State, but not including its conflicts of laws rules.
35.2 Transition Procedures. Upon the expiration or termination of the
Term of this Lease, for whatever reason, Lessor and Lessee shall do the
following (and the provisions of this Section 35.2 shall survive the expiration
or termination of this Agreement until they have been fully performed) and, in
general, shall cooperate in good faith to effect an orderly transition of the
management lease or of the Facility.
(a) Transfer of Licenses. Upon the expiration or earlier
termination of the Term, Lessee shall use its best efforts (i) to transfer to
Lessor or Lessor's nominee all licenses, operating permits and other
governmental authorizations and all contracts, including contracts with
governmental or quasi-governmental entities, that may be necessary for the
operation of the Facility, including any Franchise Agreement (collectively,
"Licenses"), or (ii) if such transfer is prohibited by law or Lessor otherwise
elects, to cooperate with Lessor or Lessor's nominee in connection with the
processing by Lessor or Lessor's nominee of any applications for, all Licenses;
provided, in either case, that the costs and expenses of any such transfer or
the processing of any such application shall be paid by Lessor or Lessor's
nominee.
(b) Leases and Concessions. Lessee shall assign to Lessor or
Lessor's nominee simultaneously with the termination of this Agreement, and the
assignee shall assume all leases and
58
<PAGE>
concession agreements in effect with respect to the Facility then
in Lessee's name.
(c) Books and Records. All books and records for the Facility
kept by Lessee pursuant to Section 3.7 shall be delivered promptly to Lessor or
Lessor's nominee, simultaneously with the termination of this Agreement, but
such books and records shall thereafter be available to Lessee at all reasonable
times for inspection, audit, examination, and transcription for a period of one
(1) year and Lessee may retain (on a confidential basis) copies or computer
records thereof.
(d) Remittance. Lessee shall remit to Lessor or Lessor's
nominee, simultaneously with the termination of this Lease, all funds remaining,
if any, after payment of all accrued Gross Operating Expenses, and other amounts
due Lessee and after deducting the costs of any scheduled repair, replacement,
or refurbishment of Furniture and Equipment with respect to which deposits have
been made.
35.3 Waiver of Presentment, etc. Lessee waives all presentments,
demands for payment and for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance and waives
all notices of the existence, creation, or incurring of new or additional
obligations, except as expressly granted herein.
ARTICLE XXXVI
Memorandum of Lease. Lessor and Lessee shall promptly upon the request
of either enter into a short form memorandum of this Lease, in form suitable for
recording under the laws of the State in which reference to this Lease, and all
options contained herein, shall be made. Lessee shall pay all costs and expenses
of recording such memorandum of this Lease.
ARTICLE XXXVII
Lessor's Option to Purchase Assets of Lessee. Effective on not less
than 90 days prior Notice given at any time within 180 days before the
expiration of the Term, but not later than 90 days prior to such expiration, or
upon such shorter Notice period as shall be appropriate if this Lease is
terminated prior to its expiration date, Lessor shall have the option to
purchase all (but not less than all) of the assets of Lessee, tangible and
intangible, relating to the Leased Property (other than this Lease), at the
expiration or termination of this Lease for an
59
<PAGE>
amount (payable in cash on the expiration date of this Lease) equal to the fair
market value thereof as appraised in conformity with Article , except that the
appraisers need not be members of the American Institute of Real Estate
Appraisers, but rather shall be appraisers having at least ten years experience
in valuing similar assets. Notwithstanding any such purchase, Lessor shall
obtain no rights to any trade name or logo used in connection with the Franchise
Agreement unless separate agreement as to such use is reached with the
applicable franchisor.
ARTICLE XXXVIII
Lessor's Option to Terminate Lease. In the event Lessor enters into a
bona fide contract to sell the Leased Property to a non-Affiliate, Lessor may
terminate the Lease by giving not less than 30 days prior Notice to Lessee of
Lessor's election to terminate the Lease effective upon the closing under such
contract or Lessor may convey the Lease pursuant to Article XXX. Effective upon
such closing, this Lease shall terminate and be of no further force and effect
except as to any obligations of the parties existing as of such date that
survive termination of this Lease. As compensation for the early termination of
its leasehold estate under this Article , Lessor shall within six months of such
closing either (a) pay to Lessee the fair market value of Lessee's leasehold
estate hereunder or (b) offer to lease to Lessee one or more substitute hotel
facilities pursuant to one or more leases that would create for the Lessee
leasehold estates that have an aggregate fair market value of no less than the
fair market value of Lessee's leasehold estate hereunder, with the fair market
value of Lessee's leasehold estate hereunder determined as of the closing of the
sale of the Leased Property. If Lessor elects and complies with the option
described in (b) above, regardless of whether Lessee enters into the lease(s)
described therein, Lessor shall have no further obligations to Lessee with
respect to compensation for the early termination of this Lease. In the event
Lessor and Lessee are unable to agree upon the fair market value of an original
or replacement leasehold estate within 30 days, it shall be determined by
appraisal using the appraisal procedure set forth in Article .
For the purposes of this Section, fair market value of the leasehold
estate means, as applicable, an amount equal to the price that a willing buyer
not compelled to buy would pay a willing seller not compelled to sell for
Lessee's leasehold estate under this Lease or an offered replacement leasehold
estate.
60
<PAGE>
ARTICLE XXXIX
Compliance with Franchise Agreement. To the extent any of the
provisions of the Franchise Agreement impose a greater obligation on Lessee than
the corresponding provisions of the Lease, then Lessee shall be obligated to
comply with, and to take all reasonable actions necessary to prevent breaches or
defaults under, the provisions of the Franchise Agreement. It is the intent of
the parties hereto that, except as otherwise specifically provided by this
Lease, Lessee shall comply in every respect with the provisions of the Franchise
Agreement so as to avoid any default thereunder during the term of this Lease.
Lessor and Lessee agree to cooperate fully with each other in the event it
becomes necessary to obtain a franchise extension or modification or a new
franchise for the Leased Property.
ARTICLE XL
40.1 Room Set-Aside. Lessee is obligated to repair or replace in any
Fiscal Year Fixtures and Furniture and Equipment (i) as required by the terms of
any Franchise Agreement, (ii) as required by Article IX and Article XXXIX and
(iii) otherwise when and in a manner it deems fit, to the extent funds are
available therefor from amounts the Lessor is obligated to make available to
Lessee under this Section 40.1 or otherwise makes available to Lessee. During
the Term Lessor shall be obligated to make available to Lessee for repairing or
replacing Fixtures and Furniture and Equipment an amount equal to 4% of Room
Revenues from the Facility for the period ending December 31, 19__ and 4% of
Room Revenues from the Facility for each twelve month period thereafter. Lessor
shall be required to make such amounts available to Lessee on a quarterly basis.
Upon written request by Lessee to Lessor stating the specific use to be made and
the reasonable approval thereof by Lessor, such funds shall be made available by
Lessor for use by Lessee for periodic repairing or replacement of Fixtures and
Furniture and Equipment that constitute Leased Property in connection with the
Primary Intended Use. Lessor's obligation shall be cumulative, but not
compounded, and any amounts that have accrued hereunder shall be payable in
future periods for such uses and in accordance with the procedure set forth
herein. Lessee shall be obligated to return any funds forwarded by Lessor
pursuant to this Section 40.1, but not spent for (i) repair or replacement of
Fixtures and Furniture and Equipment that constitute Leased Property in
connection with the Primary Intended Use or (ii) Capital Expenditures pursuant
to Section 40.2. Other than as specifically set forth above in this Section
40.1, Lessee shall have no interest in any accrued obligation of Lessor
hereunder and Lessor shall have no obligation to segregate or separate any such
funds for the benefit of Lessee.
61
<PAGE>
40.2 Capital Expenditures. Lessor shall be
obligated to pay the actual costs of any items that are classified as capital
items under U.S. generally accepted accounting principles which are necessary
for the continued operation of the Facility and otherwise approved by Lessor. To
the extent that at the end of a Fiscal Year the amount set aside exceeds the
amount spent on repair or replacement of Fixtures and Furniture and Equipment,
the Lessee may apply such excess amount towards Lessor's obligations under
Section 40.2.
40.3 Prohibited Expenditures. No amounts made available under this
Article shall be used to purchase property (other than "real property" within
the meaning of Treasury Regulations Section 1.856- 3(d)), to the extent that
doing so would cause the Lessor to recognize income other than "rents from real
property" as defined in Section 856(d) of the Code.
62
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease by their duly
authorized officers as of the date first above written.
HUMPHREY HOSPITALITY LIMITED PARTNERSHIP
By: Humphrey Hospitality Trust, Inc.
Its: General Partner
By: __________________________________
James I. Humphrey, Jr.
Title: President
HUMPHREY HOSPITALITY MANAGEMENT, INC.
By:_____________________________________
Randy Smith
Title: President
<PAGE>
Exhibit A
PROPERTY DESCRIPTION
Exhibit 10.31
LEASE AGREEMENT
DATED AS OF DECEMBER 23, 1996
BETWEEN
HUMPHREY HOSPITALITY LIMITED PARTNERSHIP
AS LESSOR
AND
HUMPHREY HOSPITALITY MANAGEMENT, INC.
(COMFORT SUITES-DOVER DELAWARE)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C>
ARTICLE I.............................................................................................. 1
1.1 Leased Property...................................................................... 1
1.2 Term................................................................................. 2
ARTICLE II............................................................................................. 2
Definitions................................................................................... 2
ARTICLE III............................................................................................ 14
3.1 Rent................................................................................. 14
3.2 Additional Charges................................................................... 14
3.3 Lease Provision...................................................................... 15
3.4 Conversion of Property............................................................... 15
3.5 Annual Budget........................................................................ 15
3.6 Books and Records.................................................................... 16
ARTICLE IV............................................................................................. 16
4.1 Payment of Impositions............................................................... 16
4.2 Notice of Impositions................................................................ 18
4.3 Adjustment of Impositions............................................................ 18
4.5 Insurance Premiums................................................................... 18
ARTICLE V.............................................................................................. 18
5.1 No Termination, Abatement, etc....................................................... 18
5.2 Abatement Procedures................................................................. 19
ARTICLE VI............................................................................................. 19
6.1 Ownership of the Leased Property..................................................... 19
6.2 Lessee's Personal Property........................................................... 19
6.3 Lessor's Lien........................................................................ 20
ARTICLE VII............................................................................................ 20
7.1 Condition of the Leased Property..................................................... 20
7.2 Use of the Leased Property........................................................... 21
7.3 Lessor to Grant Easements, etc....................................................... 22
ARTICLE VIII........................................................................................... 23
8.1 Compliance with Legal and Insurance Requirements,
etc........................................................................................... 23
8.2 Legal Requirement Covenants.......................................................... 23
8.3 Environmental Covenants.............................................................. 24
ARTICLE IX............................................................................................. 26
9.1 Capital Improvements, Maintenance and Repair......................................... 26
9.2 Encroachments, Restrictions, Etc..................................................... 28
ARTICLE X.............................................................................................. 29
10.1 Alterations.......................................................................... 29
10.2 Salvage.............................................................................. 29
10.3 Joint Use Agreements................................................................. 29
<PAGE>
ARTICLE XI............................................................................................. 29
Liens......................................................................................... 29
ARTICLE XII............................................................................................ 30
Permitted Contests............................................................................ 30
ARTICLE XIII........................................................................................... 31
13.1 General Insurance Requirements....................................................... 31
13.2 Replacement Cost..................................................................... 33
13.3 Worker's Compensation................................................................ 33
13.4 Waiver of Subrogation................................................................ 33
13.5 Form Satisfactory, etc............................................................... 33
13.6 Change in Limits..................................................................... 34
13.7 Blanket Policy....................................................................... 34
13.9 Reports On Insurance Claims.......................................................... 35
ARTICLE XIV............................................................................................ 35
14.1 Insurance Proceeds................................................................... 35
14.2 Reconstruction in the Event of Damage or
Destruction Covered by Insurance.............................................................. 35
14.3 Reconstruction in the Event of Damage or
Destruction Not Covered by Insurance.......................................................... 37
14.4 Lessee's Property.................................................................... 37
14.5 Damage Near End of Term.............................................................. 37
14.6 Waiver............................................................................... 38
ARTICLE XV............................................................................................. 38
15.1 Definitions.......................................................................... 38
15.2 Parties' Rights and Obligations...................................................... 38
15.3 Total Taking......................................................................... 38
15.4 Allocation of Award.................................................................. 39
15.5 Partial Taking....................................................................... 39
15.6 Temporary Taking..................................................................... 39
15.7 Lessee's Offer....................................................................... 40
ARTICLE XVI............................................................................................ 40
16.1 Events of Default.................................................................... 40
16.2 Surrender............................................................................ 42
16.3 Damages.............................................................................. 42
16.4 Waiver............................................................................... 43
16.5 Application of Funds................................................................. 43
ARTICLE XVII........................................................................................... 43
Lessor's Right to Cure Lessee's Default....................................................... 43
ARTICLE XVIII.......................................................................................... 44
Provisions Relating to Purchase of the Leased Property........................................ 44
ARTICLE XIX............................................................................................ 45
19.1 Personal Property Limitation......................................................... 45
ii
<PAGE>
19.2 Sublease Rent Limitation............................................................. 45
19.3 Sublease Tenant Limitation........................................................... 45
19.4 Lessee Ownership Limitation.......................................................... 45
19.5 Lessee Officer and Employee Limitation............................................... 45
ARTICLE XX............................................................................................. 46
Holding Over.................................................................................. 46
ARTICLE XXI............................................................................................ 46
Risk of Loss.................................................................................. 46
ARTICLE XXII........................................................................................... 47
Indemnification............................................................................... 47
ARTICLE XXIII.......................................................................................... 48
23.1 Subletting and Assignment............................................................ 48
23.2 Attornment........................................................................... 49
ARTICLE XXIV........................................................................................... 49
Officer's Certificates; Financial Statements; Lessor's
Estoppel Certificates and Covenants........................................................... 49
ARTICLE XXV............................................................................................ 50
Lessor's Right to Inspect..................................................................... 50
ARTICLE XXVI........................................................................................... 50
No Waiver..................................................................................... 50
ARTICLE XXVII.......................................................................................... 51
Remedies Cumulative........................................................................... 51
ARTICLE XXVIII......................................................................................... 51
Acceptance of Surrender....................................................................... 51
ARTICLE XXIX........................................................................................... 51
No Merger of Title............................................................................ 51
ARTICLE XXX............................................................................................ 51
Conveyance by Lessor.......................................................................... 51
Other Interests............................................................................... 52
ARTICLE XXXI........................................................................................... 52
Quiet Enjoyment............................................................................... 52
ARTICLE XXXII.......................................................................................... 52
Notices....................................................................................... 52
ARTICLE XXXIII......................................................................................... 53
Appraisers.................................................................................... 53
iii
<PAGE>
ARTICLE XXXIV.......................................................................................... 54
34.1 Lessor May Grant Liens............................................................... 54
34.2 Lessee's Right to Cure............................................................... 54
34.3 Breach by Lessor..................................................................... 55
ARTICLE XXXV........................................................................................... 55
35.1 Miscellaneous........................................................................ 55
35.2 Transition Procedures................................................................ 56
35.3 Waiver of Presentment, etc........................................................... 57
ARTICLE XXXVI.......................................................................................... 57
Memorandum of Lease........................................................................... 57
ARTICLE XXXVII......................................................................................... 57
Lessor's Option to Purchase Assets of Lessee.................................................. 57
ARTICLE XXXVIII........................................................................................ 57
Lessor's Option to Terminate Lease............................................................ 57
ARTICLE XXXIX.......................................................................................... 58
Compliance with Franchise Agreement........................................................... 58
ARTICLE XL............................................................................................. 58
40.1 Room Set-Aside....................................................................... 58
40.2 Capital Expenditures................................................................. 59
40.3 Prohibited Expenditures.............................................................. 59
</TABLE>
iv
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT (hereinafter called "Lease"), made as of the 23rd
day of December 1996, by and between HUMPHREY HOSPITALITY LIMITED PARTNERSHIP, a
Virginia limited partnership (hereinafter called "Lessor"), and HUMPHREY
HOSPITALITY MANAGEMENT, INC., a Maryland corporation (hereinafter called
"Lessee"), provides as follows.
W I T N E S S E T H:
Contemporaneously with the execution hereof, Lessor acquired the
"Leased Property".
In furtherance of the consummation of such transaction, Lessor and
Lessee wish to enter into this Lease.
NOW, THEREFORE, Lessor, in consideration of the payment of rent by
Lessee to Lessor, the covenants and agreements to be performed by Lessee, and
upon the terms and conditions hereinafter stated, does hereby rent and lease
unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased
Property.
ARTICLE I
1.1 Leased Property. The leased property (the "Leased
Property") is comprised of Lessor's interest in the following:
(a) the land described in Exhibit "A" attached hereto
and by reference incorporated herein (the "Land");
(b) all buildings, structures and other improvements of every
kind including, but not limited to, alleyways and connecting tunnels, sidewalks,
utility pipes, conduits and lines (on-site and offsite), parking areas and
roadways appurtenant to such buildings and structures presently situated upon
the Land (collectively, the "Leased Improvements");
(c) all easements, rights and appurtenances relating to
the Land or the Leased Improvements;
(d) all equipment, machinery, fixtures, and other items of
property required for or incidental to the use of the Leased Improvements as a
hotel, including all components thereof, now and hereafter permanently affixed
to or incorporated into the Leased Improvements, including, without limitation,
all furnaces, boilers, heaters, electrical equipment, heating, plumbing,
lighting, ventilating, refrigerating, incineration, air and water pollution
control, waste disposal, air-cooling and air-conditioning systems and apparatus,
sprinkler systems and fire and theft protection
1
<PAGE>
equipment, all of which to the greatest extent permitted by law are hereby
deemed by the parties hereto to constitute real estate, together with all
replacements, modifications, alterations and additions thereto (collectively,
the "Fixtures");
(e) all furniture and furnishings and all other items of
personal property (excluding Inventory and personal property owned by Lessee)
located on, and used in connection with, the operation of the Leased
Improvements as a hotel, together with all replacements, modifications,
alterations and additions thereto; and
(f) all existing leases of space within the Leased Property
(including any security deposits or collateral held by Lessor pursuant thereto).
THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION
OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF
PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL
COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS OF RECORD
INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS,
MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH
WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE
SURVEY THEREOF.
1.2 Term. The term of the Lease (the "Term") shall commence on the date
hereof (the "Commencement Date") and shall end on the tenth anniversary of the
last day of the month in which the Commencement Date occurs unless the Lessee
chooses to renew the Lease for an additional five years, unless sooner
terminated in accordance with the provisions hereof.
ARTICLE II
Definitions. For all purposes of this Lease, except as otherwise
expressly provided or unless the context otherwise requires, (a) the terms
defined in this Article have the meanings assigned to them in this Article and
include the plural as well as the singular, (b) all accounting terms not
otherwise defined herein have the meanings assigned to them in accordance with
generally accepted accounting principles as are at the time applicable, (c) all
references in this Lease to designated "Articles," "Sections" and other
subdivisions are to the designated Articles, Sections and other subdivisions of
this Lease and (d) the words "herein," "hereof" and "hereunder" and other words
of similar import refer to this Lease as a whole and not to any particular
Article, Section or other subdivision:
Additional Charges: As defined in Section 3.3.
2
<PAGE>
Affiliate: As used in this Lease the term "Affiliate" of a person shall
mean (a) any person that, directly or indirectly, controls or is controlled by
or is under common control with such person, (b) any other person that owns,
beneficially, directly or indirectly, five percent or more of the outstanding
capital stock, shares or equity interests of such person, or (c) any officer,
director, employee, partner or trustee of such person or any person controlling,
controlled by or under common control with such person (excluding trustees and
persons serving in similar capacities who are not otherwise an Affiliate of such
person). The term "person" means and includes individuals, corporations, general
and limited partnerships, limited liability companies, stock companies or
associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts, or other entities and governments and
agencies and political subdivisions thereof. For the purposes of this
definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
through the ownership of voting securities, partnership interests or other
equity interests.
Annual Budget: As used in this Lease, the term "Annual Budget" shall
mean an operating and capital budget prepared by Lessee and delivered to Lessor
in accordance with Section 3.5.
Award: As defined in Section 15.1(c).
Base Rate: The rate of interest announced publicly by Citibank, N.A.,
in New York, New York, from time to time, as such bank's base rate. If no such
rate is announced or becomes discontinued, then such other rate as Lessor may
reasonably designate.
Base Rent: As defined in Section 3.1(a).
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that
is not a day on which national banks in the City of New York, New York, or in
the municipality wherein the Leased Property is located, are closed.
CERCLA: The Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
Code: The Internal Revenue Code of 1986, as amended.
Commencement Date: As defined in Section of the Lease.
Condemnation, Condemnor: As defined in Section 15.1.
3
<PAGE>
Consolidated Financials: For any fiscal year or other accounting period
for Lessee and its consolidated subsidiaries, statements of earnings and
retained earnings and of changes in financial position for such period and for
the period from the beginning of the respective fiscal year to the end of such
period and the related balance sheet as at the end of such period, together with
the notes thereto, all in reasonable detail and setting forth in comparative
form the corresponding figures for the corresponding period in the preceding
fiscal year, and prepared in accordance with generally accepted accounting
principles and audited by independent certified public accountants acceptable to
Lessor in its sole discretion.
Consolidated Net Worth: At any time, the sum of the following for
Lessee and any consolidated subsidiaries, on a consolidated basis determined in
accordance with generally accepted accounting principles:
(a) the amount of capital or stated capital (after deducting
the cost of any shares held in its treasury), plus
(b) the amount of capital surplus and retained earnings (or, in the
case of a capital or retained earnings deficit, minus the amount of such
deficit), minus
(c) the sum of the following (without duplication of deductions with
respect to items already deducted in arriving at surplus and retained earnings):
(1) unamortized debt discount and expense; and (2) any write-up in the book
value of assets resulting from a revaluation thereof subsequent to the date of
the most recent Consolidated Financials prior to the date thereof, except any
net write-up in value of foreign currency in accordance with generally accepted
accounting principles.
Consumer Price Index: The "Consumer Price Index" published by
the Bureau of Labor Statistics of the United States Department of
Labor, U.S. City Average, All Items for Urban Wage Earners and
Clerical Workers (1982-1984=100).
Date of Taking: As defined in Section 15.2(b).
Encumbrance: As defined in Section 34.1.
Environmental Authority: Any department, agency or other body
or component of any Government that exercises any form of
jurisdiction or authority under any Environmental Law.
Environmental Authorization: Any license, permit, order, approval,
consent, notice, registration, filing or other form of permission or
authorization required under any Environmental Law.
4
<PAGE>
Environmental Laws: All applicable federal, state, local and foreign
laws and regulations relating to pollution of the environment (including without
limitation, ambient air, surface water, ground water, land surface or subsurface
strata), including without limitation laws and regulations relating to
emissions, discharges, Releases or threatened Releases of Hazardous Materials or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials. Environmental
Laws include but are not limited to CERCLA, FIFRA, RCRA, SARA and TSCA.
Environmental Liabilities: Any and all obligations to pay the amount of
any judgment or settlement, the cost of complying with any settlement, judgment
or order for injunctive or other equitable relief, the cost of compliance or
corrective action in response to any notice, demand or request from an
Environmental Authority, the amount of any civil penalty or criminal fine, and
any court costs and reasonable amounts for attorney's fees, fees for witnesses
and experts, and costs of investigation and preparation for defense of any claim
or any Proceeding, regardless of whether such Proceeding is threatened, pending
or completed, that may be or have been asserted against or imposed upon Lessor,
Lessee, any Predecessor, the Leased Property or any property used therein and
arising out of:
(a) Failure of Lessee, Lessor, any Predecessor or the Leased
Property to comply at any time with all Environmental Laws;
(b) Presence of any Hazardous Materials on, in, under, at or
in any way affecting the Leased Property;
(c) A Release at any time of any Hazardous Materials on, in, at, under
or in any way affecting the Leased Property;
(d) Identification of Lessee, Lessor or any Predecessor as a
potentially responsible party under CERCLA or under any Environmental Law
similar to CERCLA;
(e) Presence at any time of any above-ground and/or underground storage
tanks, as defined in RCRA or in any applicable Environmental Law on, in, at or
under the Leased Property or any adjacent site or facility; or
(f) Any and all claims for injury or damage to persons or property
arising out of exposure to Hazardous Materials originating or located at the
Leased Property, or resulting from operation thereof or any adjoining property.
Event of Default: As defined in Section
5
<PAGE>
Facility: The hotel and/or other facility offering lodging and
other services or amenities being operated or proposed to be
operated on the Leased Property.
Fair Market Rental: The fair market rental of the Leased Property means
the rental which a willing tenant not compelled to rent would pay a willing
landlord not compelled to lease for the use and occupancy of such Leased
Property pursuant to the Lease for the term in question, (a) assuming that
Lessee is not in default thereunder and (b) determined in accordance with the
appraisal procedures set forth in Article XX or in such other manner as shall be
mutually acceptable to Lessor and Lessee.
Fair Market Value: The fair market value of the Leased Property means
an amount equal to the price that a willing buyer not compelled to buy would pay
a willing seller not compelled to sell for such Leased Property, (a) assuming
the same is unencumbered by this Lease, (b) determined in accordance with the
appraisal procedures set forth in Article XXXIII or in such other manner as
shall be mutually acceptable to Lessor and Lessee, (c) assuming that such seller
must pay customary closing costs and title premiums, and (d) taking into account
the positive or negative effect on the value of the Leased Property attributable
to the interest rate, amortization schedule, maturity date, prepayment penalty
and other terms and conditions of any encumbrance that is assumed by the
transferee. In addition, in determining the Fair Market Value with respect to
damaged or destroyed Leased Property such value shall be determined as if such
Leased Property had not been so damaged or destroyed.
FIFRA: The Federal Insecticide, Fungicide, and Rodenticide
Act, as amended.
Fiscal Year: The 12-month period from January 1 to
December 31.
Fixtures: As defined in Section 1.1.
Franchise Agreement: Any franchise agreement or license
agreement with a franchisor under which the Facility is operated.
Furniture and Equipment: For purposes of this Lease, the terms
"furniture and equipment" shall mean collectively all carpet, furniture,
furnishings, wall coverings, fixtures and hotel equipment and systems located
at, or used in connection with, the Facility, together with all replacements
therefor and additions thereto, including, without limitation, (i) all equipment
and systems required for the operation of kitchens, bars, if any, restaurants,
if any, and laundry and dry cleaning facilities, (ii) dining room wagons,
materials handling equipment, cleaning and
6
<PAGE>
engineering equipment, (iii) telephone and computerized accounting
systems, and (iv) vehicles.
Government: The United States of America, any state, district or
territory thereof, any foreign nation, any state, district, department,
territory or other political division thereof, or any political subdivision of
any of the foregoing.
Gross Operating Expenses: For purposes of this Lease, the term "Gross
Operating Expenses" shall mean all of the following with respect to the
Facility: reasonable and customary salaries and employee expense and payroll
taxes (including salaries, wages, bonuses and other compensation of all
employees at the Facility, and benefits including life, medical and disability
insurance and retirement benefits), expenditures described in Section 9.1,
operational supplies, utilities, insurance to be provided by Lessee under the
terms of this Agreement, governmental fees and assessments, food, beverages,
laundry service expense, the cost of Inventories and fixed asset supplies,
license fees, advertising, marketing, reservation systems and any and all other
operating expenses as are reasonably necessary for the proper and efficient
operation of the Facility incurred by Lessee in accordance with the provisions
hereof (excluding, however, (i) federal, state and municipal excise, sales and
use taxes collected directly from patrons and guests or as a part of the sales
price of any goods, services or displays, such as gross receipts, admissions,
cabaret or similar or equivalent taxes paid over to federal, state or municipal
governments, (ii) the cost of insurance to be provided under Article XIII, (iii)
expenditures by Lessor pursuant to Article XIII and (iv) payments on any
Mortgage or other mortgage or security instrument on the Facility); all
determined in accordance with generally accepted accounting principles and the
Uniform System. No part of Lessee's central office overhead or general or
administrative expense (as opposed to that of the Facility) shall be deemed to
be a part of Gross Operating Expenses, as herein provided. Reasonable
out-of-pocket expenses of Lessee incurred for the account of or in connection
with the Facility operations, including but not limited to postage, telephone
charges and reasonable travel expenses of employees, officers and other
representatives and consultants of Lessee and its Affiliates, shall be deemed to
be a part of Gross Operating Expenses and such persons shall be afforded
reasonable accommodations, food, beverages, laundry, valet and other such
services by and at the Facility without charge to such persons or Lessee.
Gross Operating Profit shall mean, for any Fiscal Year, the
excess of Gross Revenues for such Fiscal Year over Gross Operating
Expenses for such Fiscal Year.
7
<PAGE>
Gross Revenues: All revenues, receipts, and income of any kind derived
directly or indirectly by Lessee from or in connection with the Facility
(including rentals or other payments from tenants, lessees, licensees or
concessionaires but not including their gross receipts unless such party is an
Affiliate of the Lessee in which case the gross receipts shall be included)
whether on a cash basis or credit, paid or collected, determined in accordance
with generally accepted accounting principles and the Uniform System, excluding,
however: (i) funds furnished by Lessor, (ii) federal, state and municipal
excise, sales, and use taxes collected directly from patrons and guests or as a
part of the sales price of any goods, services or displays, such as gross
receipts, admissions, cabaret or similar or equivalent taxes and paid over to
federal, state or municipal governments, (iii) gratuities, (iv) proceeds of
insurance and condemnation, (v) proceeds from sales other than sales in the
ordinary course of business, (vi) all loan proceeds from financing or
refinancings of the Facility or interests therein or components thereof, (vii)
judgments and awards, except any portion thereof arising from normal business
operations of the hotel, and (viii) items constituting "allowances" under the
Uniform System.
Hazardous Materials: All chemicals, pollutants, contaminants,
wastes and toxic substances, including without limitation:
(a) Solid or hazardous waste, as defined in RCRA or in any
Environmental Law;
(b) Hazardous substances, as defined in CERCLA or in any
Environmental Law;
(c) Toxic substances, as defined in TSCA or in any
Environmental Law;
(d) Insecticides, fungicides, or rodenticides, as defined in
FIFRA or in any Environmental Law; and
(e) Gasoline or any other petroleum product or byproduct,
polychlorinated biphenols, asbestos and urea formaldehyde.
Impositions: Collectively, all taxes (including, without limitation,
all ad valorem, sales and use, single business, gross receipts, transaction
privilege, rent or similar taxes as the same relate to or are imposed upon
Lessee or its business conducted upon the Leased Property) other than Real
Estate Taxes and Personal Property Taxes, assessments (including, without
limitation, all assessments for public improvements or benefit, whether or not
commenced or completed prior to the date hereof and whether or not to be
completed within the Term), ground rents, water, sewer or other rents and
charges, excises, tax inspection, authorization and
8
<PAGE>
similar fees and all other governmental charges, in each case whether general or
special, ordinary or extraordinary, or foreseen or unforeseen, of every
character in respect of the Leased Property or the business conducted thereon by
Lessee (including all interest and penalties thereon caused by any failure in
payment by Lessee), which at any time prior to, during or with respect to the
Term hereof may be assessed or imposed on or with respect to or be a lien upon
(a) Lessor's interest in the Leased Property, (b) the Leased Property, or any
part thereof or any rent therefrom or any estate, right, title or interest
therein, or (c) any occupancy, operation, use or possession of, or sales from,
or activity conducted on or in connection with the Leased Property, or the
leasing or use of the Leased Property or any part thereof by Lessee. Nothing
contained in this definition of Impositions shall be construed to require Lessee
to pay (1) any tax based on net income (whether denominated as a franchise or
capital stock or other tax) imposed on Lessor or any other person, or (2) any
net revenue tax of Lessor or any other person, or (3) any tax imposed with
respect to the sale, exchange or other disposition by Lessor of any Leased
Property or the proceeds thereof, or (4) any single business, gross receipts
(other than a tax on any rent received by Lessor from Lessee), transaction,
privilege or similar taxes as the same relate to or are imposed upon Lessor,
except to the extent that any tax, assessment, tax levy or charge that Lessee is
obligated to pay pursuant to the first sentence of this definition and that is
in effect at any time during the Term hereof is totally or partially repealed,
and a tax, assessment, tax levy or charge set forth in clause (1) or (2) is
levied, assessed or imposed expressly in lieu thereof.
Indemnified Party: Either of a Lessee Indemnified Party or a
Lessor Indemnified Party.
Indemnifying Party: Any party obligated to indemnify an
Indemnified Party pursuant to Section 8.3 or Article XXII.
Insurance Requirements: All terms of any insurance policy
required by this Lease and all requirements of the issuer of any
such policy.
Inventory: All "Inventories of Merchandise" and "Inventories
of Supplies" as defined in the Uniform System, including, but not
limited to, linens and other non-depreciable personal property.
Land: As defined in Article I.
Lease: This Lease.
Leased Improvements; Leased Property: Each as defined in
Article I.
9
<PAGE>
Legal Requirements: All federal, state, county, municipal and other
governmental statutes, laws, rules, orders, regulations, ordinances, judgments,
decrees and injunctions affecting either the Leased Property or the maintenance,
construction, use or alteration thereof (whether by Lessee or otherwise),
whether or not hereafter enacted and in force, including (a) all laws, rules or
regulations pertaining to the environment, occupational health and safety and
public health, safety or welfare, and (b) any laws, rules or regulations that
may (1) require repairs, modifications or alterations in or to the Leased
Property or (2) in any way adversely affect the use and enjoyment thereof; and
all permits, licenses and authorizations and regulations relating thereto and
all covenants, agreements, restrictions and encumbrances contained in any
instruments, either of record or known to Lessee (other than encumbrances
created by Lessor without the consent of Lessee), at any time in force affecting
the Leased Property.
Lending Institution: Any insurance company, credit company, federally
insured commercial or savings bank, national banking association, savings and
loan association, employees welfare, pension or retirement fund or system,
corporate profit sharing or pension trust, college or university, or real estate
investment trust, including any corporation qualified to be treated for federal
tax purposes as a real estate investment trust, such trust having a net worth of
at least $10,000,000.
Lessee: The Lessee designated on this Lease and its
respective permitted successors and assigns.
Lessee Indemnified Party: Lessee, any Affiliate of Lessee, any other
Person against whom any claim for indemnification may be asserted hereunder as a
result of a direct or indirect ownership interest (including a stockholder's
interest) in Lessee, the officers, directors, stockholders, employees, agents
and representatives of Lessee and any corporate stockholder, agent, or
representative of Lessee, and the respective heirs, personal representatives,
successors and assigns of any such officer, director, stockholder, employee,
agent or representative.
Lessee's Personal Property: As defined in Section 6.2.
Lessor: The Lessor designated on this Lease and its
respective successors and assigns.
Lessor Indemnified Party: Lessor, any Affiliate of Lessor, any other
Person against whom any claim for indemnification may be asserted hereunder as a
result of a direct or indirect ownership interest (including a stockholder's or
partnership interest) in Lessor, the officers, directors, stockholders,
employees, agents and representatives of the general partner of Lessor and any
10
<PAGE>
partner, agent, or representative of Lessor, and the respective heirs, personal
representatives, successors and assigns of any such officer, director, partner,
stockholder, employee, agent or representative.
Minimum Price: The sum of (a) the equity in the Leased Property at the
time of acquisition of the Leased Property by Lessor (i.e., that portion of the
purchase price of the Leased Property paid by Lessor in cash or exchange for
partnership interests in the Lessor) plus (b) other capital expenditures on the
Leased Property made by Lessor after the date hereof plus (c) the unpaid
principal balance of all encumbrances against the Leased Property at the time of
purchase of the Leased Property by Lessee, less (x) all proceeds received by
Lessor from any financing or refinancing of the Leased Property after the date
hereof (after payment of any debt refinanced and net of any costs and expenses
incurred in connection with such financing or refinancing, including, without
limitation, loan points, commitment fees and commissions and legal fees) and (y)
the net amount (after deduction of all reasonable legal fees and other costs and
expenses, including without limitation expert witness fees, incurred by Lessor
in connection with obtaining any such proceeds or award) of all insurance
proceeds received by Lessor and awards received by Lessor from any partial
Taking of the Leased Property that are not applied to restoration.
Notice: A notice given pursuant to Article XXXII.
Officer's Certificate: A certificate of Lessee reasonably acceptable to
Lessor, signed by the chief financial officer or another officer authorized so
to sign by the board of directors or by-laws of Lessee, or any other person
whose power and authority to act has been authorized by delegation in writing by
any such officer.
Overdue Rate: On any date, a rate equal to the Base Rate plus 5% per
annum, but in no event greater than the maximum rate then permitted under
applicable law.
Other Revenues: Gross revenue from the operation of the
Facility excluding:
(a) Room Revenues;
(b) the amount of all credit, rebates or refunds to
customers, guests or patrons;
(c) all sales taxes or any other taxes imposed on such revenues.
11
<PAGE>
Payment Date: Any due date for the payment of any installment
of Base Rent.
Person: Any Government, natural person, corporation,
partnership or other legal entity.
Personal Property Taxes: All personal property taxes imposed on the
furniture, furnishings or other items of personal property located on, and used
in connection with, the operation of the Leased Improvements as a hotel (other
than Inventory and other personal property owned by the Lessee), together with
all replacement, modifications, alterations and additions thereto.
Predecessor: Any Person whose liabilities arising under any
Environmental Law have or may have been retained or assumed by Lessee, either
contractually or by operation of law, relating to the Leased Property.
Primary Intended Use: As defined in Section 7.2(b).
Proceeding: Any judicial action, suit or proceeding (whether civil or
criminal), any administrative proceeding (whether formal or informal), any
investigation by a governmental authority or entity (including a grand jury),
and any arbitration, mediation or other non-judicial process for dispute
resolution.
RCRA: The Resource Conservation and Recovery Act, as amended.
Real Estate Taxes: All real estate taxes, including general and special
assessments, if any, which are imposed upon the Land and any improvements
thereon.
Rejectable Offer Price: An amount equal to the greater of
(a) the Fair Market Value, determined as of the applicable purchase
date, or (b) the Minimum Price.
Release: A "Release" as defined in CERCLA or in any Environmental Law,
unless such Release has been properly authorized and permitted in writing by all
applicable Environmental Authorities or is allowed by such Environmental Law
without authorizations or permits.
Rent: Collectively, the Base Rent, and Additional Charges.
Room Revenues: Gross revenue from the rental of guest rooms,
whether to individuals, groups or transients, at the Facility,
excluding the following:
(a) the amount of all credits, rebates or refunds to
customers, guests or patrons;
12
<PAGE>
(b) all sales taxes or any other taxes imposed on the rental of such
guest rooms; and
(c) any fees collected for amenities including, but not limited to:
telephone, laundry, movies or concessions.
SARA: The Superfund Amendments and Reauthorization Act of
1986, as amended.
State: The State or Commonwealth of the United States in
which the Leased Property is located.
Subsidiaries: Corporations in which Lessee owns, directly or
indirectly, more than 50% of the voting stock or control, as
applicable (individually, a "Subsidiary").
Taking: A taking or voluntary conveyance during the Term hereof of all
or part of the Leased Property, or any interest therein or right accruing
thereto or use thereof, as the result of, or in settlement of, any Condemnation
or other eminent domain proceeding affecting the Leased Property whether or not
the same shall have actually been commenced.
Term: As defined in Section 1.2.
TSCA: The Toxic Substances Control Act, as amended.
Unavoidable Delays: Delays due to strikes, lock-outs, labor unrest,
inability to procure materials, power failure, acts of God, governmental
restrictions, enemy action, civil commotion, fire, unavoidable casualty or other
causes beyond the control of the party responsible for performing an obligation
hereunder, provided that lack of funds shall not be deemed a cause beyond the
control of either party hereto unless such lack of funds is caused by the
failure of the other party hereto to perform any obligations of such party under
this Lease or any guaranty of this Lease.
Uneconomic for its Primary Intended Use: A state or condition of the
Facility (after the application of any insurance proceeds if any) such that, in
the good faith judgment of Lessee, reasonably exercised and evidenced by the
resolution of the board of directors or other governing body of Lessee, the
Facility cannot be operated on a commercially practicable basis for its Primary
Intended Use, taking into account, among other relevant factors, the number of
usable rooms and projected revenues, such that Lessee intends to, and shall,
complete the cessation of operations from the Facility.
Uniform System: Shall mean the Uniform System of Accounts for
Hotels (8th Revised Edition, 1986) as published by the Hotel
13
<PAGE>
Association of New York City, Inc., as same may hereafter be revised.
Unsuitable for its Primary Intended Use: A state or condition of the
Facility (after the application of insurance proceeds if any) such that, in the
good faith judgment of Lessee, reasonably exercised and evidenced by the
resolution of the board of directors or other governing body of Lessee, due to
casualty damage or loss through Condemnation, the Facility cannot function as an
integrated hotel facility consistent with standards applicable to a well
maintained and operated hotel.
ARTICLE III
3.1 Rent. Lessee covenants and agrees to pay to Lessor in lawful money
of the United States of America which shall be legal tender for the payment of
public and private debts, in immediately available funds without deduction or
offset, at Lessor's address set forth in Article hereof or at such other place
or to such other Person as Lessor from time to time may designate in a Notice,
all Base Rent, and Additional Charges, during the Term, as follows:
(a) Base Rent: Prorated for any partial month at the
beginning of the term of this Lease, and for the subsequent months
base rent shall be the monthly sum of $31,570.
3.2 Additional Charges. In addition to the Base Rent, (b) Lessee also
will pay and discharge as and when due and payable all other amounts,
liabilities, obligations and Impositions that Lessee assumes or agrees to pay
under this Lease, and (c) in the event of any failure on the part of Lessee to
pay any of those items referred to in clause (a) of this Section 3.3, Lessee
also will promptly pay and discharge every fine, penalty, interest and cost that
may be added for non-payment or late payment of such items (the items referred
to in clauses (a) and (b) of this Section 3.3 being additional rent hereunder
and being referred to herein collectively as the "Additional Charges"), and
Lessor shall have all legal, equitable and contractual rights, powers and
remedies provided either in this Lease or by statute or otherwise in the case of
non-payment of the Additional Charges as in the case of non-payment of the Base
Rent. The Lessee's obligations regarding the payment of Impositions are set out
in Section 4.2. If any installment of Base Rent or Additional Charges (but only
as to those Additional Charges that are payable directly to Lessor) shall not be
paid on its due date, Lessee will pay Lessor on demand, as Additional Charges, a
late charge (to the extent permitted by law) computed at the Overdue Rate on the
amount of such installment, from the due date of such installment to the date of
payment thereof. To the extent that Lessee pays any Additional
14
<PAGE>
Charges to Lessor pursuant to any requirement of this Lease, Lessee shall be
relieved of its obligation to pay such Additional Charges to the entity to which
they would otherwise be due and Lessor shall pay same from monies received from
Lessee.
3.3 Lease Provision. The Rent shall be paid so that this Lease shall
yield to Lessor the full amount of the installments of Base Rent and Additional
Charges throughout the Term, all as more fully set forth in Article , but
subject to any other provisions of this Lease that expressly provide for
adjustment or abatement of Rent or other charges or expressly provide that
certain expenses or maintenance shall be paid or performed by Lessor.
3.4 Conversion of Property. If, during the Term, Lessee desires to
provide food and beverage operations at the Facility (other than complimentary
continental breakfast), Lessee shall give notice of such desire to Lessor.
Lessor and Lessee shall then commence negotiations to adjust Rent to reflect the
proposed change to the operation of the Facility, each acting reasonably and in
good faith. All other terms of this Lease will remain substantially the same.
During negotiations, which shall not extend beyond 60 days, Lessee shall not
"convert" the Facility and shall continue fulfilling its obligations under the
existing terms of this Lease. If no agreement is reached after such 60-day
period, Lessee shall withdraw such notice and this Lease shall continue in full
force. Once the "conversion" is approved or the Lessor has approved such
operations, the Lessee may lease such converted facilities. If the Lessee
desires to relet such facilities, the Lessor shall approve the terms of such
lease unless its terms are the same or more advantageous to the Lessor than
those of the prior lease.
3.5 Annual Budget. Not later than fifteen (15) days prior to the
commencement of each Fiscal Year beginning with the Fiscal Year commencing
January 1, 1997, Lessee shall submit the Annual Budget to Lessor. The Annual
Budget shall be subject to the approval of the Lessor unless Net Operating
Income for such Fiscal Year, as of December 1, exceeds Net Operating Income for
the prior Fiscal Year by an amount greater than the amount change of the
Consumer Price Index during such period. The Annual budget shall contain the
following:
(a) Lessee's reasonable estimate of Gross Revenues (including
room rates and Room Revenues), Gross Operating Expenses, and Gross Operating
Profits for the forthcoming Fiscal Year itemized on schedules on a quarterly
basis as approved by Lessor and Lessee, as same may be revised or replaced from
time to time by Lessee and Approved by Lessor, together with the assumptions, in
narrative form, forming the basis of such schedules.
15
<PAGE>
(b) An estimate of the amounts to be spent for the repair,
replacement, or refurbishment of Furniture and Equipment.
(c) An estimate of any amounts Lessor will be required to
provide in the forthcoming Fiscal Year for required or desirable items that
would be classified as capital items by generally accepted accounting
principles, and projections of the amounts that may be required in the two
succeeding Fiscal Years for such items.
(d) A cash flow projection.
(e) A narrative description of the program for advertising and
marketing the Facility for the forthcoming Fiscal Year containing a detailed
budget itemization of the proposed advertising expenditures by category and the
assumptions, in narrative form, forming the basis of such budget itemization.
3.6 Books and Records. Lessee shall keep full and adequate books of
account and other records reflecting the results of operation of the Facility on
an accrual basis, all in accordance with the Uniform System and generally
accepted accounting principles and the obligations of Lessee under this Lease.
The books of account and all other records relating to or reflecting the
operation of the Facility shall be kept either at the Facility or at Lessee's
offices in Silver Springs, Maryland, and shall be available to Lessor and its
representatives and its auditors or accountants, at all reasonable times for
examination, audit, inspection, and transcription. All of such books and records
pertaining to the Facility including, without limitation, books of account,
guest records and front office records, at all times shall be the property of
Lessor and shall not be removed from the Facility or Lessee's offices without
the approval of Lessor.
ARTICLE IV
4.1 Payment of Impositions. Subject to Article XII relating to
permitted contests, Lessee will pay, or cause to be paid, all Impositions (other
than Real Estate Taxes and Personal Property Taxes, which shall be paid by
Lessor) before any fine, penalty, interest or cost may be added for non-payment,
such payments to be made directly to the taxing or other authorities where
feasible, and will promptly furnish to Lessor copies of official receipts or
other satisfactory proof evidencing such payments. Lessee's obligation to pay
such Impositions shall be deemed absolutely fixed upon the date such Impositions
become a lien upon the Leased Property or any part thereof. If any such
Imposition may, at the option of the taxpayer, lawfully be paid in installments
(whether or not interest shall accrue on the unpaid balance of such Imposition),
Lessee may exercise the option to pay the same (and
16
<PAGE>
any accrued interest on the unpaid balance of such Imposition) in installments
and in such event, shall pay such installments during the Term hereof (subject
to Lessee's right of contest pursuant to the provisions of Article XII) as the
same respectively become due and before any fine, penalty, premium, further
interest or cost may be added thereto. Lessor, at its expense, shall, to the
extent required or permitted by applicable law, prepare and file all tax returns
in respect of Lessor's net income, gross receipts, sales and use, single
business, transaction privilege, rent, ad valorem, franchise taxes, Real Estate
Taxes, Personal Property Taxes and taxes on its capital stock, and Lessee, at
its expense, shall, to the extent required or permitted by applicable laws and
regulations, prepare and file all other tax returns and reports in respect of
any Imposition as may be required by governmental authorities. If any refund
shall be due from any taxing authority in respect of any Imposition paid by
Lessee, the same shall be paid over to or retained by Lessee if no Event of
Default shall have occurred hereunder and be continuing. If an Event of Default
shall have occurred and be continuing, any such refund shall be paid over to or
retained by Lessor. Any such funds retained by Lessor due to an Event of Default
shall be applied as provided in Article XVI. Lessor and Lessee shall, upon
request of the other, provide such data as is maintained by the party to whom
the request is made with respect to the Leased Property as may be necessary to
prepare any required returns and reports. Lessee shall file all Personal
Property Tax returns in such jurisdictions where it is legally required to so
file. Lessor, to the extent it possesses the same, and Lessee, to the extent it
possesses the same, will provide the other party, upon request, with cost and
depreciation records necessary for filing returns for any property classified as
personal property. Where Lessor is legally required to file Personal Property
Tax returns, Lessee shall provide Lessor with copies of assessment notices in
sufficient time for Lessor to file a protest. Lessor may, upon notice to Lessee,
at Lessor's option and at Lessor's sole expense, protest, appeal, or institute
such other proceedings (in its or Lessee's name) as Lessor may deem appropriate
to effect a reduction of real estate or personal property assessments for those
Impositions to be paid by Lessor, and Lessee, at Lessor's expense as aforesaid,
shall fully cooperate with Lessor in such protest, appeal, or other action.
Lessor hereby agrees to indemnify, defend, and hold harmless Lessee from and
against any claims, obligations, and liabilities against or incurred by Lessee
in connection with such cooperation. Billings for reimbursement of Personal
Property Taxes by Lessee to Lessor shall be accompanied by copies of a bill
therefor and payments thereof which identify the personal property with respect
to which such payments are made. Lessor, however, reserves the right to effect
any such protest, appeal or other action and, upon notice to Lessee, shall
control any such activity, which shall then go
17
<PAGE>
forward at Lessor's sole expense. Upon such notice, Lessee, at Lessor's expense,
shall cooperate fully with such activities.
4.2 Notice of Impositions. Lessor shall give prompt Notice to Lessee of
all Impositions payable by Lessee hereunder of which Lessor at any time has
knowledge, provided that Lessor's failure to give any such Notice shall in no
way diminish Lessee's obligations hereunder to pay such Impositions, but such
failure shall obviate any default hereunder for a reasonable time after Lessee
receives Notice or has otherwise acquired knowledge of any Imposition which it
is obligated to pay during the first taxing period applicable thereto.
4.3 Adjustment of Impositions. Impositions imposed in respect of the
tax-fiscal period during which the Term terminates shall be adjusted and
prorated between Lessor and Lessee, whether or not such Imposition is imposed
before or after such termination, and Lessee's obligation to pay its prorated
share thereof after termination shall survive such termination.
4.4 Maintenance. Lessee will be solely responsible for obtaining and
maintaining utility services to the Leased Property and will pay or cause to be
paid all charges for electricity, gas, oil, water, sewer and other utilities
used in the Leased Property during the Term.
4.5 Insurance Premiums. To the extent provided in Section 13.1(b),
Lessee will pay or cause to be paid all premiums for the insurance coverages
required to be maintained by it under Article XIII.
ARTICLE V
5.1 No Termination, Abatement, etc. Except as otherwise specifically
provided in this Lease, and except for loss of the Franchise Agreement solely by
reason of any action or inaction by Lessor, Lessee, to the extent permitted by
law, shall remain bound by this Lease in accordance with its terms and shall
neither take any action without the written consent of Lessor to modify,
surrender or terminate the same, nor seek nor be entitled to any abatement,
deduction, deferment or reduction of the Rent, or setoff against the Rent, nor
shall the obligations of Lessee be otherwise affected by reason of (a) any
damage to, or destruction of, any Leased Property or any portion thereof from
whatever cause or any Taking of the Leased Property or any portion thereof, (b)
the lawful or unlawful prohibition of, or restriction upon, Lessee's use of the
Leased Property, or any portion thereof, or the interference with such use by
any Person, corporation, partnership or other entity, or by reason of eviction
by paramount title,
18
<PAGE>
(c) any claim which Lessee has or might have against Lessor by reason of any
default or breach of any warranty by Lessor under this Lease or any other
agreement between Lessor and Lessee, or to which Lessor and Lessee are parties,
(d) any bankruptcy, insolvency, reorganization, composition, readjustment,
liquidation, dissolution, winding up or other proceedings affecting Lessor or
any assignee or transferee of Lessor, or (e) for any other cause whether similar
or dissimilar to any of the foregoing other than a discharge of Lessee from any
such obligations as a matter of law. Lessee hereby specifically waives all
rights, arising from any occurrence whatsoever, which may now or hereafter be
conferred upon it by law to (1) modify, surrender or terminate this Lease or
quit or surrender the Leased Property or any portion thereof, or (2) entitle
Lessee to any abatement, reduction, suspension or deferment of the Rent or other
sums payable by Lessee hereunder, except as otherwise specifically provided in
this Lease. The obligations of Lessee hereunder shall be separate and
independent covenants and agreements and the Rent and all other sums payable by
Lessee hereunder shall continue to be payable in all events unless the
obligations to pay the same shall be terminated pursuant to the express
provisions of this Lease or by termination of this Lease other than by reason of
an Event of Default.
5.2 Abatement Procedures. In the event of a partial Taking as described
in Section , the Lease shall not terminate, but the Base Rent shall be abated in
the manner and to the extent that is fair, just and equitable to both Lessee and
Lessor, taking into consideration, among other relevant factors, the number of
usable rooms, the amount of square footage, or the revenues affected by such
partial Taking. If Lessor and Lessee are unable to agree upon the amount of such
abatement within 30 days after such partial Taking, the matter may be submitted
by either party to a court of competent jurisdiction for resolution.
ARTICLE VI
6.1 Ownership of the Leased Property. Lessee acknowledges that the
Leased Property is the property of Lessor and that Lessee has only the right to
the possession and use of the Leased Property upon the terms and conditions of
this Lease.
6.2 Lessee's Personal Property. Lessee will acquire and maintain
throughout the Term such Inventory as is required to operate the Leased Property
in the manner contemplated by this Lease. Lessee may (and shall as provided
hereinbelow), at its expense, install, affix or assemble or place on any parcels
of the Land or in any of the Leased Improvements, any items of personal property
(including Inventory) owned by Lessee. Lessee, at the commencement of the Term,
and from time to time thereafter, shall
19
<PAGE>
provide Lessor with an accurate list of all such items of Lessee's personal
property (collectively, the "Lessee's Personal Property"). Lessee may, subject
to the first sentence of this Section 6.2 and the conditions set forth below,
remove any of Lessee's Personal Property set forth on such list at any time
during the Term or upon the expiration or any prior termination of the Term. All
of Lessee's Personal Property, other than Inventory, not removed by Lessee
within ten days following the expiration or earlier termination of the Term
shall be considered abandoned by Lessee and may be appropriated, sold, destroyed
or otherwise disposed of by Lessor without first giving Notice thereof to
Lessee, without any payment to Lessee and without any obligation to account
therefor. Lessee will, at its expense, restore the Leased Property to the
condition required by Section , including repair of all damage to the Leased
Property caused by the removal of Lessee's Personal Property, whether effected
by Lessee or Lessor. Upon the expiration or earlier termination of the Term,
Lessor or its designee shall have the option to purchase all Inventory on hand
at the Leased Property at the time of such expiration or termination for a sale
price equal to the fair market value of such Inventory. Lessee may make such
financing arrangements, title retention agreements, leases or other agreements
with respect to the Lessee's Personal Property as it sees fit provided that
Lessee first advises Lessor of any such arrangement and such arrangement
expressly provides that in the event of Lessee's default thereunder, Lessor (or
its designee) may assume Lessee's obligations and rights under such arrangement.
6.3 Lessor's Lien. To the fullest extent permitted by applicable law,
Lessor is granted a lien and security interest on all Lessee's Personal Property
now or hereinafter placed in or upon the Leased Property, and such lien and
security interest shall remain attached to such Lessee's Personal Property until
payment in full of all Rent and satisfaction of all of Lessee's obligations
hereunder; provided, however, Lessor shall subordinate its lien and security
interest to that of any non-Affiliate of Lessee which finances such Lessee's
Personal Property or any non-Affiliate conditional seller of such Lessee's
Personal Property, the terms and conditions of such subordination to be
satisfactory to Lessor in the exercise of reasonable discretion. Lessee shall,
upon the request of Lessor, execute such financing statements or other documents
or instruments reasonably requested by Lessor to perfect the lien and security
interests herein granted.
ARTICLE VII
7.1 Condition of the Leased Property. Lessee acknowledges receipt and
delivery of possession of the Leased Property. Lessee has examined and otherwise
has knowledge of the condition of the
20
<PAGE>
Leased Property and has found the same to be satisfactory for its purposes
hereunder. Lessee is leasing the Leased Property "as is" in its present
condition. Lessee waives any claim or action against Lessor in respect of the
condition of the Leased Property. LESSOR MAKES NO WARRANTY OR REPRESENTATION,
EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY, OR ANY PART THEREOF,
EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR
PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN,
LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE.
LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS
SATISFACTORY TO IT. Provided, however, to the extent permitted by law, Lessor
shall allow Lessee the benefit of all of Lessor's rights to proceed against any
predecessor in title other than Lessee (or an Affiliate of Lessee which conveyed
the Property to Lessor) for breaches of warranties or representations or for
latent defects in the Leased Property. Lessor shall fully cooperate with Lessee
in the prosecution of any such claim, in Lessor's or Lessee's name, all at
Lessee's sole cost and expense. Lessee hereby agrees to indemnify, defend and
hold harmless Lessor from and against any claims, obligations and liabilities
against or incurred by Lessor in connection with such cooperation.
7.2 Use of the Leased Property.
(a) Lessee covenants that it will obtain and to maintain all
approvals needed to use and operate the Leased Property and the Facility under
applicable local, state and federal law.
(b) Lessee shall use or cause to be used the Leased Property
only as a hotel facility, and for such other uses as may be necessary or
incidental to such use (the "Primary Intended Use"). Lessee shall not use the
Leased Property or any portion thereof for any other use without the prior
written consent of Lessor, which consent may be granted, denied or conditioned
in Lessor's sole discretion. No use shall be made or permitted to be made of the
Leased Property, and no acts shall be done, which will cause the cancellation or
increase the premium of any insurance policy covering the Leased Property or any
part thereof (unless another adequate policy satisfactory to Lessor is available
and Lessee pays any premium increase), nor shall Lessee sell or permit to be
kept, used or sold in or about the Leased Property any article which may be
prohibited by law or fire underwriter's regulations. Lessee shall, at its sole
cost, comply with all of the requirements pertaining to the Leased Property of
any insurance board, association, organization or company necessary for the
maintenance of insurance, as herein provided, covering the Leased Property and
Lessee's Personal Property.
21
<PAGE>
(c) Subject to the provisions of Articles XIV and XV, Lessee
covenants and agrees that during the Term it will (1) operate continuously the
Leased Property as a hotel facility, (2) keep in full force and effect and
comply with all the provisions of the Franchise Agreement (except that Lessee
shall have no obligation to complete any improvements to the Leased Property
required by the franchisor unless the Lessor funds the cost thereof), (3) not
terminate or amend the Franchise Agreement without the consent of Lessor, (4)
maintain appropriate certifications and licenses for such use and (5) will seek
to maximize the Gross Revenues generated therefrom consistent with sound
business practices.
(d) Lessee shall not commit or suffer to be committed any
waste on the Leased Property, or in the Facility, nor shall Lessee cause or
permit any nuisance thereon.
(e) Lessee shall neither suffer nor permit the Leased Property
or any portion thereof, or Lessee's Personal Property, to be used in such a
manner as (1) might reasonably tend to impair Lessor's (or Lessee's, as the case
may be) title thereto or to any portion thereof, or (2) may reasonably make
possible a claim or claims of adverse usage or adverse possession by the public,
as such, or of implied dedication of the Leased Property or any portion thereof,
except as necessary in the ordinary and prudent operation of the Facility on the
Leased Property.
7.3 Lessor to Grant Easements, etc. Lessor will, from time to time, so
long as no Event of Default has occurred and is continuing, at the request of
Lessee and at Lessee's cost and expense (but subject to the approval of Lessor,
which approval shall not be unreasonably withheld or delayed), (a) grant
easements and other rights in the nature of easements with respect to the Leased
Property to third parties, (b) release existing easements or other rights in the
nature of easements which are for the benefit of the Leased Property, (c)
dedicate or transfer unimproved portions of the Leased Property for road,
highway or other public purposes, (d) execute petitions to have the Leased
Property annexed to any municipal corporation or utility district, (e) execute
amendments to any covenants and restrictions affecting the Leased Property and
(f) execute and deliver to any person any instrument appropriate to confirm or
effect such grants, releases, dedications, transfers, petitions and amendments
(to the extent of its interests in the Leased Property), but only upon delivery
to Lessor of an Officer's Certificate stating that such grant, release,
dedication, transfer, petition or amendment does not interfere with the proper
conduct of the business of Lessee on the Leased Property and does not materially
reduce the value of the Leased Property.
22
<PAGE>
ARTICLE VIII
8.1 Compliance with Legal and Insurance Requirements, etc. Subject to
Section 8.3(b) below and Article relating to permitted contests, Lessee, at its
expense, will promptly (a) comply with all applicable Legal Requirements and
Insurance Requirements in respect of the use, operation, maintenance, repair and
restoration of the Leased Property, and (b) procure, maintain and comply with
all appropriate licenses and other authorizations required for any use of the
Leased Property and Lessee's Personal Property then being made, and for the
proper erection, installation, operation and maintenance of the Leased Property
or any part thereof.
8.2 Legal Requirement Covenants. Subject to Section 8.3(b) below,
Lessee covenants and agrees that the Leased Property and Lessee's Personal
Property shall not be used for any unlawful purpose, and that Lessee shall not
permit or suffer to exist any unlawful use of the Leased Property by others.
Lessee shall acquire and maintain all appropriate licenses, certifications,
permits and other authorizations and approvals needed to operate the Leased
Property in its customary manner for the Primary Intended Use, and any other
lawful use conducted on the Leased Property as may be permitted from time to
time hereunder. Lessee further covenants and agrees that Lessee's use of the
Leased Property and maintenance, alteration, and operation of the same, and all
parts thereof, shall at all times conform to all Legal Requirements, unless the
same are finally determined by a court of competent jurisdiction to be unlawful
(and Lessee shall cause all such sub-tenants, invitees or others to so comply
with all Legal Requirements). Lessee may, however, upon prior Notice to Lessor,
contest the legality or applicability of any such Legal Requirement or any
licensure or certification decision if Lessee maintains such action in good
faith, with due diligence, without prejudice to Lessor's rights hereunder, and
at Lessee's sole expense. If by the terms of any such Legal Requirement
compliance therewith pending the prosecution of any such proceeding may legally
be delayed without the incurrence of any lien, charge or liability of any kind
against the Facility or Lessee's leasehold interest therein and without
subjecting Lessee or Lessor to any liability, civil or criminal, for failure so
to comply therewith, Lessee may delay compliance therewith until the final
determination of such proceeding. If any lien, charge or civil or criminal
liability would be incurred by reason of any such delay, Lessee, on the prior
written consent of Lessor, which consent shall not be unreasonably withheld, may
nonetheless contest as aforesaid and delay as aforesaid provided that such delay
would not subject Lessor to criminal liability and Lessee both (a) furnishes to
Lessor security reasonably satisfactory to Lessor against any loss or injury by
23
<PAGE>
reason of such contest or delay and (b) prosecutes the contest with due
diligence and in good faith.
8.3 Environmental Covenants. Lessor and Lessee (in addition to, and not
in diminution of, Lessee's covenants and undertakings in Sections 8.1 and 8.2
hereof) covenant and agree as follows:
(a) At all times hereafter until the later of (i) such time as
all liabilities, duties or obligations of Lessee to the Lessor under the Lease
have been satisfied in full and (ii) such time as Lessee completely vacates the
Leased Property and surrenders possession of the same to Lessor, Lessee shall
fully comply with all Environmental Laws applicable to the Leased Property and
the operations thereon. Lessee agrees to give Lessor prompt written notice of
(1) all Environmental Liabilities; (2) all pending, threatened or anticipated
Proceedings, and all notices, demands, requests or investigations, relating to
any Environmental Liability or relating to the issuance, revocation or change in
any Environmental Authorization required for operation of the Leased Property;
(3) all Releases at, on, in, under or in any way affecting the Leased Property,
or any Release known by Lessee at, on, in or under any property adjacent to the
Leased Property; and (4) all facts, events or conditions that could reasonably
lead to the occurrence of any of the above-referenced matters.
(b) Lessor hereby agrees to defend, indemnify and save
harmless any and all Lessee Indemnified Parties from and against any and all
Environmental Liabilities other than Environmental Liabilities which were caused
by the acts or grossly negligent failures to act of Lessee.
(c) Lessee hereby agrees to defend, indemnify and save
harmless any and all Lessor Indemnified Parties from and against any and all
Environmental Liabilities which were caused by the acts or grossly negligent
failures to act of Lessee.
(d) If any Proceeding is brought against any Indemnified Party
in respect of an Environmental Liability with respect to which such Indemnified
Party may claim indemnification under either Section 8.3(b) or (c), the
Indemnifying Party, upon request, shall at its sole expense resist and defend
such Proceeding, or cause the same to be resisted and defended by counsel
designated by the Indemnified Party and approved by the Indemnifying Party,
which approval shall not be unreasonably withheld; provided, however, that such
approval shall not be required in the case of defense by counsel designated by
any insurance company undertaking such defense pursuant to any applicable policy
of insurance. Each Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel will be at the sole
24
<PAGE>
expense of such Indemnified Party unless such counsel has been approved by the
Indemnifying Party, which approval shall not be unreasonably withheld. The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
made without its consent, which shall not be unreasonably withheld, but if
settled with the consent of the Indemnifying Party, or if settled without its
consent (if its consent shall be unreasonably withheld), or if there be a final,
nonappealable judgment for an adversary party in any such Proceeding, the
Indemnifying Party shall indemnify and hold harmless the Indemnified Parties
from and against any liabilities incurred by such Indemnified Parties by reason
of such settlement or judgement.
(e) At any time any Indemnified Party has reason to believe
circumstances exist which could reasonably result in an Environmental Liability,
upon reasonable prior written notice to Lessee stating such Indemnified Party's
basis for such belief, an Indemnified Party shall be given immediate access to
the Leased Property (including, but not limited to, the right to enter upon,
investigate, drill wells, take soil borings, excavate, monitor, test, cap and
use available land for the testing of remedial technologies), Lessee's
employees, and to all relevant documents and records regarding the matter as to
which a responsibility, liability or obligation is asserted or which is the
subject of any Proceeding; provided that such access may be conditioned or
restricted as may be reasonably necessary to ensure compliance with law and the
safety of personnel and facilities or to protect confidential or privileged
information. All Indemnified Parties requesting such immediate access and
cooperation shall endeavor to coordinate such efforts to result in as minimal
interruption of the operation of the Leased Property as practicable.
(f) The indemnification rights and obligations provided for in
this Article VIII shall be in addition to any indemnification rights and
obligations provided for elsewhere in this Lease.
(g) The indemnification rights and obligations provided for in
this Article VIII shall survive the termination of this Agreement.
For purposes of this Section 8.3, all amounts for which any
Indemnified Party seeks indemnification shall be computed net of (a) any actual
income tax benefit resulting therefrom to such Indemnified Party, (b) any
insurance proceeds received (net of tax effects) with respect thereto, and (c)
any amounts recovered (net of tax effects) from any third parties based on
claims the Indemnified Party has against such third parties which reduce the
damages that would otherwise be sustained; provided that in all cases, the
timing of the receipt or realization of insurance
25
<PAGE>
proceeds or income tax benefits or recoveries from third parties shall be taken
into account in determining the amount of reduction of damages. Each Indemnified
Party agrees to use its reasonable efforts to pursue, or assign to Lessee or
Lessor, as the case may be, any claims or rights it may have against any third
party which would materially reduce the amount of damages otherwise incurred by
such Indemnified Party.
Notwithstanding anything to the contrary contained in this
Agreement, if Lessor shall become entitled to the possession of the Leased
Property by virtue of the termination of the Lease or repossession of the Leased
Property, then Lessor may assign its indemnification rights under Section 8.3 of
this Agreement (but not any other rights hereunder) to any Person to whom the
Lessor subsequently transfers the Leased Property, subject to the following
conditions and limitations, each of which shall be deemed to be incorporated
into the terms of such assignment, whether or not specifically referred to
therein:
(1) The indemnification rights referred to in this
section may be assigned only if a known Environmental
Liability then exists or if a Proceeding is then pending or,
to the knowledge of Lessee or Lessor, then threatened with
respect to the Leased Property;
(2) Such indemnification rights shall be limited to
Environmental Liabilities relating to or specifically
affecting the Leased Property; and
(3) Any assignment of such indemnification rights
shall be limited to the immediate transferee of Lessor, and
shall not extend to any such transferee's successors or
assigns.
ARTICLE IX
9.1 Capital Improvements, Maintenance and Repair.
(a) Subject to Section 9.1(b), Lessee will keep the Leased
Property and all private roadways, sidewalks and curbs appurtenant thereto that
are under Lessee's control, including windows and plate glass, parking lots,
mechanical, electrical and plumbing systems and equipment (including conduit and
ductware), and non-load bearing interior walls, in good order and repair, except
for ordinary wear and tear (whether or not the need for such repairs occurred as
a result of Lessee's use, any prior use, the elements or the age of the Leased
Property, or any portion thereof), and, except as otherwise provided in Articles
or , with reasonable promptness, make all necessary and appropriate
26
<PAGE>
repairs thereto of every kind and nature, whether interior or exterior, ordinary
or extraordinary, foreseen or unforeseen or arising by reason of a condition
existing prior to the commencement of the Term of this Lease (concealed or
otherwise), or required by any governmental agency having jurisdiction over the
Leased Property, except as to the structural elements of the Leased Improvements
and underground utilities.
(b) Notwithstanding any other provision of this Lease, unless
the need for compliance with Section 9.1(a) is caused by Lessee's negligence or
willful misconduct or that of its employees or agents, Lessee shall not be
required to bear the costs of complying with Section 9.1(a) with respect to
items classified as either (i) capital items under U.S. generally accepted
accounting principles or (ii) Fixtures or Furniture and Equipment in, on, or
under the Facility or its components, except to the extent (X) that amounts are
available therefor from Lessor under Article XL or otherwise or (Y) required
under Articles XIV and XV on the conditions set forth therein.
(c) Article sets forth the only obligations of Lessor to fund
the cost of any repairs, replacements, alterations, restorations or renewals of
any nature or description to the Leased Property, whether ordinary or
extraordinary, foreseen or unforeseen, or to make any expenditure whatsoever
with respect thereto, in connection with this Lease, or to maintain the Leased
Property in any way. Lessee hereby waives, to the extent permitted by law, the
right to make repairs at the expense of Lessor pursuant to any law in effect at
the time of the execution of this Lease or hereafter enacted. Lessor shall have
the right to give, record and post, as appropriate, notices of nonresponsibility
under any mechanic's lien laws now or hereafter existing.
(d) Lessee shall be permitted to prosecute claims against
Lessor's predecessors in title for breach of any representation or warranty or
for any latent defects in the Leased Property to be maintained by Lessee unless
Lessor is already diligently pursuing such a claim. All repairs shall, to the
extent reasonably achievable, be at least equivalent in quality to the original
work. Lessee will not take or omit to take any action, the taking or omission of
which might materially impair the value or the usefulness of the Leased Property
or any part thereof for its Primary Intended Use.
(e) Nothing contained in this Lease and no action or inaction
by Lessor shall be construed as (1) constituting the request of Lessor,
expressed or implied, to any contractor, subcontractor, laborer, materialman or
vendor to or for the performance of any labor or services or the furnishing of
any materials or other property for the construction, alteration,
27
<PAGE>
addition, repair or demolition of or to the Leased Property or any part thereof,
or (2) giving Lessee any right, power or permission to contract for or permit
the performance of any labor or services or the furnishing of any materials or
other property in such fashion as would permit the making of any claim against
Lessor in respect thereof or to make any agreement that may create, or in any
way be the basis for any right, title, interest, lien, claim or other
encumbrance upon the estate of Lessor in the Leased Property, or any portion
thereof without the express approval of the Lessor, provided however that the
Lessee may impose a lien on the leasehold interest without the approval of the
Lessor.
(f) Lessee will, upon the expiration or prior termination of
the Term, vacate and surrender the Leased Property to Lessor in the condition in
which the Leased Property was originally received from Lessor, except as
repaired, rebuilt, restored, altered or added to as permitted or required by the
provisions of this Lease and except for ordinary wear and tear (subject to the
obligation of Lessee to maintain the Leased Property in accordance with Section
9.1(a) above during the entire Term of the Lease), or damage by casualty or
Condemnation (subject to the obligations of Lessee to restore or repair as set
forth in the Lease).
9.2 Encroachments, Restrictions, Etc. If any of the Leased
Improvements, at any time, materially encroach upon any property, street or
right-of-way adjacent to the Leased Property, or violate the agreements or
conditions contained in any lawful restrictive covenant or other agreement
affecting the Leased Property, or any part thereof, or impair the rights of
others under any easement or right-of-way to which the Leased Property is
subject, then promptly upon the request of Lessor or at the behest of any person
affected by any such encroachment, violation or impairment, Lessee shall, at its
expense, subject to its right to contest the existence of any encroachment,
violation or impairment and, in such case, in the event of an adverse final
determination, either (a) obtain valid and effective waivers or settlements of
all claims, liabilities and damages resulting from each such encroachment,
violation or impairment, whether the same shall affect Lessor or Lessee or (b)
make such changes in the Leased Improvements, and take such other actions, as
Lessee in the good faith exercise of its judgment deems reasonably practicable
to remove such encroachment, and to end such violation or impairment, including,
if necessary, the alteration of any of the Leased Improvements, and in any event
take all such actions as may be necessary in order to be able to continue the
operation of the Leased Improvements for the Primary Intended Use substantially
in the manner and to the extent the Leased Improvements were operated prior to
the assertion of such violation, impairment or encroachment. Any such alteration
shall be made in conformity with the applicable requirements of
28
<PAGE>
Article . Lessee's obligations under this Section shall be in addition to and
shall in no way discharge or diminish any obligation of any insurer under any
policy of title or other insurance held by Lessor.
ARTICLE X
10.1 Alterations. After receiving approval of Lessor, which approval
shall not be unreasonably withheld, Lessee shall have the right to make such
additions, modifications or improvements to the Leased Property from time to
time as Lessee deems desirable for its permitted uses and purposes, provided
that such action will not significantly alter the character or purposes or
significantly detract from the value or operating efficiency thereof and will
not significantly impair the revenue-producing capability of the Leased Property
or adversely affect the ability of the Lessee to comply with the provisions of
this Lease. The cost of such additions, modifications or improvements to the
Leased Property shall be paid by Lessee, and all such additions, modifications
and improvements shall, without payment by Lessor at any time, be included under
the terms of this Lease and upon expiration or earlier termination of this Lease
shall pass to and become the property of Lessor.
10.2 Salvage. All materials which are scrapped or removed in connection
with the making of repairs required by Articles or shall be or become the
property of Lessor or Lessee depending on which party is paying for or providing
the financing for such work.
10.3 Joint Use Agreements. If Lessee constructs additional improvements
that are connected to the Leased Property or share maintenance facilities, HVAC,
electrical, plumbing or other systems, utilities, parking or other amenities,
the parties shall enter into a mutually agreeable cross-easement or joint use
agreement, the form of which has been approved in advance by Lessor, to make
available necessary services and facilities in connection with such additional
improvements, to protect each of their respective interests in the properties
affected, and to provide for separate ownership, use, and/or financing of such
improvements.
ARTICLE XI
Liens. Subject to the provision of Article relating to permitted
contests, Lessee will not directly or indirectly create or allow to remain and
will promptly discharge at its expense any lien, encumbrance, attachment, title
retention agreement or claim upon the Leased Property or any attachment, levy,
claim or encumbrance in respect of the Rent, not including, however,
29
<PAGE>
(a) this Lease, (b) the matters, if any, included as exceptions in the title
policy insuring Lessor's interest in the Leased Property, (c) restrictions,
liens and other encumbrances which are consented to in writing by Lessor or any
easements granted pursuant to the provisions of Section of this Lease, (d) liens
for those taxes upon Lessor which Lessee is not required to pay hereunder, (e)
subleases permitted by Article hereof, (f) liens for Impositions or for sums
resulting from noncompliance with Legal Requirements so long as (1) the same are
not yet payable or are payable without the addition of any fine or penalty or
(2) such liens are in the process of being contested as permitted by Article ,
(g) liens of mechanics, laborers, materialmen, suppliers or vendors for sums
either disputed or not yet due provided that (1) the payment of such sums shall
not be postponed under any related contract for more than 60 days after the
completion of the action giving rise to such lien and such reserve or other
appropriate provisions as shall be required by law or generally accepted
accounting principles shall have been made therefor and (2) any such liens are
in the process of being contested as permitted by Article hereof, (h) any liens
which are the responsibility of Lessor pursuant to the provisions of Article of
this Lease.
ARTICLE XII
Permitted Contests. Lessee shall have the right to contest the amount
or validity of any Imposition to be paid by Lessee or any Legal Requirement or
Insurance Requirement or any lien, attachment, levy, encumbrance, charge or
claim ("Claims") not otherwise permitted by Article , by appropriate legal
proceedings in good faith and with due diligence (but this shall not be deemed
or construed in any way to relieve, modify or extend Lessee's covenants to pay
or its covenants to cause to be paid any such charges at the time and in the
manner as in this Article provided), on condition, however, that such legal
proceedings shall not operate to relieve Lessee from its obligations hereunder
and shall not cause the sale or risk the loss of any portion of the Leased
Property, or any part thereof, or cause Lessor or Lessee to be in default under
any mortgage, deed of trust, security deed or other agreement encumbering the
Leased Property or any interest therein. Upon the request of Lessor, Lessee
shall either (a) provide a bond or other assurance reasonably satisfactory to
Lessor that all Claims which may be assessed against the Leased Property
together with interest and penalties, if any, thereon will be paid, or (b)
deposit within the time otherwise required for payment with a bank or trust
company as trustee upon terms reasonably satisfactory to Lessor, as security for
the payment of such Claims, money in an amount sufficient to pay the same,
together with interest and penalties in connection therewith, as to all Claims
which may be
30
<PAGE>
assessed against or become a Claim on the Leased Property, or any part thereof,
in said legal proceedings. Lessee shall furnish Lessor and any lender of Lessor
with reasonable evidence of such deposit within five days of the same. Lessor
agrees to join in any such proceedings at Lessee's expense if the same be
required to legally prosecute such contest of the validity of such Claims;
provided, however, that Lessor shall not thereby be subjected to any liability
for the payment of any costs or expenses in connection with any proceedings
brought by Lessee; and Lessee covenants to indemnify and save harmless Lessor
from any such costs or expenses. Lessee shall be entitled to any refund of any
Claims and such charges and penalties or interest thereon which have been paid
by Lessee or paid by Lessor and for which Lessor has been fully reimbursed. In
the event that Lessee fails to pay any Claims when due or to provide the
security therefor as provided in this paragraph and to diligently prosecute any
contest of the same, Lessor may, upon ten days advance Notice to Lessee, pay
such charges together with any interest and penalties and the same shall be
repayable by Lessee to Lessor as Additional Charges at the next Payment Date
provided for in this Lease. Provided, however, that should Lessor reasonably
determine that the giving of such Notice would risk loss to the Leased Property
or cause damage to Lessor, then Lessor shall give such Notice as is practical
under the circumstances. Lessor reserves the right to contest any of the Claims
at its expense not pursued by Lessee. Lessor and Lessee agree to cooperate in
coordinating the contest of any claims.
ARTICLE XIII
13.1 General Insurance Requirements.
(a) Coverages. During the Term of this Lease, Lessee shall at all times
keep the Leased Property insured with the kinds and amounts of insurance
described below provided, however, that the Lessor shall be responsible for
payment of any insurance requested by it pursuant to paragraph (IX) of Section
13.1(a) of this Lease if not of a type customarily arrived by similar business
and properties. This insurance shall be written by companies licensed and
authorized to issue insurance in the State. The policies must name Lessor as the
insured or as an additional named insured, as the case may be. Losses shall be
payable to Lessor or Lessee as provided in this Lease. Any loss adjustment shall
require the written consent of Lessor and Lessee, each acting reasonably and in
good faith. Evidence of insurance shall be deposited with Lessor. The policies
on the Leased Property, including the Leased Improvements, Fixtures and Lessee's
Personal Property, shall include:
31
<PAGE>
(i) Building insurance on the "Special Form" (formerly "All
Risk" form) (which may include earthquake and flood in reasonable amounts as
determined by Lessor) in an amount not less than 100% of the then full
replacement cost thereof (as defined in Section 13.2) or such other amount which
is acceptable to Lessor, and personal property insurance on the "Special Form"
in the full amount of the replacement cost thereof;
(ii) Insurance for loss or damage (direct and indirect) from
steam boilers, pressure vessels or similar apparatus, now or hereafter installed
in the Facility, in the minimum amount of $5,000,000 or in such lesser or
greater amounts as are then customary or as may be reasonably requested by
Lessor from time to time;
(iii) Loss of income insurance on the "Special Form", in the
amount of one year of Base Rent for the benefit of Lessor, and business
interruption insurance on the "Special Form" in the amount of one year of gross
profit, for the benefit of Lessor or Lessee;
(iv) Commercial general liability insurance, with amounts not
less than $10,000,000 covering each of the following: bodily injury, death, or
property damage liability per occurrence, personal and advertising injury,
general aggregate, products and completed operations, with respect to Lessor,
and "all risk legal liability" (including liquor law or "dram shop" liability,
if liquor or alcoholic beverages are served on the Leased Property) with respect
to Lessor and Lessee;
(v) Insurance covering such other hazards and in such amounts
as may be customary for comparable properties in the area of the Leased Property
and is available from insurance companies, insurance pools or other appropriate
companies authorized to do business in the State at rates which are economically
practicable in relation to the risks covered as may be reasonably requested by
Lessor;
(vi) Fidelity bonds with limits and deductibles as may be
reasonably requested by Lessor, covering Lessee's employees in job
classifications normally bonded under prudent hotel management practices in the
United States or otherwise required by law;
(vii) Workmen's compensation insurance to the extent necessary
to protect Lessor and the Leased Property against Lessee's workman's
compensation claims;
(viii) Vehicle liability insurance for owned, non-owned, and
hired vehicles, in the amount of $1,000,000; and
32
<PAGE>
(ix) Such other insurance as Lessor may reasonably request for
facilities such as the Leased Property and the operation thereof.
(b) Responsibility for Premiums. Lessee shall keep in force the
foregoing insurance coverages at its expense; provided, however, that Lessor
shall reimburse Lessee for any premium or premiums paid by Lessee for the
coverages required under Sections 13.1(a)(i), except to the extent that the
premium or premiums relate to coverages for property owned by the Lessee, and
13.1(a)(ii), as well as any other casualty coverages required by Lessor.
13.2 Replacement Cost. The term "full replacement cost" as used herein
shall mean the actual replacement cost of the Leased Property requiring
replacement from time to time including an increased cost of construction
endorsement, if available, and the cost of debris removal. In the event either
party believes that full replacement cost (the then-replacement cost less such
exclusions) has increased or decreased at any time during the Lease Term, it
shall have the right to have such full replacement cost re-determined.
13.3 Worker's Compensation. Lessee, at its sole cost, shall at all
times maintain adequate worker's compensation insurance coverage for all persons
employed by Lessee on the Leased Property. Such worker's compensation insurance
shall be in accordance with the requirements of applicable local, state and
federal law.
13.4 Waiver of Subrogation. All insurance policies carried by Lessor or
Lessee covering the Leased Property, the Fixtures, the Facility or Lessee's
Personal Property, including, without limitation, contents, fire and casualty
insurance, shall expressly waive any right of subrogation on the part of the
insurer against the other party. The parties hereto agree that their policies
will include such waiver clause or endorsement so long as the same are
obtainable without extra cost, and in the event of such an extra charge the
other party, at its election, may pay the same, but shall not be obligated to do
so. Each party agrees to seek recovery from any applicable insurance coverage
available to such party prior to seeking recovery against the other.
13.5 Form Satisfactory, etc. All of the policies of insurance referred
to in this Article shall be written in a form, with deductibles and by insurance
companies satisfactory to Lessor and also shall meet and satisfy the
requirements of any ground lessor, lender or franchisor having any interest in
the Leased Premises. Subject to the right to reimbursement or credit specified
in Section 13.1, Lessee shall pay all of the premiums therefor, and deliver such
policies or certificates thereof to Lessor prior to
33
<PAGE>
their effective date (and, with respect to any renewal policy, 30 days prior to
the expiration of the existing policy), and in the event of the failure of
Lessee either to effect such insurance as herein called for or to pay the
premiums therefor, or to deliver such policies or binding certificates thereof
to Lessor at the times required, Lessor shall be entitled, but shall have no
obligation, to effect such insurance and pay the premiums therefor, and Lessee
shall reimburse Lessor for any premium or premiums paid by Lessor for the
coverages required under this Section (other than the premiums required to be
paid or reimbursed to Lessee by Lessor in accordance with Section 13.1(b)) upon
written demand therefor, and Lessee's failure to repay the same within 30 days
after Notice of such failure from Lessor shall constitute an Event of Default
within the meaning of Section 16.1(d). Each insurer mentioned in this Article
shall agree, by endorsement to the policy or policies issued by it, or by
independent instrument furnished to Lessor, that it will give to Lessor 30 days'
written notice before the policy or policies in question shall be materially
altered, allowed to expire or canceled.
13.6 Change in Limits. If either Lessor or Lessee at any time deems the
limits of the personal injury or property damage under the comprehensive public
liability insurance then carried to be either excessive or insufficient, Lessor
and Lessee shall endeavor in good faith to agree on the proper and reasonable
limits for such insurance to be carried and such insurance shall thereafter be
carried with the limits thus agreed on until further change pursuant to the
provisions of this Section.
13.7 Blanket Policy. Notwithstanding anything to the contrary contained
in this Article XIII, Lessee or Lessor may bring the insurance provided for
herein within the coverage of a so-called blanket policy or policies of
insurance carried and maintained by Lessee or Lessor; provided, however, that
the coverage afforded to Lessor and Lessee will not be reduced or diminished or
otherwise be different from that which would exist under a separate policy
meeting all other requirements of this Lease by reason of the use of such
blanket policy of insurance, and provided further that the requirements of this
Article XIII are otherwise satisfied.
13.8 Separate Insurance. Lessee shall not on Lessee's own initiative or
pursuant to the request or requirement of any third party, take out separate
insurance concurrent in form or contributing in the event of loss with that
required in this Article to be furnished, or increase the amount of any then
existing insurance by securing an additional policy or additional policies,
unless all parties having an insurable interest in the subject matter of the
insurance, including in all cases Lessor, are included therein as additional
insureds, and the loss is payable under such additional separate insurance in
the same manner as
34
<PAGE>
losses are payable under this Lease. Lessee shall immediately notify Lessor that
Lessee has obtained any such separate insurance or of the increasing of any of
the amounts of the then existing insurance.
13.9 Reports On Insurance Claims. Lessee shall promptly investigate and
make a complete and timely written report to the appropriate insurance company
as to all accidents, claims for damage relating to the ownership, operation, and
maintenance of the Facility, any damage or destruction to the Facility and the
estimated cost of repair thereof and shall prepare any and all reports required
by any insurance company in connection therewith. All such reports shall be
timely filed with the insurance company as required under the terms of the
insurance policy involved, and a final copy of such report shall be furnished to
Lessor. Lessee shall be authorized to adjust, settle, or compromise any
insurance loss, or to execute proofs of such loss, in the aggregate amount of
$5,000 or less, with respect to any single casualty or other event.
ARTICLE XIV
14.1 Insurance Proceeds. Subject to the provisions of Section 14.6, and
the senior rights of any lender, all proceeds payable by reason of any loss or
damage to the Leased Property, or any portion thereof, and insured under any
policy of insurance required by Article of this Lease shall be paid to Lessor
and held in trust by Lessor in an interest-bearing account, shall be made
available, if applicable, for reconstruction or repair, as the case may be, of
any damage to or destruction of the Leased Property, or any portion thereof,
and, if applicable, shall be paid out by Lessor from time to time for the
reasonable costs of such reconstruction or repair upon satisfaction of
reasonable terms and conditions specified by Lessor. Any excess proceeds of
insurance remaining after the completion of the restoration or reconstruction of
the Leased Property shall be paid to Lessee. If neither Lessor nor Lessee is
required or elects to repair and restore, and the Lease is terminated without
purchase by Lessee as described in Section 14.2, all such insurance proceeds
shall be retained by Lessor. All salvage resulting from any risk covered by
insurance shall belong to Lessor.
14.2 Reconstruction in the Event of Damage or Destruction
Covered by Insurance.
(a) Except as provided in Section 14.5, if during the Term the
Leased Property is totally or partially destroyed by a risk covered by the
insurance described in Article and the Facility thereby is rendered Unsuitable
for its Primary Intended Use, Lessee shall, at Lessee's option, either (1)
restore the
35
<PAGE>
Facility to substantially the same condition as existed immediately before the
damage or destruction and otherwise in accordance with the terms of the Lease,
or (2) offer to acquire the Leased Property from Lessor for a purchase price
equal to the Rejectable Offer Price of the Leased Property. If Lessee restores
the Facility, the insurance proceeds shall be paid out by Lessor from time to
time for the reasonable costs of such restoration upon satisfaction of
reasonable terms and conditions, and any excess proceeds remaining after such
restoration shall be paid to Lessee. If Lessee acquires the Leased Property,
Lessee shall receive the insurance proceeds. If Lessor does not accept Lessee's
offer so to purchase the Leased Property within 90 days, Lessee may withdraw its
offer to purchase the Leased Property and, if so withdrawn, Lessee may terminate
the Lease with respect to the Leased Property without further liability
hereunder and Lessor shall be entitled to retain all insurance proceeds.
(b) Except as provided in Section 14.5, if during the Term the
Leased Property is partially destroyed by a risk covered by the insurance
described in Article , but the Facility is not thereby rendered Unsuitable for
its Primary Intended Use, Lessee shall restore the Facility to substantially the
same condition as existed immediately before the damage or destruction and
otherwise in accordance with the terms of the Lease. Such damage or destruction
shall not terminate this Lease; provided, however, that if Lessee cannot within
a reasonable time obtain all necessary government approvals, including building
permits, licenses and conditional use permits, after diligent efforts to do so,
to perform all required repair and restoration work and to operate the Facility
for its Primary Intended Use in substantially the same manner as that existing
immediately prior to such damage or destruction and otherwise in accordance with
the terms of the Lease, Lessee may make a written offer to Lessor to purchase
the Leased Property for a purchase price equal to the Rejectable Offer Price of
the Leased Property determined without regard to such damage or destruction. If
Lessee makes such offer and Lessor does not accept the same within 30 days after
Lessee delivers its offer to Lessor, Lessee shall withdraw such offer, in which
event this Lease shall remain in full force and effect and Lessee shall
immediately proceed to restore the Facility to substantially the same condition
as existed immediately before such damage or destruction and otherwise in
accordance with the terms of the Lease. If Lessee restores the Facility, the
insurance proceeds shall be paid out by Lessor from time to time for the
reasonable costs of such restoration upon satisfaction of reasonable terms and
conditions specified by Lessor, and any excess proceeds remaining after such
restoration shall be paid to Lessee.
(c) If the cost of the repair or restoration exceeds the
amount of proceeds received by Lessor from the insurance required
36
<PAGE>
under Article , Lessee shall be obligated to contribute any excess amounts
needed to restore the Facility prior to commencing work thereon. Such difference
shall be paid by Lessee to Lessor promptly after Lessee receives Lessor's
written invoice therefor, to be held in trust, together with any other insurance
proceeds, for application to the cost of repair and restoration.
(d) If Lessor accepts Lessee's offer to purchase the Leased
Property under this Article, this Lease shall terminate as to the Leased
Property upon payment of the purchase price, and Lessor shall remit to Lessee
all insurance proceeds pertaining to the Leased Property being held in trust by
Lessor.
14.3 Reconstruction in the Event of Damage or Destruction Not
Covered by Insurance.
Except as provided in Section 14.5, if during the Term the Facility is totally
or materially destroyed by a risk not covered by the insurance described in
Article XIII, whether or not such damage or destruction renders the Facility
Unsuitable for its Primary Intended Use, Lessee at its option shall either, (a)
at Lessee's sole cost and expense, restore the Facility to substantially the
same condition it was in immediately before such damage or destruction and such
damage or destruction shall not terminate this Lease, or (b) make a written
offer to purchase the Leased Property for a purchase price equal to the
Rejectable Offer Price of the Leased Property without regard to such damage or
destruction. If Lessor does not accept Lessee's offer so to purchase the Leased
Property within 90 days after Lessee delivers its offer to Lessor, Lessee may
withdraw its offer to purchase the Leased Property and, if so withdrawn, Lessee
may terminate the Lease with respect to the Leased Property without further
liability hereunder. If such damage or destruction is not material, Lessee
shall, at Lessee's sole cost and expense, restore the Facility to substantially
the same condition as existed immediately before the damage or destruction and
otherwise in accordance with the terms of the Lease, and such damage or
destruction shall not terminate the Lease.
14.4 Lessee's Property. All insurance proceeds payable by reason of any
loss of or damage to any of Lessee's Personal Property shall be paid to Lessee;
provided, however, no such payments shall diminish or reduce the insurance
payments otherwise payable to or for the benefit of Lessor hereunder.
14.5 Damage Near End of Term. Notwithstanding any provisions of Section
or appearing to the contrary, if damage to or destruction of the Facility
rendering it unsuitable for its Primary Intended Use occurs during the last 24
months of the Term, then either party shall have the right to terminate this
Lease by giving
37
<PAGE>
written notice to the other within 30 days after the date of damage or
destruction, whereupon all accrued Rent shall be paid immediately, and this
Lease shall automatically terminate five days after the date of such notice.
14.6 Waiver. Lessee hereby waives any statutory rights of termination
that may arise by reason of any damage or destruction of the Facility that
Lessor is obligated to restore or may restore under any of the provisions of
this Lease.
ARTICLE XV
15.1 Definitions.
(a) "Condemnation" means a Taking resulting from (1) the
exercise of any governmental power, whether by legal proceedings or otherwise,
by a Condemnor, and (2) a voluntary sale or transfer by Lessor to any Condemnor,
either under threat of condemnation or while legal proceedings for condemnation
are pending.
(b) "Date of Taking" means the date the Condemnor has the
right to possession of the property being condemned.
(c) "Award" means all compensation, sums or anything of value
awarded, paid or received on a total or partial Condemnation.
(d) "Condemnor" means any public or quasi-public authority, or
private corporation or individual, having the power of Condemnation.
15.2 Parties' Rights and Obligations. If during the Term there is any
Condemnation of all or any part of the Leased Property or any interest in this
Lease, the rights and obligations of Lessor and Lessee shall be determined by
this Article XV.
15.3 Total Taking. If title to the fee of the whole of the Leased
Property is condemned by any Condemnor, subject to the provisions of Section
15.7, this Lease shall cease and terminate as of the Date of Taking by the
Condemnor. If title to the fee of less than the whole of the Leased Property is
so taken or condemned, which nevertheless renders the Leased Property Unsuitable
or Uneconomic for its Primary Intended Use, Lessee and Lessor shall each have
the option, by notice to the other, at any time prior to the Date of Taking, to
terminate this Lease as of the Date of Taking. Upon such date, if such Notice
has been given, this Lease shall thereupon cease and terminate. All Base Rent
and Additional Charges paid or payable by Lessee hereunder shall be apportioned
as of the Date of Taking, and Lessee shall promptly pay
38
<PAGE>
Lessor such amounts. In the event of any such termination, the provisions of
Section shall apply.
15.4 Allocation of Award. The total Award made with respect to the
Leased Property or for loss of rent, or for Lessor's loss of business beyond the
Term, shall be solely the property of and payable to Lessor. Any Award made for
loss of Lessee's business during the remaining Term, if any, for the taking of
Lessee's Personal Property, or for removal and relocation expenses of Lessee in
any such proceedings shall be the sole property of and payable to Lessee. In any
Condemnation proceedings Lessor and Lessee shall each seek its Award in
conformity herewith, at its respective expense; provided, however, Lessee shall
not initiate, prosecute or acquiesce in any proceedings that may result in a
diminution of any Award payable to Lessor.
15.5 Partial Taking. If title to less than the whole of the Leased
Property is condemned, and the Leased Property is still suitable for its Primary
Intended Use, and not Uneconomic for its Primary Intended Use, or if Lessee or
Lessor is entitled but neither elects to terminate this Lease as provided in
Section , Lessee at the expense of the Lessor shall with all reasonable dispatch
restore the untaken portion of any Leased Improvements so that such Leased
Improvements constitute a complete architectural unit of the same general
character and condition (as nearly as may be possible under the circumstances)
as the Leased Improvements existing immediately prior to the Condemnation. In
the event of any Condemnation as described in this Section 15.5, the entire
amount of the Award shall be paid to the Lessor.
15.6 Temporary Taking. If the whole or any part of the Leased Property
or of Lessee's interest under this Lease is condemned by any Condemnor for its
temporary use or occupancy, this Lease shall not terminate by reason thereof,
Lessee, however, shall be released from its obligations to pay, in the manner
and at the terms herein specified, the pro rata amounts of Base Rent based on
the number of rooms affected by such Condemnation and the total rooms in the
Leased Property and Additional Charges. Except only to the extent that Lessee
may be prevented from so doing pursuant to the terms of the order of the
Condemnor, Lessee shall continue to perform and observe all of the other terms,
covenants, conditions and obligations hereof on the part of the Lessee to be
performed and observed, as though such Condemnation had not occurred. In the
event of any Condemnation as described this Section 15.6, the entire amount of
any Award made for such Condemnation allocable to the Term of this Lease,
whether paid by way of damages, rent or otherwise, shall be paid to Lessor.
Lessor covenants that upon the termination of any such period of temporary use
or occupancy it will, at its sole cost and expense, restore the Leased Property
as nearly as may be reasonably possible to the condition in which the
39
<PAGE>
same was immediately prior to such Condemnation, unless such period of temporary
use or occupancy extends beyond the expiration of the Term, in which case Lessor
shall not be required to make such restoration.
15.7 Lessee's Offer. In the event of the termination of this Lease as
provided in Section 15.3, Lessee shall offer to acquire the Leased Property from
Lessor for a purchase price equal to the Rejectable Offer Price of the Leased
Property without regard to such taking and, if accepted, Lessee shall receive
the entire Award. If Lessor does not accept Lessee's offer to purchase the
Leased Property, Lessee shall withdraw its offer to purchase the Leased Property
and, if so withdrawn, Lessee may terminate the Lease with respect to the Leased
Property without further liability hereunder, except for payment of Rent as
provided in the penultimate sentence of Section 15.3 or for matters which by
their express terms survive termination of this Lease, and Lessor shall be
entitled to retain the Award except as provided in Section 15.4.
ARTICLE XVI
16.1 Events of Default. If any one or more of the following events
(individually, an "Event of Default") occurs:
(a) if an Event of Default occurs under any other lease
between Lessor and Lessee, any Affiliate of Lessee or Solomons Beacon Inn
Limited Partnership; or
(b) if Lessee fails to make payment of the Base Rent or
Additional Charges within ten days after the same becomes due and payable;
(c) if Lessee fails to observe or perform any other term,
covenant or condition of this Lease and such failure is not cured by Lessee
within a period of 30 days after receipt by the Lessee of Notice thereof from
Lessor, unless such failure cannot with due diligence be cured within a period
of 30 days, in which case it shall not be deemed an Event of Default if Lessee
proceeds promptly and with due diligence to cure the failure and diligently
completes the curing thereof provided, however, in no event shall such cure
period extend beyond 90 days after such Notice; or
(d) if the Lessee shall file a petition in bankruptcy or
reorganization for an arrangement pursuant to any federal or state bankruptcy
law or any similar federal or state law, or shall be adjudicated a bankrupt or
shall make an assignment for the benefit of creditors or shall admit in writing
its inability to pay its debts generally as they become due, or if a petition or
answer proposing the adjudication of the Lessee as a bankrupt or its
40
<PAGE>
reorganization pursuant to any federal or state bankruptcy law or any similar
federal or state law shall be filed in any court and the Lessee shall be
adjudicated a bankrupt and such adjudication shall not be vacated or set aside
or stayed within 60 days after the entry of an order in respect thereof, or if a
receiver of the Lessee or of the whole or substantially all of the assets of the
Lessee shall be appointed in any proceeding brought by the Lessee or if any such
receiver, trustee or liquidator shall be appointed in any proceeding brought
against the Lessee and shall not be vacated or set aside or stayed within 120
days after such appointment; or
(e) if Lessee is liquidated or dissolved, or begins
proceedings toward such liquidation or dissolution, or, in any manner, permits
the sale or divestiture of substantially all of its assets; or
(f) if the estate or interest of Lessee in the Leased Property
or any part thereof is voluntarily or involuntarily transferred, assigned,
conveyed, levied upon or attached in any proceeding (unless Lessee is contesting
such lien or attachment in good faith in accordance with Article hereof); or
(g) if, except as a result of damage, destruction or a partial
or complete Condemnation, Lessee voluntarily ceases operations on the Leased
Property; or
(h) if an event of default has been declared by the franchisor
under the Franchise Agreement with respect to the Facility on the Leased
Premises or such Franchise Agreement has been terminated as a result of any
action or failure to act by the Lessee;
then, and in any such event, Lessor may exercise one or more
remedies available to it herein or at law or in equity, including but not
limited to its right to terminate this Lease by giving Lessee not less than ten
days' Notice of such termination except in the case of a default under Sections
16.1(e),(f), or (g), in which case notice shall not be required.
If litigation is commenced with respect to any alleged default
under this Lease, the prevailing party in such litigation shall receive, in
addition to its damages incurred, such sum as the court shall determine as its
reasonable attorneys' fees, and all costs and expenses incurred in connection
therewith.
No Event of Default (other than a failure to make a payment of
money) shall be deemed to exist under clause (d) during any time for up to one
year the curing thereof is prevented by an Unavoidable Delay, provided that upon
the cessation of such
41
<PAGE>
Unavoidable Delay, Lessee remedies such default or Event of Default without
further delay.
16.2 Surrender. If an Event of Default occurs (and the event giving
rise to such Event of Default has not been cured within the curative period
relating thereto as set forth in Section 16.1) and is continuing, whether or not
this Lease has been terminated pursuant to Section 16.1, Lessee shall, if
requested by Lessor so to do, immediately surrender and assign to Lessor or
Lessor's designee the Leased Property including, without limitation, any and all
books, records, files, licenses, permits and keys relating thereto, and quit the
same and Lessor may enter upon and repossess the Leased Property by reasonable
force, summary proceedings, ejectment or otherwise, and may remove Lessee and
all other persons and any and all personal property from the Leased Property,
subject to rights of any hotel guests and to any requirement of law. Lessee
hereby waives any and all requirements of applicable laws for service of notice
to re-enter the Leased Property. Lessor shall be under no obligation to, but may
if it so chooses, relet the Leased Property or otherwise mitigate Lessor's
damages.
16.3 Damages. Neither (a) the termination of this Lease, (b) the
repossession of the Leased Property, (c) the failure of Lessor to relet the
Leased Property, nor (d) the reletting of all or any portion thereof, shall
relieve Lessee of its liability and obligations hereunder, all of which shall
survive any such termination, repossession or reletting. In the event of any
such termination, Lessee shall forthwith pay to Lessor all Rent due and payable
with respect to the Leased Property to and including the date of such
termination.
Lessee shall forthwith pay to Lessor, at Lessor's option, as
and for liquidated and agreed current damages for Lessee's default, either:
(1) Without termination of Lessee's right to possession of the
Leased Property, each installment of Rent and other sums payable by Lessee to
Lessor under the Lease as the same becomes due and payable, which Rent and other
sums shall bear interest at the Overdue Rate, and Lessor may enforce, by action
or otherwise, any other term or covenant of this Lease; or
(2) the sum of:
(A) the unpaid Rent which had been
earned at the time of termination, repossession or
reletting, and
(B) the worth at the time of
termination, repossession or reletting of the amount
by which
42
<PAGE>
the unpaid Rent for the balance of the Term after the
time of termination, repossession or reletting,
exceeds the amount of such rental loss that Lessee
proves could be reasonably avoided and as reduced for
rentals received after the time of termination,
repossession or reletting, if and to the extent
required by applicable law, the worth at the time of
termination, repossession or reletting of the amount
referred to in this subparagraph (B) is computed by
discounting such amount at the discount rate of the
Federal Reserve Bank of New York at the time of award
plus 1%, and
(C) any other amount necessary to compensate
Lessor for all the detriment proximately caused by
Lessee's failure to perform its obligations under
this Lease or which in the ordinary course of things,
would be likely to result therefrom.
16.4 Waiver. If this Lease is terminated pursuant to Section 16.1,
Lessee waives, to the extent permitted by applicable law, (a) any right to a
trial by jury in the event of summary proceedings to enforce the remedies set
forth in this Article XVI, and (b) the benefit of any laws now or hereafter in
force exempting property from liability for rent or for debt and Lessor waives
any right to "pierce the corporate veil" of Lessee other than to the extent
funds shall have been inappropriately paid any Affiliate of Lessee following a
default resulting in an Event of Default.
16.5 Application of Funds. Any payments received by Lessor under any of
the provisions of this Lease during the existence or continuance of any Event of
Default shall be applied to Lessee's obligations in the order that Lessor may
determine or as may be prescribed by the laws of the State.
ARTICLE XVII
Lessor's Right to Cure Lessee's Default. If Lessee fails to make any
payment or to perform any act required to be made or performed under this Lease
including, without limitation, Lessee's failure to comply with the terms of any
Franchise Agreement other than a failure to complete improvements required by
the franchisor because the Lessor has not provided Lessee with the funds
therefor, and fails to cure the same within the relevant time periods provided
in Section , Lessor, without waiving or releasing any obligation of Lessee, and
without waiving or releasing any obligation or default, may (but shall be under
no obligation to) at any time thereafter make such payment or perform such act
for the account and at the expense of Lessee, and may, to the extent
43
<PAGE>
permitted by law, enter upon the Leased Property for such purpose and, subject
to Section , take all such action thereon as, in Lessor's opinion, may be
necessary or appropriate therefor. Before entering the Leased Property for the
purposes provided in this Article XVII, Lessor shall notify the Lessee of its
intention to enter the Leased Property unless such Notice would be impractical.
No such entry shall be deemed an eviction of Lessee. All sums so paid by Lessor
and all costs and expenses (including, without limitation, reasonable attorneys'
fees and expenses, in each case to the extent permitted by law) so incurred,
together with a late charge thereon (to the extent permitted by law) at the
Overdue Rate from the date on which such sums or expenses are paid or incurred
by Lessors, shall be paid by Lessee to Lessor on demand. The obligations of
Lessee and rights of Lessor contained in this Article shall survive the
expiration or earlier termination of this Lease.
ARTICLE XVIII
Provisions Relating to Purchase of the Leased Property. If Lessee
purchases the Leased Property from Lessor pursuant to any of the terms of this
Lease, the closing of the purchase shall occur 90 days after Lessor accepts
Lessee's offer to purchase the Leased Property, unless the provision of the
Lease under which such offer was made specifies a different closing date, in
which case the date set forth in such provision shall be the closing date. At
such closing, Lessor shall, upon receipt from Lessee of the applicable purchase
price, together with full payment of any unpaid Rent due and payable with
respect to any period ending on or before the date of the purchase, deliver to
Lessee an appropriate limited or special warranty deed or other conveyance
conveying the entire interest of Lessor in and to the Leased Property to Lessee
free and clear of all encumbrances other than (a) those that Lessee has agreed
hereunder to pay or discharge, (b) those mortgage liens, if any, that Lessee has
agreed in writing to accept and to take title subject to, (c) those liens and
encumbrances subject to which the Leased Property was conveyed to Lessor, (d)
encumbrances, easements, licenses or rights of way required to be imposed on the
Leased Property under Section 7.3, (e) any other encumbrances permitted to be
imposed on the Leased Property under the provisions of Section that are
assumable at no cost to Lessee or to which Lessee may take subject without cost
to Lessee and (f) any taxes not yet due and payable; and (g) those encumbrances
created, requested or consented to by Lessee. The difference between the
applicable purchase price and the total of the encumbrances assumed or taken
subject to shall be paid in cash to Lessor or as Lessor may direct, in federal
or other immediately available funds, except as otherwise mutually agreed by
Lessor and Lessee. All expenses of such conveyance, including, without
limitation, the cost of title
44
<PAGE>
examination or title insurance, if desired by Lessee, Lessee's attorneys' fees
incurred in connection with such conveyance and release, and transfer taxes and
recording fees, shall be paid by Lessee. Lessor shall pay its attorney's fees.
This Article XVIII is subject to the prior rights of any lender whose lien is
secured by the Leased Premises.
ARTICLE XIX
19.1 Personal Property Limitation. Anything contained in this Lease to
the contrary notwithstanding, the average of the adjusted tax bases of the items
of personal property that are leased to the Lessee under this Lease at the
beginning and at the end of any Fiscal Year shall not exceed 15% of the average
of the aggregate adjusted tax bases of the Leased Property at the beginning and
at the end of such Fiscal Year. This Section 19.1 is intended to ensure that the
Rent qualifies as "rents from real property," within the meaning of Section
856(d) of the Code, or any similar or successor provisions thereto, and shall be
interpreted in a manner consistent with such intent.
19.2 Sublease Rent Limitation. Anything contained in this Lease to the
contrary notwithstanding, Lessee shall not sublet the Leased Property on any
basis such that the rental to be paid by the sublessee thereunder would be
based, in whole or in part, on either (a) the income or profits derived by the
business activities of the sublessee, or (b) any other formula such that any
portion of the Rent would fail to qualify as "rents from real property" within
the meaning of Section 856(d) of the Code, or any similar or successor provision
thereto.
19.3 Sublease Tenant Limitation. Anything contained in this Lease to
the contrary notwithstanding, Lessee shall not sublease the Leased Property or
any portions thereof to any Person in which Humphrey Hospitality Trust, Inc.
owns, directly or indirectly, a 10% or more interest, within the meaning of
Section 856(d)(2)(B) of the Code, or any similar or successor provisions
thereto.
19.4 Lessee Ownership Limitation. Anything contained in this Lease to
the contrary notwithstanding, neither Lessee or an Affiliate of the Lessee shall
acquire, directly or indirectly, a 10% or more interest in Humphrey Hospitality
Trust, Inc. within the meaning of Section 856(d)(2)(B) of the Code, or any
similar or successor provision thereto.
19.5 Lessee Officer and Employee Limitation. Anything contained in
this Lease to the contrary notwithstanding, none of the officers or employees of
the Lessee (or any Person who furnishes or renders services to the tenants of
the Leased
45
<PAGE>
Property, or manages or operates the Leased Property) shall be officers or
employees of Humphrey Hospitality Trust, Inc. In addition, if a Person serves as
both (a) a director of the Lessee (or any Person who furnishes or renders
services to the tenants of the Leased Property, or manages or operates the
Leased Property) and (b) a trustee and officer (or employee) of Humphrey
Hospitality Trust, Inc. that Person shall not receive any compensation for
serving as a director of the Lessee (or any Person who furnishes or renders
services to the tenants of the Leased Property, or manages or operates the
Leased Property). Furthermore, if a Person serves as both (a) a trustee of
Humphrey Hospitality Trust, Inc. and (b) a director and officer (or employee) of
the Lessee (or any Person who furnishes or renders services to the tenants of
the Leased Property, or manages or operates the Leased Property), that Person
shall not receive any compensation for serving as a trustee of Humphrey
Hospitality Trust, Inc.
ARTICLE XX
Holding Over. If Lessee for any reason remains in possession of the
Leased Property after the expiration or earlier termination of the Term, such
possession shall be as a tenant at sufferance during which time Lessee shall pay
as rental each month two times the aggregate of (a) one-twelfth of the aggregate
Base Rent payable with respect to the last Fiscal Year of the Term, (b) all
Additional Charges accruing during the applicable month and (c) all other sums,
if any, payable by Lessee under this Lease with respect to the Leased Property.
During such period, Lessee shall be obligated to perform and observe all of the
terms, covenants and conditions of this Lease, but shall have no rights
hereunder other than the right, to the extent given by law to tenancies at
sufferance, to continue its occupancy and use of the Leased Property. Nothing
contained herein shall constitute the consent, express or implied, of Lessor to
the holding over of Lessee after the expiration or earlier termination of this
Lease.
ARTICLE XXI
Risk of Loss. During the Term, the risk of loss or of decrease in the
enjoyment and beneficial use of the Leased Property in consequence of the damage
or destruction thereof by fire, the elements, casualties, thefts, riots, wars or
otherwise, or in consequence of foreclosures, attachments, levies or executions
(other than those caused by Lessor and those claiming from, through or under
Lessor) is assumed by Lessee, and, in the absence of gross negligence, willful
misconduct or breach of this Lease by Lessor pursuant to Section , Lessor shall
in no event be answerable or accountable therefor, nor shall any of the events
mentioned in this
46
<PAGE>
Section entitle Lessee to any abatement of Rent except as specifically provided
in this Lease.
ARTICLE XXII
Indemnification. Notwithstanding the existence of any insurance, and
without regard to the policy limits of any such insurance or self-insurance, but
subject to the last sentence of Section 13.4 if any insurance coverage is
applicable, Section and Article VIII, Lessee will protect, indemnify, hold
harmless and defend Lessor Indemnified Parties from and against all liabilities,
obligations, claims, damages, penalties, causes of action, costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses), to the
extent permitted by law, imposed upon or incurred by or asserted against Lessor
Indemnified Parties by reason of: (a) any accident, injury to or death of
persons or loss of or damage to property occurring on or about the Leased
Property or adjoining sidewalks, including without limitation any claims under
liquor liability, "dram shop" or similar laws, (b) any past, present or future
use, misuse, non-use, condition, management, maintenance or repair by Lessee or
any of its agents, employees or invitees of the Leased Property or Lessee's
Personal Property or any litigation, proceeding or claim by governmental
entities or other third parties to which a Lessor Indemnified Party is made a
party or participant related to such use, misuse, non-use, condition,
management, maintenance, or repair thereof by Lessee or any of its agents,
employees or invitees, including any failure of Lessee or any of its agents,
employees or invitees to perform any obligations under this Lease or imposed by
applicable law (other than arising out of Condemnation proceedings), (c) any
Impositions that are the obligations of Lessee pursuant to the applicable
provisions of this Lease, (d) any failure on the part of Lessee to perform or
comply with any of the terms of this Lease, and (e) the non-performance of any
of the terms and provisions of any and all existing and future subleases of the
Leased Property to be performed by the landlord thereunder and (f) the gross
negligent acts and omissions and wilful misconduct of Lessee.
Lessor shall indemnify, save harmless and defend Lessee Indemnified
Parties from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses imposed upon or incurred by or
asserted against Lessee Indemnified Parties as a result of the gross negligence
or willful misconduct of Lessor arising in connection with this Lease. The
Lessor's obligations to indemnify Lessee Indemnified Parties shall be limited to
the value of Lessor's equity interest in the Facilities. Nothing herein shall be
construed as requiring Lessor to indemnify a Lessee Indemnified Party against
its own grossly negligent acts and omissions and wilful misconduct.
47
<PAGE>
Any amounts that become payable by an Indemnifying Party under this
Section shall be paid within ten days after liability therefor on the part of
the Indemnifying Party is determined by litigation or otherwise, and if not
timely paid, shall bear a late charge (to the extent permitted by law) at the
Overdue Rate from the date of such determination to the date of payment. An
Indemnifying Party, at its expense, shall contest, resist and defend any such
claim, action or proceeding asserted or instituted against the Indemnified
Party. The Indemnified Party, at its expense, shall be entitled to participate
in any such claim, action, or proceeding, and neither the Indemnifying Party nor
the Indemnified Party may compromise or otherwise dispose of the same without
the consent of the Indemnified Party or the Indemnifying Party, which may not be
unreasonably withheld. Nothing herein shall be construed as indemnifying a
Lessor Indemnified Party against its own grossly negligent acts or omissions or
willful misconduct.
Lessee's or Lessor's liability for a breach of the provisions of this
Article shall survive any termination of this Lease.
ARTICLE XXIII
23.1 Subletting and Assignment. Subject to the provisions of Article
and Section and any other express conditions or limitations set forth herein,
Lessee may not without the consent of Lessor, which consent may be withheld in
Lessor's sole discretion, (a) assign this Lease or sublet all or any part of the
Leased Property or (b) sublet any retail or restaurant portion of the Leased
Improvements in the normal course of the Primary Intended Use; provided that any
subletting to any party other than an Affiliate of Lessee shall not individually
as to any one such subletting, or in the aggregate, materially diminish the Rent
payable under this Lease. In the case of a subletting, the sublessee shall
comply with the provisions of Section 23.2, and in the case of an assignment,
the assignee shall assume in writing and agree to keep and perform all of the
terms of this Lease on the part of Lessee to be kept and performed and shall be,
and become, jointly and severally liable with Lessee for the performance
thereof. Notwithstanding the above, Lessee may assign the Lease to Humphrey
Hotels, Inc. without the consent of Lessor; provided that any such assignee
assumes in writing and agrees to keep and perform all of the terms of the Lease
on the part of the Lessee to be kept and performed and shall be and become
jointly and severally liable with Lessee for the performance thereof. In case of
either an assignment or subletting made during the Term, Lessee shall remain
primarily liable, as principal rather than as surety, for the prompt payment of
the Rent and for the performance and observance of all of the covenants and
conditions to be performed by Lessee hereunder. An original counterpart of each
such sublease and
48
<PAGE>
assignment and assumption, duly executed by Lessee and such sublessee or
assignee, as the case may be, in form and substance satisfactory to Lessor,
shall be delivered promptly to Lessor.
23.2 Attornment. Lessee shall insert in each sublease permitted under
Section 23.1 provisions to the effect that (a) such sublease is subject and
subordinate to all of the terms and provisions of this Lease and to the rights
of Lessor hereunder, (b) if this Lease terminates before the expiration of such
sublease, the sublessee thereunder will, at Lessor's option, attorn to Lessor
and waive any right the sublessee may have to terminate the sublease or to
surrender possession thereunder as a result of the termination of this Lease,
and (c) if the sublessee receives a written Notice from Lessor or Lessor's
assignees, if any, stating that an uncured Event of Default exists under this
Lease, the sublessee shall thereafter be obligated to pay all rentals accruing
under said sublease directly to the party giving such Notice, or as such party
may direct. All rentals received from the sublessee by Lessor or Lessor's
assignees, if any, as the case may be, shall be credited against the amounts
owing by Lessee under this Lease.
ARTICLE XXIV
Officer's Certificates; Financial Statements; Lessor's
Estoppel Certificates and Covenants.
(a) At any time and from time to time upon not less than 30
days Notice by Lessor, Lessee will furnish to Lessor an Officer's Certificate
certifying that this Lease is unmodified and in full force and effect (or that
this Lease is in full force and effect as modified and setting forth the
modifications), the date to which the Rent has been paid, whether to the
knowledge of Lessee there is any existing default or Event of Default hereunder
by Lessor or Lessee, and such other information as may be reasonably requested
by Lessor. Any such certificate furnished pursuant to this Section may be relied
upon by Lessor, any lender and any prospective purchaser of the Leased Property.
(b) Lessee will furnish the following statements to Lessor:
(1) with reasonable promptness, such
information respecting the financial condition and
affairs of Lessee, including audited financial
statements prepared by the same certified independent
accounting firm that prepares the returns for Lessor
or such other accounting firm as may be approved by
Lessor, as Lessor may request from time to time; and
49
<PAGE>
(2) the most recent Consolidated Financials
of Lessee within 45 days after each quarter of any
Fiscal Year (or, in the case of the final quarter in
any Fiscal Year, the most recent audited Consolidated
Financials of Lessee within 90 days); and
(3) on or about the 15th day of each month,
a detailed profit and loss statement for the Leased
Property for the preceding month, a balance sheet for
the Leased Property as of the end of the preceding
month, and a detailed accounting of revenues for the
Leased Property for the preceding month, each in form
acceptable to Lessor.
(c) At any time and from time to time upon not less than 10
days Notice by Lessee, Lessor will furnish to Lessee or to any person designated
by Lessee an estoppel certificate certifying that this Lease is unmodified and
in full force and effect (or that this Lease is in full force and effect as
modified and setting forth the modifications), the date to which Rent has been
paid, whether to the knowledge of Lessor there is any existing default or Event
of Default on Lessee's part hereunder, and such other information as may be
reasonably requested by Lessee.
(d) Lessee covenants that during the Term it will maintain a
ratio of total debt-to-Consolidated Net Worth of 25% or less, exclusive of
capitalized leases on an annual basis as of June 30, 1997.
ARTICLE XXV
Lessor's Right to Inspect. Lessee shall permit Lessor and its
authorized representatives as frequently as reasonably requested by Lessor to
inspect the Leased Property and Lessee's accounts and records pertaining thereto
and make copies thereof, during usual business hours upon reasonable advance
notice, subject only to any business confidentiality requirements reasonably
requested by Lessee.
ARTICLE XXVI
No Waiver. No failure by Lessor or Lessee to insist upon the strict
performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof, and no acceptance of full or partial payment
of Rent during the continuance of any such breach, shall constitute a waiver of
any such breach or of any such term. To the extent permitted by law, no waiver
of any breach
50
<PAGE>
shall affect or alter this Lease, which shall continue in full force and effect
with respect to any other then existing or subsequent breach.
ARTICLE XXVII
Remedies Cumulative. To the extent permitted by law, each legal,
equitable or contractual right, power and remedy of Lessor or Lessee now or
hereafter provided either in this Lease or by statute or otherwise shall be
cumulative and concurrent and shall be in addition to every other right, power
and remedy and the exercise or beginning of the exercise by Lessor or Lessee of
any one or more of such rights, powers and remedies shall not preclude the
simultaneous or subsequent exercise by Lessor or Lessee of any or all of such
other rights, powers and remedies.
ARTICLE XXVIII
Acceptance of Surrender. No surrender to Lessor of this Lease or of the
Leased Property or any part thereof, or of any interest therein, shall be valid
or effective unless agreed to and accepted in writing by Lessor and no act by
Lessor or any representative or agent of Lessor, other than such a written
acceptance by Lessor, shall constitute an acceptance of any such surrender.
ARTICLE XXIX
No Merger of Title. There shall be no merger of this Lease or of the
leasehold estate created hereby by reason of the fact that the same person or
entity may acquire, own or hold, directly or indirectly: (a) this Lease or the
leasehold estate created hereby or any interest in this Lease or such leasehold
estate and (b) the fee estate in the Leased Property.
ARTICLE XXX
Conveyance by Lessor. If Lessor or any successor owner of the Leased
Property conveys the Leased Property in accordance with the terms hereof other
than as security for a debt, and the grantee or transferee of the Leased
Property expressly assumes all obligations of Lessor hereunder arising or
accruing from and after the date of such conveyance or transfer, Lessor or such
successor owner, as the case may be, shall thereupon be released from all future
liabilities and obligations of Lessor under this Lease arising or accruing from
and after the date of such conveyance or other
51
<PAGE>
transfer as to the Leased Property and all such future liabilities and
obligations shall thereupon be binding upon the new owner.
Other Interests. This Lease and Lessee's interest hereunder shall at
all times be subject and subordinate to the lien and security title of any deeds
to secure debt, deeds of trust, mortgages, or other interests heretofore or
hereafter granted by Lessor or which otherwise encumber or affect the Leased
Property and to any and all advances to be made thereunder and to all renewals,
modifications, consolidations, replacements, substitutions, and extensions
thereof (all of which are herein called the "Mortgage"). In confirmation of such
subordination, however, Lessee shall, at Lessor's request, promptly execute,
acknowledge and deliver any instrument which may be required to evidence
subordination to any Mortgage and attornment to the holder thereof, conditioned
upon receipt of a nondisturbance clause. In the event of Lessee's failure to
deliver such subordination and if the Mortgage does not change any term of the
Lease, Lessor may, in addition to any other remedies for breach of covenant
hereunder, execute, acknowledge, and deliver the instrument as the agent or
attorney-in-fact of Lessee, and Lessee hereby irrevocably constitutes Lessor its
attorney-in-fact for such purpose, Lessee acknowledging that the appointment is
coupled with an interest and is irrevocable. Lessee hereby waives and releases
any claim it might have against Lessor or any other party for any actions
lawfully taken by the holder of any Mortgage.
ARTICLE XXXI
Quiet Enjoyment. So long as Lessee pays all Rent as the same becomes
due and complies with all of the terms of this Lease and performs its
obligations hereunder, in each case within the applicable grace periods, if any,
Lessee shall peaceably and quietly have, hold and enjoy the Leased Property for
the Term hereof, free of any claim or other action by Lessor or anyone claiming
by, through or under Lessor, but subject to all liens and encumbrances subject
to which the Leased Property was conveyed to Lessor or hereafter consented to by
Lessee or provided for herein. Notwithstanding the foregoing, Lessee shall have
the right by separate and independent action to pursue any claim it may have
against Lessor as a result of a breach by Lessor of the covenant of quiet
enjoyment contained in this Section.
ARTICLE XXXII
Notices. All notices, demands, requests, consents approvals and other
communications ("Notice" or "Notices") hereunder shall be in writing and
personally served or mailed (by registered or certified mail, return receipt
requested and postage prepaid), if
52
<PAGE>
to Lessor at 12301 Old Columbia Pike, Silver Spring, Maryland 33487, and if to
Lessee at 12301 Old Columbia Pike, Silver Spring, Maryland 33487, or to such
other address or addresses as either party may hereafter designate. Personally
delivered Notice shall be effective upon receipt, and Notice given by mail shall
be complete at the time of deposit in the U.S. Mail system, but any prescribed
period of Notice and any right or duty to do any act or make any response within
any prescribed period or on a date certain after the service of such Notice
given by mail shall be extended five days.
ARTICLE XXXIII
Appraisers. If it becomes necessary to determine the Fair Market Value
or Fair Market Rental of the Leased Property for any purpose of this Lease, the
party required or permitted to give Notice of such required determination shall
include in the Notice the name of a person selected to act as appraiser on its
behalf. Within 20 days after Notice, Lessor (or Lessee, as the case may be)
shall by Notice to Lessee (or Lessor, as the case may be) appoint a second
person as appraiser on its behalf. The appraisers thus appointed, each of whom
must be a member of the American Institute of Real Estate Appraisers (or any
successor organization thereto) with at least five years experience in the State
appraising property similar to the Leased Property, shall, within 45 days after
the date of the Notice appointing the first appraiser, proceed to appraise the
Leased Property to determine the Fair Market Value or Fair Market Rental thereof
as of the relevant date (giving effect to the impact, if any, of inflation from
the date of their decision to the relevant date); provided, however, that if
only one appraiser shall have been so appointed, then the determination of such
appraiser shall be final and binding upon the parties. To the extent consistent
with sound appraisal practice as then existing at the time of any such
appraisal, such appraisal shall be made on a basis consistent with the basis on
which the Leased Property was appraised for purposes of determining its Fair
Market Value at the time the Leased Property was acquired by Lessor. If two
appraisers are appointed and if the difference between the amounts so determined
does not exceed 5% of the lesser of such amounts, then the Fair Market Value or
Fair Market Rental shall be an amount equal to 50% of the sum of the amounts so
determined. If the difference between the amounts so determined exceeds 5% of
the lesser of such amounts, then such two appraisers shall have 20 days to
appoint a third appraiser. If no such appraiser shall have been appointed within
such 20 days or within 90 days of the original request for a determination of
Fair Market Value or Fair Market Rental, whichever is earlier, either Lessor or
Lessee may apply to any court having jurisdiction to have such appointment made
by such court. Any appraiser appointed by the
53
<PAGE>
original appraisers or by such court shall be instructed to determine the Fair
Market Value or Fair Market Rental within 45 days after appointment of such
appraiser. The determination of the appraiser which differs most in the terms of
dollar amount from the determinations of the other two appraisers shall be
excluded, and 50% of the sum of the remaining two determinations shall be final
and binding upon Lessor and Lessee as the Fair Market Value or Fair Market
Rental of the Leased Property, as the case may be. This provision for
determining by appraisal shall be specifically enforceable to the extent such
remedy is available under applicable law, and any determination hereunder shall
be final and binding upon the parties except as otherwise provided by applicable
law. Lessor and Lessee shall each pay the fees and expenses of the appraiser
appointed by it and each shall pay one-half of the fees and expenses of the
third appraiser and one-half of all other costs and expenses incurred in
connection with each appraisal.
ARTICLE XXXIV
34.1 Lessor May Grant Liens. Without the consent of Lessee, Lessor may,
subject to the terms and conditions set forth below in this Section , from time
to time, directly or indirectly, create or otherwise cause to exist any lien,
encumbrance or title retention agreement ("Encumbrance") upon the Leased
Property, or any portion thereof or interest therein, whether to secure any
borrowing or other means of financing or refinancing. Any such Encumbrance shall
(a) contain the right to prepay (whether or not subject to a prepayment
penalty); (b) provide that it is subject to the rights of Lessee under this
Lease and (c) contain the Agreement by the holder of the Encumbrance that it
will (1) give Lessee the same notice, if any, given to Lessor of any default or
acceleration of any obligation underlying any such Encumbrance or any sale in
foreclosure under such Encumbrance, (2) permit Lessee to cure any such default
on Lessor's behalf within any applicable cure period, and Lessee shall be
reimbursed by Lessor for any and all costs incurred in effecting such cure,
including without limitation out-of-pocket costs incurred to effect any such
cure (including reasonable attorneys' fees) and (3) permit Lessee to appear by
its representative and to bid at any sale in foreclosure made with respect to
any such Encumbrance. Upon the request of Lessor, Lessee shall subordinate this
Lease to the lien of a new mortgage on the Leased Property and agree to attorn
to the new mortgagee, on the condition that the proposed mortgagee executes a
non-disturbance agreement recognizing this Lease, and agreeing, for itself and
its successors and assigns, to comply with the provisions of this Article XXXIV.
34.2 Lessee's Right to Cure. Subject to the provisions of
Section 34.3, if Lessor breaches any covenant to be performed by it
54
<PAGE>
under this Lease, Lessee, after Notice to and demand upon Lessor, without
waiving or releasing any obligation hereunder, and in addition to all other
remedies available to Lessee, may (but shall be under no obligation at any time
thereafter to) make such payment or perform such act for the account and at the
expense of Lessor. All sums so paid by Lessee and all costs and expenses
(including, without limitation, reasonable attorneys' fees) so incurred,
together with interest thereon at the Overdue Rate from the date on which such
sums or expenses are paid or incurred by Lessee, shall be paid by Lessor to
Lessee on demand or, following entry of a final, nonappealable judgment against
Lessor for such sums, may be offset by Lessee against the Rent payments next
accruing or coming due. The rights of Lessee hereunder to cure and to secure
payment from Lessor in accordance with this Section shall survive the
termination of this Lease with respect to the Leased Property.
34.3 Breach by Lessor. It shall be a breach of this Lease if Lessor
fails to observe or perform any term, covenant or condition of this Lease on its
part to be performed and such failure continues for a period of 30 days after
Notice thereof from Lessee, unless such failure cannot with due diligence be
cured within a period of 30 days, in which case such failure shall not be deemed
to continue if Lessor, within such 30-day period, proceeds promptly and with due
diligence to cure the failure and diligently completes the curing thereof. The
time within which Lessor shall be obligated to cure any such failure also shall
be subject to extension of time due to the occurrence of any Unavoidable Delay.
ARTICLE XXXV
35.1 Miscellaneous. Anything contained in this Lease to the contrary
notwithstanding, all claims against, and liabilities of, Lessee or Lessor
arising prior to any date of termination of this Lease shall survive such
termination. If any term or provision of this Lease or any application thereof
is invalid or unenforceable, the remainder of this Lease and any other
application of such term or provisions shall not be affected thereby. If any
late charges or any interest rate provided for in any provision of this Lease
are based upon a rate in excess of the maximum rate permitted by applicable law,
the parties agree that such charges shall be fixed at the maximum permissible
rate. Neither this Lease nor any provision hereof may be changed, waived,
discharged or terminated except by a written instrument in recordable form
signed by Lessor and Lessee. All the terms and provisions of this Lease shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns. The headings in this Lease are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof. This
Lease shall be governed
55
<PAGE>
by and construed in accordance with the laws of the State, but not
including its conflicts of laws rules.
35.2 Transition Procedures. Upon the expiration or termination of the
Term of this Lease, for whatever reason, Lessor and Lessee shall do the
following (and the provisions of this Section 35.2 shall survive the expiration
or termination of this Agreement until they have been fully performed) and, in
general, shall cooperate in good faith to effect an orderly transition of the
management lease or of the Facility.
(a) Transfer of Licenses. Upon the expiration or earlier
termination of the Term, Lessee shall use its best efforts (i) to transfer to
Lessor or Lessor's nominee all licenses, operating permits and other
governmental authorizations and all contracts, including contracts with
governmental or quasi-governmental entities, that may be necessary for the
operation of the Facility, including any Franchise Agreement (collectively,
"Licenses"), or (ii) if such transfer is prohibited by law or Lessor otherwise
elects, to cooperate with Lessor or Lessor's nominee in connection with the
processing by Lessor or Lessor's nominee of any applications for, all Licenses;
provided, in either case, that the costs and expenses of any such transfer or
the processing of any such application shall be paid by Lessor or Lessor's
nominee.
(b) Leases and Concessions. Lessee shall assign to Lessor or
Lessor's nominee simultaneously with the termination of this Agreement, and the
assignee shall assume all leases and concession agreements in effect with
respect to the Facility then in Lessee's name.
(c) Books and Records. All books and records for the Facility
kept by Lessee pursuant to Section 3.7 shall be delivered promptly to Lessor or
Lessor's nominee, simultaneously with the termination of this Agreement, but
such books and records shall thereafter be available to Lessee at all reasonable
times for inspection, audit, examination, and transcription for a period of one
(1) year and Lessee may retain (on a confidential basis) copies or computer
records thereof.
(d) Remittance. Lessee shall remit to Lessor or Lessor's
nominee, simultaneously with the termination of this Lease, all funds remaining,
if any, after payment of all accrued Gross Operating Expenses, and other amounts
due Lessee and after deducting the costs of any scheduled repair, replacement,
or refurbishment of Furniture and Equipment with respect to which deposits have
been made.
56
<PAGE>
35.3 Waiver of Presentment, etc. Lessee waives all presentments,
demands for payment and for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance and waives
all notices of the existence, creation, or incurring of new or additional
obligations, except as expressly granted herein.
ARTICLE XXXVI
Memorandum of Lease. Lessor and Lessee shall promptly upon the request
of either enter into a short form memorandum of this Lease, in form suitable for
recording under the laws of the State in which reference to this Lease, and all
options contained herein, shall be made. Lessee shall pay all costs and expenses
of recording such memorandum of this Lease.
ARTICLE XXXVII
Lessor's Option to Purchase Assets of Lessee. Effective on not less
than 90 days prior Notice given at any time within 180 days before the
expiration of the Term, but not later than 90 days prior to such expiration, or
upon such shorter Notice period as shall be appropriate if this Lease is
terminated prior to its expiration date, Lessor shall have the option to
purchase all (but not less than all) of the assets of Lessee, tangible and
intangible, relating to the Leased Property (other than this Lease), at the
expiration or termination of this Lease for an amount (payable in cash on the
expiration date of this Lease) equal to the fair market value thereof as
appraised in conformity with Article , except that the appraisers need not be
members of the American Institute of Real Estate Appraisers, but rather shall be
appraisers having at least ten years experience in valuing similar assets.
Notwithstanding any such purchase, Lessor shall obtain no rights to any trade
name or logo used in connection with the Franchise Agreement unless separate
agreement as to such use is reached with the applicable franchisor.
ARTICLE XXXVIII
Lessor's Option to Terminate Lease. In the event Lessor enters into a
bona fide contract to sell the Leased Property to a non-Affiliate, Lessor may
terminate the Lease by giving not less than 30 days prior Notice to Lessee of
Lessor's election to terminate the Lease effective upon the closing under such
contract or Lessor may convey the Lease pursuant to Article XXX. Effective upon
such closing, this Lease shall terminate and be of no further force and effect
except as to any obligations of the parties
57
<PAGE>
existing as of such date that survive termination of this Lease. As compensation
for the early termination of its leasehold estate under this Article XXXVIII,
Lessor shall within six months of such closing either (a) pay to Lessee the fair
market value of Lessee's leasehold estate hereunder or (b) offer to lease to
Lessee one or more substitute hotel facilities pursuant to one or more leases
that would create for the Lessee leasehold estates that have an aggregate fair
market value of no less than the fair market value of Lessee's leasehold estate
hereunder, with the fair market value of Lessee's leasehold estate hereunder
determined as of the closing of the sale of the Leased Property. If Lessor
elects and complies with the option described in (b) above, regardless of
whether Lessee enters into the lease(s) described therein, Lessor shall have no
further obligations to Lessee with respect to compensation for the early
termination of this Lease. In the event Lessor and Lessee are unable to agree
upon the fair market value of an original or replacement leasehold estate within
30 days, it shall be determined by appraisal using the appraisal procedure set
forth in Article XXXIII.
For the purposes of this Section, fair market value of the leasehold
estate means, as applicable, an amount equal to the price that a willing buyer
not compelled to buy would pay a willing seller not compelled to sell for
Lessee's leasehold estate under this Lease or an offered replacement leasehold
estate.
ARTICLE XXXIX
Compliance with Franchise Agreement. To the extent any of the
provisions of the Franchise Agreement impose a greater obligation on Lessee than
the corresponding provisions of the Lease, then Lessee shall be obligated to
comply with, and to take all reasonable actions necessary to prevent breaches or
defaults under, the provisions of the Franchise Agreement. It is the intent of
the parties hereto that, except as otherwise specifically provided by this
Lease, Lessee shall comply in every respect with the provisions of the Franchise
Agreement so as to avoid any default thereunder during the term of this Lease.
Lessor and Lessee agree to cooperate fully with each other in the event it
becomes necessary to obtain a franchise extension or modification or a new
franchise for the Leased Property.
ARTICLE XL
40.1 Room Set-Aside. Lessee is obligated to repair or replace in any
Fiscal Year Fixtures and Furniture and Equipment (i) as required by the terms of
any Franchise Agreement, (ii) as required by Article IX and Article XXXIX and
(iii) otherwise when and in a manner it deems fit, to the extent funds are
available therefor
58
<PAGE>
from amounts the Lessor is obligated to make available to Lessee under this
Section 40.1 or otherwise makes available to Lessee. During the Term Lessor
shall be obligated to make available to Lessee for repairing or replacing
Fixtures and Furniture and Equipment an amount equal to 4% of Room Revenues from
the Facility for the period ending December 31, 1994 and 4% of Room Revenues
from the Facility for each twelve month period thereafter. Lessor shall be
required to make such amounts available to Lessee on a quarterly basis. Upon
written request by Lessee to Lessor stating the specific use to be made and the
reasonable approval thereof by Lessor, such funds shall be made available by
Lessor for use by Lessee for periodic repairing or replacement of Fixtures and
Furniture and Equipment that constitute Leased Property in connection with the
Primary Intended Use. Lessor's obligation shall be cumulative, but not
compounded, and any amounts that have accrued hereunder shall be payable in
future periods for such uses and in accordance with the procedure set forth
herein. Lessee shall be obligated to return any funds forwarded by Lessor
pursuant to this Section 40.1, but not spent for (i) repair or replacement of
Fixtures and Furniture and Equipment that constitute Leased Property in
connection with the Primary Intended Use or (ii) Capital Expenditures pursuant
to Section 40.2. Other than as specifically set forth above in this Section
40.1, Lessee shall have no interest in any accrued obligation of Lessor
hereunder and Lessor shall have no obligation to segregate or separate any such
funds for the benefit of Lessee.
40.2 Capital Expenditures. Lessor shall be obligated to pay the
actual costs of any items that are classified as capital items under U.S.
generally accepted accounting principles which are necessary for the continued
operation of the Facility and otherwise approved by Lessor. To the extent that
at the end of a Fiscal Year the amount set aside exceeds the amount spent on
repair or replacement of Fixtures and Furniture and Equipment, the Lessee may
apply such excess amount towards Lessor's obligations under Section 40.2.
40.3 Prohibited Expenditures. No amounts made available under this
Article shall be used to purchase property (other than "real property" within
the meaning of Treasury Regulations Section 1.856- 3(d)), to the extent that
doing so would cause the Lessor to recognize income other than "rents from real
property" as defined in Section 856(d) of the Code.
59
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease by their duly
authorized officers as of the date first above written.
HUMPHREY HOSPITALITY LIMITED PARTNERSHIP
By: Humphrey Hospitality Trust, Inc.
----------------------------------------
Its: General Partner
By: /s / James I. Humphrey, Jr.
----------------------------------------
James I. Humphrey, Jr.
Title: President
HUMPHREY HOSPITALITY MANAGEMENT, INC.
By: /s / Randy Smith
----------------------------------------
Randy Smith
Title: President
<PAGE>
Exhibit A
PROPERTY DESCRIPTION
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of income on pages
F-4 through F-26 of the Company's Registration Statement on Form S-11
(Registration No. 333-48583) to which this Financial Data Schedule is an
exhibit thereto, and is qualified in its entirety by reference to such financial
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> $353
<SECURITIES> 0
<RECEIVABLES> 1,857
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,210
<PP&E> 53,112
<DEPRECIATION> (2,636)
<TOTAL-ASSETS> 53,799
<CURRENT-LIABILITIES> 822
<BONDS> 31,755
0
0
<COMMON> 35
<OTHER-SE> 17,817
<TOTAL-LIABILITY-AND-EQUITY> 53,799
<SALES> 0
<TOTAL-REVENUES> 7,432
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,022
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,557
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.73
</TABLE>
