<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 5, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SUNSTONE HOTEL INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
115 CALLE DE INDUSTRIAS
SUITE 201
SAN CLEMENTE, CALIFORNIA 92672
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT A. ALTER
SUNSTONE HOTEL INVESTORS, INC.
115 CALLE DE INDUSTRIAS
SUITE 201
SAN CLEMENTE, CALIFORNIA 92672
(714) 361-3900
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)
------------------------
COPIES TO:
<TABLE>
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ROGER M. COHEN, ESQ. PETER T. HEALY, ESQ.
BROBECK, PHLEGER & HARRISON LLP O'MELVENY & MYERS LLP
4675 MACARTHUR COURT, SUITE 1000 275 BATTERY STREET
NEWPORT BEACH, CALIFORNIA 92660 SAN FRANCISCO, CALIFORNIA 94111
(714) 752-7535 (415) 984-8833
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ------------------.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------.
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
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Shares of Common Stock,
$0.01 par value................. 5,520,000 shares $10.75 $59,340,000 $20,462.07
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</TABLE>
(1) Includes up to 720,000 shares of Common Stock issuable upon exercise of an
over-allotment option granted to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457. Based upon the average of the high ($10.875) and
low ($10.625) sale prices reported on the Nasdaq National Market for Common
Stock on July 1, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
SUNSTONE HOTEL INVESTORS, INC.
CROSS-REFERENCE SHEET
PURSUANT TO RULE 501(B) OF REGULATION S-K
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<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
- ------------------------------------------------- -------------------------------------------
<S> <C> <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................................... Not Applicable
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 Data
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; Policies and Objectives
with Respect to Certain Activities;
Certain
Provisions of Maryland Law and of the
Company's Articles of Incorporation and
Bylaws
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
Stockholder Matters...................... Not Applicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
- ------------------------------------------------- -------------------------------------------
<S> <C> <C>
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.................... Principal Stockholders
21. Directors and Executive Officers........... Management
22. Executive Compensation..................... Management
23. Certain Relationships and Related
Transactions............................. Prospectus Summary; Business and
Properties; Management; Certain
Transactions
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 Transactions
26. Limitations of Liability................... Description of Capital Stock
27. Financial Statements and Information....... Prospectus Summary; Selected Financial
Information; Financial Statements
28. Interests of Named Experts and Counsel..... Legal Matters; Experts
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Certain Transactions -- Indemnification
Agreements
</TABLE>
<PAGE> 4
SUBJECT TO COMPLETION, DATED JULY , 1996
4,800,000 SHARES
[LOGO]
COMMON STOCK
Sunstone Hotel Investors, Inc. (the "Company") is a self-administered real
estate investment trust that, through Sunstone Hotel Investors, L.P. (the
"Partnership"), owns mid-price and upscale hotels in the western United States.
The hotels operate or will operate under nationally recognized franchises,
including Courtyard by Marriott(R), Doubletree Hotel(R), Hampton Inn(R), Holiday
Inn(R), Holiday Inn(R) Hotel & Suites, Holiday Inn Express(SM), Holiday Inn
Select(SM) and Residence Inn(R). The Company recently acquired one hotel and
intends to acquire two additional hotels concurrently with the closing of this
Offering (collectively, the "Acquisition Hotels"). Following such acquisitions,
the Company will own 20 hotels with an aggregate of 2,612 rooms in seven states,
including Arizona (1 hotel), California (5), Colorado (6), New Mexico (1),
Oregon (2), Utah (2) and Washington (3).
The net proceeds to the Company from this offering (the "Offering") will be
approximately $48.3 million, $24.4 million of which will be used to fund the
purchase of the Acquisition Hotels, and the balance to repay borrowings
outstanding under the Company's line of credit and for working capital. The
Company's Articles of Incorporation limit its consolidated indebtedness to 50%
of the Company's investment in hotel properties, at cost. Upon the closing of
the Offering, the Company's consolidated indebtedness will be approximately
14.9% of its investment in hotel properties, at cost.
All of the shares of Common Stock offered hereby are being sold by the
Company. The Common Stock is currently listed for quotation on the Nasdaq
National Market under the symbol "SSHI." The Company has applied for approval to
list the Common Stock on the New York Stock Exchange under the symbol "SSI" and
expects to be listed on such exchange prior to the closing of the Offering. On
July 2, 1996, the last reported sales price per share of the Company's Common
Stock on the Nasdaq National Market was $10.875. Since its initial public
offering of Common Stock in August 1995, the Company has paid regular quarterly
dividends representing an annual distribution of $0.92 per share.
SEE "RISK FACTORS" HEREIN FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THE OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
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Price to Underwriting Proceeds to
Public Discount(1) Company(2)
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Per Share.......................................... $ $ $
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Total(3)........................................... $ $ $
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $800,000. See
"Use of Proceeds."
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional 720,000 shares of Common Stock solely to cover over-allotments,
if any, at the Price to Public less the Underwriting Discount. If the
Underwriters exercise this option in full, the Price to Public will total
$ , the Underwriting Discount will total $ , and the
Proceeds to Company will total $ . See "Underwriting."
The shares of Common Stock are offered by the Underwriters named herein,
when, as and if delivered to and accepted by the Underwriters and subject to
their right to reject any order in whole or in part. It is expected that
delivery of the certificates representing the shares of Common Stock will be
made against payment therefor at the office of Montgomery Securities on or about
, 1996.
------------------------
MONTGOMERY SECURITIES
BEAR, STEARNS & CO. INC.
EVEREN SECURITIES, INC.
RAYMOND JAMES & ASSOCIATES, INC.
, 1996
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.
<PAGE> 5
[COLOR PHOTOS OF HOTELS AND MAP]
<PAGE> 6
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 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 Corp
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 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 Stock 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. For further information concerning the Company and
the Common Stock 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 THE OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH 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 NEW YORK STOCK EXCHANGE, THE NASDAQ NATIONAL
MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. DURING THIS OFFERING, CERTAIN
PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN
TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON
STOCK PURSUANT TO EXEMPTIONS FROM RULE 10B-6 AND 10B-7 UNDER THE EXCHANGE ACT.
SEE "UNDERWRITING."
------------------------
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. SUCH
STATEMENTS RELATE TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE
COMPANY, AND PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING
STATEMENTS. PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS PROSPECTUS WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER, INCLUDING THOSE DISCUSSED IN THE SECTION ENTITLED "RISK FACTORS."
i
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY......................... 1
The Company.............................. 1
The Hotels............................... 3
The Lodging Industry..................... 5
Recent Developments...................... 6
Risk Factors............................. 9
Distribution Policy...................... 9
REIT Structure........................... 10
Tax Status............................... 10
The Offering............................. 11
Summary Financial Data................... 12
RISK FACTORS............................... 14
The Company's Inability to Effectively
Manage Growth.......................... 14
Conflicts of Interest Between the Company
and Certain Officers and Directors..... 14
Lack of Control Over Operations of the
Hotels................................. 15
Renovation and Redevelopment Risks....... 15
Risk that Pending Acquisitions Will
Not Close.............................. 15
Multi-Property Acquisition Risks......... 16
Hawthorn Suites Development Risks........ 16
Competition for Acquisitions............. 16
Development Risks........................ 17
Substantial Reliance on Mr. Alter........ 17
Total Dependence on the Lessee and
Payments under the Percentage Leases... 17
Distribution of Substantially All of Cash
Available for Distribution;
Distributions Include Return of
Capital................................ 18
Hotel Industry Risks..................... 18
Real Estate Investment Risks............. 19
Risks of Increases in Operating Costs and
Capital Expenditures................... 21
Dependence on Acquisitions to Increase
Cash Available for Distribution........ 21
Risks of Leverage........................ 21
Risks of Operating Hotels Under Franchise
Agreements............................. 21
Tax Risks................................ 22
Ability of Board of Directors to Change
Certain Policies....................... 23
Common Stock Price Fluctuations and
Trading Volume......................... 23
Adverse Effect of Shares Available for
Future Issuance and Sale on Market
Price of Common Stock.................. 24
Limitation on Acquisition and Change of
Control................................ 24
THE COMPANY................................ 26
USE OF PROCEEDS............................ 27
PRICE RANGE OF COMMON STOCK
AND DISTRIBUTIONS........................ 28
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CAPITALIZATION............................. 29
SELECTED FINANCIAL INFORMATION............. 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................... 34
Overview................................. 34
Pro Forma Results of Operations of the
Company................................ 34
Pro Forma Results of Operations of the
Lessee................................. 36
Seasonality and Diversification.......... 36
Actual Results of Operations of
the Company............................ 37
Pro Forma Liquidity and Capital
Resources.............................. 38
Inflation................................ 39
BUSINESS AND PROPERTIES.................... 40
The Lodging Industry..................... 40
Overview of the Company.................. 41
Growth Strategy.......................... 41
Description of Franchises................ 46
Description of the Hotels................ 49
Operating Performance of the Hotels...... 53
The Percentage Leases.................... 56
The Management Agreement................. 61
Franchise Agreements..................... 61
Operating Practices...................... 63
Employees................................ 63
Environmental Matters.................... 63
Competition.............................. 64
Depreciation............................. 64
Legal Proceedings........................ 65
POLICIES AND OBJECTIVES WITH RESPECT TO
CERTAIN ACTIVITIES....................... 65
Investment Policies...................... 65
Financing................................ 66
Conflict of Interest Policies............ 66
Policies With Respect to Other
Activities............................. 68
Working Capital Reserves................. 68
MANAGEMENT................................. 69
Directors and Executive Officers......... 69
Audit Committee.......................... 70
Compensation Committee................... 71
Executive Compensation................... 71
Compensation of Directors................ 73
Alter Employment Agreement............... 73
Biederman Employment Agreement........... 73
1994 Stock Incentive Plan................ 73
The Directors Plan....................... 76
Limitation of Liability and
Indemnification........................ 77
Certain Events With Respect to Mr. Alter
and Mr. Biederman...................... 78
Strategic Consultant..................... 78
</TABLE>
ii
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<TABLE>
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CERTAIN TRANSACTIONS....................... 79
Minimizing the Risks of Potential
Conflicts
of Interest............................ 79
Initial Capitalization................... 79
Percentage Leases........................ 79
Acquisition of the Sunstone Initial
Hotels................................. 79
Management Agreement..................... 80
Employment Agreements.................... 80
Third Party Pledge Agreement............. 80
Unit Purchase Agreement.................. 80
Purchase of Courtyard by
Marriott-Riverside, California Hotel... 80
Purchase of Residence Inn-Highlands
Ranch, Colorado Hotel.................. 81
Personnel and Office Sharing Arrangement
and Certain Reimbursements............. 81
Indemnification Agreements............... 81
THE LESSEE................................. 82
General.................................. 82
Management............................... 82
1996 Stock Appreciation Rights Plan...... 83
THE MANAGEMENT COMPANY..................... 85
General.................................. 85
The Management Agreement................. 85
PRINCIPAL STOCKHOLDERS..................... 86
DESCRIPTION OF CAPITAL STOCK............... 87
General.................................. 87
Common Stock............................. 87
Preferred Stock.......................... 88
Classification or Reclassification of
Common Stock or Preferred Stock........ 88
Restrictions on Ownership................ 88
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S ARTICLES OF INCORPORATION
AND BYLAWS............................... 91
Classification of the Board of
Directors.............................. 91
Removal of Directors..................... 91
Limitation of Liability and
Indemnification........................ 91
Business Combinations.................... 92
Control Share Acquisitions............... 93
Amendments to the Company's Articles of
Incorporation and Bylaws............... 93
Dissolution of the Company............... 94
<CAPTION>
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<S> <C>
Operations............................... 94
Anti-Takeover Effect of Certain
Provisions
of Maryland Law and of the Company's
Articles of Incorporation and Bylaws... 94
Other Matters............................ 94
SHARES AVAILABLE FOR FUTURE
SALE..................................... 94
PARTNERSHIP AGREEMENT...................... 95
Management............................... 95
Transferability of Interests............. 95
Capital Contribution..................... 96
Redemption Rights........................ 96
Registration Rights...................... 97
Operations............................... 97
Distributions............................ 97
Allocations.............................. 97
Term..................................... 97
Tax Matters.............................. 97
FEDERAL INCOME TAX CONSIDERATIONS.......... 98
Summary of Tax Opinions.................. 98
Taxation of the Company.................. 99
Requirements for Qualification........... 100
Failure to Qualify....................... 108
Taxation of Taxable U.S. Stockholders.... 108
Taxation of Stockholders on the
Disposition
of the Common Stock.................... 109
Capital Gains and Losses................. 109
Information Reporting Requirements and
Backup Withholding..................... 109
Taxation of Tax-Exempt Stockholders...... 110
Taxation of Non-U.S. Stockholders........ 110
Other Tax Consequences................... 111
Tax Aspects of the Partnership........... 112
UNDERWRITING............................... 116
EXPERTS.................................... 117
REPORTS TO STOCKHOLDERS.................... 117
LEGAL MATTERS.............................. 117
ADDITIONAL INFORMATION..................... 118
GLOSSARY................................... 119
SIGNATURES........................... Part II-11
POWER OF ATTORNEY.................... Part II-11
INDEX OF FINANCIAL STATEMENTS.............. F-1
</TABLE>
iii
<PAGE> 9
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 the context otherwise indicates, all references
herein to the "Company" include Sunstone Hotel Investors, Inc. and the
Partnership, Sunstone Hotel Investors, L.P. Except as otherwise noted, all the
information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option. The offering of 4,800,000 shares of Common Stock pursuant
to this Prospectus is referred to as the "Offering." As used herein, the terms
"upscale" and "mid-price", respectively, mean the segments of the lodging
industry classified as such by Smith Travel Research in its industry reports
that consist of hotels with average daily room rates (total revenues divided by
the total number of rooms occupied) between the 70th and 85th percentile and the
40th and 70th percentile, respectively, of the average daily room rates of all
hotels in the markets in which the Company's hotels operate. See "Glossary" for
the definitions of certain additional terms used in this Prospectus.
THE COMPANY
The Company is a self-administered real estate investment trust ("REIT")
that, through Sunstone Hotel Investors, L.P. (the "Partnership"), owns
mid-priced and upscale hotels in the western United States. The hotels operate
or will operate under nationally recognized franchises, including Courtyard by
Marriott, Doubletree Hotel, Hampton Inn, Holiday Inn, Holiday Inn Hotel &
Suites, Holiday Inn Express, Holiday Inn Select and Residence Inn. The Company
owns 18 hotels, eight of which were acquired subsequent to the Company's initial
public offering (the "IPO") in August 1995. The Company recently acquired one of
the 18 hotels and intends to acquire two additional hotels concurrently with the
closing of the Offering (collectively, the "Acquisition Hotels"). Following such
acquisitions, the Company will own 20 hotels with an aggregate of 2,612 rooms in
seven states, including Arizona (1 hotel), California (5), Colorado (6), New
Mexico (1), Utah (2), Oregon (2), and Washington (3), and will have doubled the
number of hotels in its portfolio in the 12 months since the IPO. The 17 hotels
owned prior to June 1, 1996 are referred to as the "Current Hotels," and
together with the three Acquisition Hotels are referred to as the "Hotels."
In addition to significantly expanding its hotel portfolio, the Company has
generated internal revenue growth by renovating or redeveloping many of the
Current Hotels, and improving their management and marketing programs. As a
REIT, the Company derives revenues from its hotels through leases (the
"Percentage Leases") between the Partnership, as landlord, and Sunstone Hotel
Properties, Inc. (the "Lessee") which provide for rent payments based
principally on a percentage of room revenues at the hotels. Revenue per
available room ("REVPAR") for the seven Current Hotels that were owned by the
Company or its predecessor for the entire first quarter of 1995 and 1996 and
were not undergoing redevelopment or significant renovation during such periods
increased 8.2%, from $50.43 to $54.58. REVPAR for all of the Current Hotels and
the Acquisition Hotels during such periods increased 1.6%, from $38.22 to
$38.82. The Company believes that its recently completed and future
redevelopment and renovation activities, as well as improvements in management
and marketing, will continue to fuel REVPAR growth at its hotels, thereby
increasing revenue to the Company.
The Company's growth strategy is to enhance stockholder value by increasing
Cash Available for Distribution per share to the holders of its Common Stock by:
- Acquiring underperforming hotels located primarily in the western United
States that are, or can be redeveloped and repositioned into, nationally
franchised mid-price and upscale hotels, with an increasing emphasis on
multi-property acquisitions;
- Enhancing the operating performance of hotels owned or acquired by the
Company through selective renovation, redevelopment and rebranding, and
improved management and marketing;
- Developing Hawthorn Suites, a national chain of upscale extended-stay
hotels, through property conversions or new construction in several major
urban markets on the West Coast pursuant to a proposed master development
agreement with U.S. Franchise Systems, Inc.; and
1
<PAGE> 10
- Selectively developing new mid-price and upscale hotels in markets where
room demand and other competitive factors justify new construction.
The Company believes that there will continue to be substantial
acquisition, redevelopment, renovation and repositioning opportunities in the
near future in the mid-price and upscale hotel markets in the western United
States. The Company believes these opportunities will result from the aging of a
significant portion of the nation's hotel supply and the recent imposition of
capital expenditure and other modernization requirements by certain national
hotel franchisors on the owners of franchised hotels, many of which are small
independent hotel companies or private hotel owners that may be unwilling or
unable to satisfy such requirements.
Since its IPO in August 1995, the Company has:
- Acquired six of the Current Hotels for purchase prices aggregating $19.3
million, including a portfolio of four hotels in Washington and Oregon;
- Acquired and substantially completed construction of a 78-room Residence
Inn for approximately $5.0 million, which is expected to open during the
third quarter of 1996;
- Acquired one of the Acquisition Hotels, and contracted to acquire the
other two Acquisition Hotels, for purchase prices aggregating $23.8
million, and with the Acquisition Hotels will have increased the number
of rooms in its portfolio by 96.7% to 2,612;
- Completed $1.2 million in renovations to two of the Current Hotels and
$3.9 million of redevelopment to two of the Current Hotels, and commenced
redevelopment budgeted at $5.5 million to four of the Current Hotels;
- Entered into a letter of intent with U.S. Franchise Systems, Inc.
expected to result in a master development agreement to franchise
extended-stay Hawthorn Suites in several major urban markets on the West
Coast;
- Entered into a letter of intent to acquire a 166-room full-service
convention hotel for $8.4 million upon completion of construction by an
unaffiliated developer, which is expected to occur in 1997;
- Increased availability under the Line of Credit from $30 million to $50
million; and
- Added two project managers and benefitted from the addition of a chief
financial officer, an asset manager and other management personnel to the
Lessee.
2
<PAGE> 11
THE HOTELS
Strong Franchise Brands
Consistent with its strategy to own hotels with nationally recognized
franchise affiliations, upon the closing of the Offering, the Company will own
hotels with the following brands:
<TABLE>
<CAPTION>
NUMBER OF NUMBER PERCENTAGE OF
HOTELS OF ROOMS TOTAL ROOMS
--------- -------- -------------
<S> <C> <C> <C>
CURRENT HOTELS
Courtyard by Marriott..................................... 2 279 10.7%
Doubletree Hotel.......................................... 1 213 8.2%
Hampton Inn(1)............................................ 7 939 35.9%
Holiday Inn brands(2)(3).................................. 6 599 22.9%
Residence Inn(4).......................................... 1 78 3.0%
ACQUISITION HOTELS
Comfort Suites(5)......................................... 1 165 6.3%
Days Inn(6)............................................... 1 151 5.8%
Holiday Inn Select(7)..................................... 1 188 7.2%
--
----- -----
20 2,612 100.0%
== ===== =====
</TABLE>
- ---------------
(1) The Company has received a franchise license from Promus Hotels, Inc. for a
Hampton Inn for the Clackamas, Oregon, Cypress Inn hotel, subject to the
completion of certain renovations and improvements, which the Company
estimates will be completed during the third quarter of 1996.
(2) The Holiday Inn brands include Holiday Inn, Holiday Inn Express, Holiday Inn
Select and Holiday Inn Hotel & Suites.
(3) The Company has received franchise licenses from Holiday Inns Franchising,
Inc. ("Holiday Inn") for (i) a Holiday Inn Hotel & Suites for the Cypress
Inn-Kent (Seattle), Washington hotel, (ii) a Holiday Inn Express for the
Cypress Inn-Portland, Oregon and Cypress Inn-Poulsbo, Washington hotels and
(iii) a Holiday Inn Hotel & Suites for the Holiday Inn-Craig, Colorado
hotel, subject in each instance to the completion of certain renovations and
improvements, which the Company estimates will be completed during the third
quarter of 1996 (except for the Holiday Inn-Craig, Colorado hotel, which is
estimated to be completed during the first quarter of 1997).
(4) The Company has received a franchise license from Marriott International,
Inc. ("Marriott") for a Residence Inn for the Highlands Ranch (Denver),
Colorado hotel, subject to the completion of construction, which the Company
estimates will be completed during the third quarter of 1996.
(5) The Company is considering converting this hotel to an extended-stay
national brand following its acquisition.
(6) The Company has applied to Holiday Inn for a Holiday Inn Hotel & Suites
franchise license for the Days Inn-Price, Utah hotel, which has not yet been
granted. If a license is granted, the Company expects it would be subject to
certain renovations and improvements, which the Company estimates would be
completed during the fourth quarter of 1996.
(7) The Company has received a franchise license from Holiday Inn for a Holiday
Inn Select franchise license for the Holiday Inn-Renton (Seattle),
Washington hotel, subject to the completion of certain renovations and
improvements, which the Company estimates will be completed during the
fourth quarter of 1996.
For a description of the accommodations, services and amenities generally
offered by each franchise system, see "Business and Properties."
3
<PAGE> 12
Operational Data
The following table sets forth certain unaudited pro forma operational data
on a hotel-by-hotel basis, including Percentage Rent payments to the Company
from the Lessee.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------
REVENUE
YEAR NO. AVERAGE PER
YEAR RENOVATED/ OF ROOM PRO FORMA AVERAGE DAILY AVAILABLE
OPENED REDEVELOPED ROOMS REVENUE RENT(1) OCCUPANCY(2) RATE ROOM(3)
------ ----------- ----- ------------ ----------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS
Courtyard by Marriott:
Fresno, California............. 1989 1994 116 $1,784,403 $ 768,590 72.5% $58.11 $ 42.13
Riverside, California.......... 1988 1994 163 1,510,480 524,250 52.9 48.04 25.41
----- ---------- ----------
Subtotal/weighted average.... 279 3,294,883 1,292,840 61.0 53.01 32.34
----- ---------- ----------
Doubletree Hotel:
Santa Fe, New Mexico........... 1985 1996 213 2,904,098 1,108,599 51.8 72.14 37.37
Hampton Inn:
Mesa, Arizona.................. 1987 118 2,103,230 980,574 82.3 59.35 48.85
Arcadia, California............ 1989 131 1,866,039 896,010 64.2 60.78 39.02
Oakland, California............ 1986 1996 152 2,178,429 593,410 85.0 47.13 40.06
Denver, Colorado............... 1986 152 2,771,499 1,412,344 80.2 62.32 49.98
Pueblo, Colorado............... 1986 112 2,050,358 993,912 87.4 57.38 50.15
Silverthorne, Colorado......... 1976 1996 160 2,380,277 980,809 58.6 69.57 40.77
Clackamas (Portland),
Oregon(4).................... 1986 1996 114 976,469 464,312 48.9 47.95 23.45
----- ---------- ----------
Subtotal/weighted average.... 939 14,326,301 6,321,371 72.4 57.75 41.81
----- ---------- ----------
Holiday Inn:
Steamboat Springs, Colorado.... 1974 1996 82 1,408,569 504,593 66.3 70.94 47.03
Provo, Utah.................... 1972 1994 78 1,222,237 536,023 78.5 54.67 42.92
----- ---------- ----------
Subtotal/weighted average.... 160 2,630,806 1,040,616 72.3 62.32 45.06
----- ---------- ----------
Holiday Inn Hotel & Suites:
Craig, Colorado(4)............. 1981 1992 169 1,632,494 646,100 55.7 47.54 26.48
Kent (Seattle),
Washington(4)................ 1987 1996 122 1,386,483 641,062 52.3 59.58 31.16
----- ---------- ----------
Subtotal/weighted average.... 291 3,018,977 1,287,162 54.2 52.40 28.40
----- ---------- ----------
Holiday Inn Express:
Portland, Oregon(4)............ 1986 1996 85 983,719 372,309 63.5 49.89 31.68
Poulsbo, Washington(4)......... 1986 1996 63 755,818 343,022 62.1 52.90 32.85
----- ---------- ----------
Subtotal/weighted average.... 148 1,739,537 715,331 62.9 51.16 32.18
----- ---------- ----------
Residence Inn:
Highlands Ranch (Denver),
Colorado(5).................. 1996 78 N/A N/A N/A N/A N/A
----- ---------- ----------
Total/weighted average........... 2,108 27,914,602 11,765,919 65.4 57.64 37.70
----- ---------- ----------
ACQUISITION HOTELS
Comfort Suites:
South San Francisco,
California(6)................ 1985 165 3,204,950 1,272,963 83.3 65.18 54.29
Days Inn:
Price, Utah(7)................. 1984 151 1,553,590 714,696 69.0 40.46 27.92
Holiday Inn Select:
Renton (Seattle),
Washington(8)................ 1968 1994 188 2,914,026 1,266,454 74.3 57.18 42.48
----- ---------- ----------
Total/weighted average........... 2,612 $35,587,168 $15,020,032 67.4% $57.08 $ 38.47
===== ========== ==========
</TABLE>
- ---------------
(1) Represents rents to be paid by the Lessee to the Company calculated on a pro
forma basis by applying the rent provisions in the Percentage Leases, using
historical revenues and related expenses of the Hotels as if they were owned
as of January 1, 1995. For pro forma and historical revenues and related
expenses associated with the operation of the Lessee, the Company and the
Hotels, see "Selected Financial Information" and the financial statements
elsewhere in this Prospectus.
4
<PAGE> 13
(2) The average occupancy rates for certain of the Current Hotels reflect the
Company's strategy of acquiring underperforming hotels to be redeveloped,
renovated and/or rebranded.
(3) Revenue per available room is determined by dividing room revenues by
available rooms for the applicable period.
(4) This hotel is currently undergoing redevelopment or renovation in order to
satisfy the franchise license for the brand under which the hotel is listed
in the column. The Company estimates redevelopment or renovation will be
completed during the third quarter of 1996, except for the Holiday
Inn-Craig, Colorado hotel which is estimated to be completed during the
first quarter of 1997.
(5) This hotel is currently under construction, which the Company estimates will
be completed during the third quarter of 1996. The Company has received a
franchise license from Marriott for a Residence Inn for this hotel, subject
to the completion of construction.
(6) The Company is considering converting this hotel to an extended-stay brand
following its acquisition.
(7) The Company has applied to Holiday Inn for a Holiday Inn Hotel & Suites
franchise license for the Days Inn-Price, Utah hotel, which has not yet been
granted. If a license is granted the Company expects it would be subject to
certain renovations and improvements, which the Company estimates would be
completed during the fourth quarter of 1996.
(8) Renovations to date were made in 1994 by the prior owner. The Company is
obligated to renovate the hotel following the Offering in order to satisfy a
franchise license from Holiday Inn for a Holiday Inn Select. The Company
estimates that such renovations will be completed during the fourth quarter
of 1996.
THE LODGING INDUSTRY
The fundamentals of the lodging industry have improved significantly in
each year since 1991. The industry as a whole generated record earnings in 1995,
with industry-wide pre-tax profits of $8.5 billion. This was up 55% from $5.5
billion in pre-tax profits in 1994, and represented the industry's third
consecutive year of profitability. Coopers & Lybrand Hospitality Directions,
January 1996 ("Hospitality Directions") projects that industry pre-tax profits
will reach $14.7 billion in 1998.
The industry's profitability has been fueled by four consecutive years in
which the growth in demand for hotel rooms has exceeded the growth in room
supply. Industry-wide growth in room demand exceeded the growth in total room
supply by 2.0%, 2.6%, 2.8% and 1.4% in 1992, 1993, 1994 and 1995, respectively.
This trend has continued in the first quarter of 1996, with demand growth
eclipsing supply growth by 1.2%, despite harsh winter weather conditions
affecting many markets.
This sustained, favorable relationship between demand growth and supply
growth has enabled the industry to increase REVPAR every year since 1991. REVPAR
for the industry as a whole grew 2.4%, 5.7%, 6.9% and 5.6% in 1992, 1993, 1994
and 1995, respectively, and increased 7.4% in the first quarter of 1996 compared
to the first quarter of 1995. Hospitality Directions forecasts industry-wide
REVPAR gains averaging 5% annually in the period 1996 through 1998.
The fundamentals are similarly favorable in the mid-price segment in which
the majority of the Company's hotels operate. Demand for mid-price rooms grew at
3.8% in 1995, while the supply of new mid-price rooms increased only 2.4%.
Carrying this trend forward, demand for mid-price rooms grew at the same 3.8%
rate during the 12 months ended March 31, 1996, compared to a 2.6% increase in
mid-price room supply in the same period.
REVPAR at mid-price hotels grew 5.3% in 1995, and increased 6.4% in the 12
months ended March 31, 1996, compared to the 12 months ended March 31, 1995.
Hospitality Directions forecasts that the mid-price segment will achieve REVPAR
gains averaging 4.9% annually in the period 1996 through 1998.
The upscale segment of the industry, which represents a growing number of
the Company's hotels, is expected to achieve strong results in the near-term due
to limited growth in the supply of new upscale rooms. Demand growth should
exceed the rate of new upscale room supply by an average of 0.6% annually during
the
5
<PAGE> 14
1996-1998 period, according to Hospitality Directions, translating into an
average 5.7% annual increase in REVPAR for the upscale segment for the same
1996-1998 period.
The Company believes near-term supply growth will be limited in the upscale
segment due to (i) the continued availability of upscale hotel acquisition
opportunities in most markets at prices below replacement cost, (ii) the high
relative cost of construction of upscale hotels, (iii) more limited financing
available for upscale hotel construction, and (iv) long construction lead times
for upscale hotels.
Unless otherwise noted, all statistics in this Prospectus relating to the
lodging industry generally (other than Company statistics) are from, or have
been derived from, information published or provided by Smith Travel Research,
an independent industry research organization. Smith Travel Research has not
provided any form of consultation, advice or counsel regarding any aspect of the
Offering, and Smith Travel Research is in no way associated with the Offering.
RECENT DEVELOPMENTS
Completed and Pending Acquisitions
The following table sets forth certain information with respect to the
Company's hotel acquisitions, including those acquired in the IPO and
thereafter.
<TABLE>
<CAPTION>
HOTELS ROOMS
---------------------- ----------------------
NUMBER OF CUMULATIVE NUMBER OF CUMULATIVE
DATE ACQUIRED PROPERTIES HOTELS TOTAL ROOMS TOTAL
- --------------------- -------------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
August 1995 (IPO) Initial Hotels 10 10 1,331(2) 1,331
December 1995 Hampton Inn, Oakland, California 1 11 152 1,483
December 1995(1) Residence Inn, Highlands Ranch 1 12 78 1,561
February 1996 Cypress Inn Hotels: 4 16 384 1,945
Holiday Inn Express, Poulsbo,
Washington
Holiday Inn Express, Portland,
Oregon
Holiday Inn Hotel & Suites,
Kent (Seattle),
Washington
Hampton Inn, Clackamas
(Portland), Oregon
April 1996 Courtyard by Marriott, 1 17 163 2,108
Riverside, California
June 1996 Holiday Inn Select, Renton, 1 18 188 2,296
Washington
August 1996 (est.) Comfort Suites, South San 1 19 165 2,461
Francisco, California
Days Inn, Price, Utah 1 20 151 2,612
</TABLE>
See the table on page 3 for the status of franchise licenses.
- ---------------
(1) The Company acquired the land on this date. The hotel is currently under
construction and is expected to be completed by the end of the third quarter
of 1996.
(2) The total number of rooms at the time of the IPO was 1,328. In connection
with the redevelopment of the Doubletree -- Santa Fe, New Mexico hotel,
three rooms were added.
The Company acquired six hotels in the Cypress Inn portfolio purchase in
February 1996 for approximately $15 million. The six hotels were sold as a
package by a lender following a mortgage loan default by the owner/borrower. In
May 1996, the Company sold two of the hotels without adverse tax consequences
because they did not satisfy the Company's investment criteria. The Company has
commenced redevelopment budgeted at $5.5 million to the four remaining hotels
(collectively, the "Cypress Inn Hotels"), which it
6
<PAGE> 15
expects to complete during the third quarter of 1996. See "Redevelopment and
Renovation" immediately below and "Business and Properties -- Growth
Strategy -- Redevelopment and Renovation" elsewhere in this Prospectus. The
Company believes that after taking into account the purchase price and
redevelopment expenses for the four retained Cypress Inn Hotels, the total cost
to the Company for these hotels will be below replacement cost.
The Company acquired one of the Acquisition Hotels, a 188-room Holiday Inn
in Renton, Washington, on June 28, 1996 for $8.1 million. The Company intends to
acquire the other two Acquisition Hotels as a package concurrently with the
closing of the Offering for a cash purchase price of approximately $15.7
million: (1) a 165-room Comfort Suites in South San Francisco, California, and
(2) a 151-room Days Inn in Price, Utah. The purchase agreement for these two
hotels will contain customary closing and other conditions. The Company has not
completed its physical, economic or environmental due diligence investigation of
these hotels, and there can be no assurance that the Company will close this
acquisition. See "Risk Factors -- Risk that Pending Acquisitions Will Not
Close."
Development of Residence Inn
The Company is currently developing a 78-room Residence Inn hotel in
Highlands Ranch (Denver), Colorado. Highlands Ranch is a rapidly growing
22,000-acre master planned community with a limited number of sites designated
for hotel development. The Company believes that this extended-stay hotel will
appeal to families relocating to the community and business travelers visiting
the business parks in the community. The Company expects to complete the $5.0
million project during the third quarter of 1996. The site includes sufficient
land to add 42 rooms if and when market conditions justify an expansion. There
can be no assurance, however, that this development will be completed on time or
within budget. See "Risk Factors -- Development Risks."
Redevelopment and Renovation
Since the IPO, the Company has completed $3.9 million in redevelopment to
two of the Current Hotels, and has commenced redevelopment budgeted at $5.5
million on the four recently acquired Cypress Inn Hotels, which the Company
estimates will be completed during the third quarter of 1996. This redevelopment
will enable the Company to rebrand these hotels as a Holiday Inn Hotel & Suites
hotel, two Holiday Inn Express hotels and a Hampton Inn hotel, which the Company
believes will allow it to significantly increase REVPAR at each hotel. The two
Current Hotels which were redeveloped included the Best Western-Santa Fe, New
Mexico hotel ($2.3 million), which was transformed from a mid-price hotel into a
full-service, upscale Doubletree Hotel, and the Holiday Inn-Steamboat Springs,
Colorado hotel ($1.6 million), at which major exterior, guestroom, common area
and restaurant improvements were made. The restaurant improvements at the
Holiday Inn-Steamboat Springs hotel enabled the Company to lease the restaurant
to a regional restaurant operator, which the Company believes will provide
increased lease revenue from the hotel.
Since the IPO, the Company also completed $1.2 million in renovations to
two of the Current Hotels. These included the Hampton Inn-Oakland, California
hotel ($1 million) and the Hampton Inn-Silverthorne, Colorado hotel ($0.2
million). In each case, improvements were made to guest rooms and bathrooms, as
well as to the lobby and other common areas. In addition, improvements were made
to the restaurant at the Hampton Inn-Silverthorne, Colorado hotel, enabling the
Company to lease the restaurant to a regional restaurant operator, which the
Company believes will provide increased lease revenue from the hotel.
For a general discussion of the Company's renovation and redevelopment
strategy and specific information on the renovation and redevelopment work
completed or to be completed at each Hotel, see "Business and
Properties -- Growth Strategy -- Internal Growth Strategy -- Redevelopment and
Renovation." There can be no assurance that renovation or redevelopment work
will be completed on time or within budget. See "Risk Factors -- Renovation and
Redevelopment Risk."
The Company believes that after taking into account purchase prices of the
hotels and the costs of redeveloping or renovating them, the total cost to the
Company for the hotels which were redeveloped or renovated since the IPO, and
those which are now being redeveloped or renovated, is 30% to 40% below
replacement cost.
7
<PAGE> 16
Hawthorn Suites Master Development Agreement
The Company recently entered into a letter of intent with U.S. Franchise
Systems, Inc. ("USFS") which is expected to lead to a master development
agreement to franchise extended-stay Hawthorn Suites hotels in several major
urban markets in California, Oregon and Washington, including San Diego, San
Francisco, San Jose, Portland, Seattle and certain areas of Los Angeles. Under
the proposed arrangement the Company would have the first right to develop
Hawthorn Suites in its selected submarkets, provided it meets certain deadlines
for acquiring hotel sites and applying for franchise licenses. Development may
consist of conversions of existing properties or new construction and may be
performed by the Company, or by unaffiliated developers (and thus allow the
Company to minimize development risks). It is intended that USFS will be
required to help the Company identify hotel sites, provide architectural plans
and development oversight and assist in marketing the hotels. For a more
detailed description of the intended agreement regarding Hawthorn Suites, see
"Business and Properties -- Growth Strategy -- External Growth Strategy." The
Hawthorn Suites arrangement is only in the letter of intent stage, and there is
no assurance that the Company will enter into a definitive agreement regarding
it, or, that such agreement would contain the terms described herein. See "Risk
Factors -- Hawthorn Suites Development Risks" and "-- Development Risks."
Hawthorn Suites are upscale extended-stay hotels competing primarily with
Residence Inns and Homewood Suites. The franchise rights to this brand were
recently acquired by USFS, a hotel franchise company founded by Michael Leven,
the former President of Holiday Inn. The Company believes USFS intends to grow
the Hawthorn Suites brand into a leading national hotel chain from its current
base of 17 Hawthorn Suites hotels. The Company believes the arrangement with
USFS will give it a significant advantage in the growing extended-stay market in
the western United States.
Letter of Intent to Acquire Newly Developed Convention Center Hotel
In June 1996, the Company entered into a letter of intent with Mortensen
Development Corporation, a major developer of hotels in the United States, to
acquire a 166-room hotel to be developed in Pueblo, Colorado (the "Pueblo
Convention Hotel") for approximately $8.4 million. The Company's acquisition
will be subject to the completion of construction and opening of the hotel, and
certain additional conditions to be set forth in a definitive purchase
agreement. The Company anticipates that the development will commence by the
fourth quarter of 1996 and the hotel will open by the end of the third quarter
of 1997. The Company intends to brand the hotel as a Doubletree Hotel and to
lease the restaurant to a national or regional restaurant company. The project
is being coordinated by the Company and the developer with the local government,
which will develop and own the nearby Pueblo Convention Center, and which owns
and will lease to the Company the real property on which the hotel will be
built. Because of certain financial assistance being provided to the developer
by the local government, the cost per room to the Company for the Pueblo
Convention Hotel is anticipated to be less than the cost to develop a comparable
hotel. There can be no assurance, however, that a definitive development and
purchase agreement will be executed or that the Pueblo Convention Hotel will be
constructed or that the Company will consummate the acquisition. See "Risk
Factors -- Development Risks." The financial and statistical information set
forth in this Prospectus does not include information for the Pueblo Convention
Hotel.
Line of Credit and Term Loan
In June of 1996, the Company's lender, Bank One, Arizona, N.A., increased
the availability of borrowings under the Company's revolving line of credit (the
"Line of Credit") from $30 million to $50 million. At the same time, the bank
reduced the interest rate from LIBOR plus 2.75% to LIBOR plus 2.25%, with
further reductions to LIBOR plus 1.90% after the Company closes the Offering,
and LIBOR plus 1.75% if the Company satisfies certain other financial
conditions. The Company will use a portion of the proceeds of the Offering to
repay borrowings outstanding under the Line of Credit. Borrowings under the Line
of Credit are subject to the provision in the Articles of Incorporation which
limits the Company's consolidated indebtedness to 50% of its investment in hotel
properties, at cost. After proceeds of this Offering are used to repay
borrowings under the Line of Credit, the balance due under the Line of Credit
will be approximately $9.0 million and the Company's consolidated indebtedness
will be approximately 14.9% of its investment in hotel properties, at cost.
8
<PAGE> 17
In addition to increasing available borrowings under the Line of Credit,
the Company recently applied to a life insurance company for a $9.0 million
10-year fixed-rate term loan (the "Term Loan"), which will be secured by two of
the Current Hotels. The Term Loan is expected to close in the fourth quarter of
1996. The Company intends to use the proceeds of the Term Loan to further repay
borrowings under the Line of Credit. There can be no assurance that the Company
will consummate the Term Loan.
For further information regarding the Company's indebtedness and use of
debt financing, see "Risk Factors -- Risks of Leverage," "Policies and
Objectives with Respect to Certain Activities -- Financing" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Pro
Forma Liquidity and Capital Resources."
Additions to Management; Strategic Consulting
The Company added two project managers with extensive construction industry
experience to supervise hotel renovation and redevelopment. The Company has also
entered into a preliminary agreement with Geller & Co., a leading hotel industry
consulting firm, to provide strategic advice in connection with future
acquisitions and alliances with hotel franchisors. Lawrence Geller, the
principal of Geller & Co., has extensive experience and contacts in the hotel
industry, which the Company believes will help strengthen its strategic
relationships and provide additional growth opportunities. Under the consulting
arrangement, Geller & Co.'s fees will be paid only in shares of Common Stock and
options to acquire Common Stock. See "Business and Properties -- Growth
Strategy" and "Management -- Strategic Consultant."
The Lessee has also added a number of key management personnel to oversee
the operation of the Company's hotels. Kenneth J. Biehl, who served as Vice
President and Corporate Controller of Starwood Lodging Corporation, has joined
the Lessee as Chief Financial Officer. The Lessee has also added an asset
manager, a director of human resources and three regional general managers. The
Lessee will also adopt a stock appreciation rights plan tied to the price of the
Company's Common Stock in order to help further align the interests of the
Lessee's employees with those of the Company's stockholders, and will issue
162,400 stock appreciation rights to 98 of the Lessee's employees. See "The
Lessee -- Management."
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES VARIOUS RISKS, AND INVESTORS
SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS."
DISTRIBUTION POLICY
For the period from August 16, 1995 (the closing date of the IPO) through
March 31, 1996, the Company paid quarterly dividends at the rate of $0.23 per
share per quarter (corresponding to $0.92 per share per year). The Company
intends to declare a dividend in July 1996 of $0.23 per share for the second
quarter of 1996 with a record date prior to the closing of the Offering.
Therefore, purchasers of Common Stock in the Offering will not receive this
dividend. The Company's distributions with respect to 1995 included an
approximate 15% return of capital. Given the dynamic nature of the Company's
acquisition strategy and the extent to which any future acquisitions may alter
this calculation, no assurances can be given regarding what percent of future
dividends will constitute return of capital for federal income tax purposes.
While future distributions paid by the Company will be at the discretion of the
Board of Directors and will depend on the actual cash flow of the Company, its
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and such other factors as the directors of the Company deem relevant,
it is the present intention of the Company to pay regular quarterly dividends of
at least the current dividend rate for the immediate future. See "Prospectus
Summary -- Tax Status," "Partnership Agreement -- Distributions" and "Price
Range of Common Stock and Distributions." In the future the Company may
implement a dividend reinvestment program under which holders of Common Stock
may elect automatically to reinvest dividends and make additional investments in
shares of Common Stock. If a dividend reinvestment and stock purchase program is
9
<PAGE> 18
implemented, the Company may, from time to time, repurchase Common Stock in the
open market for purposes of fulfilling its obligations under this program, or
may elect to issue additional shares of Common Stock.
REIT STRUCTURE
In order for the Company to qualify as a REIT under federal income tax law,
neither the Company nor the Partnership can operate hotels. The Partnership
leases the Current Hotels and will lease the Acquisition Hotels and intends to
lease any other hotels acquired in the future to the Lessee pursuant to
Percentage Leases between the Partnership and the Lessee, each with an initial
term of ten years. The Lessee will pay the franchise fees, management fees and
certain other operating expenses of the Hotels. The Lessee is owned by Robert A.
Alter, Chairman and President of the Company, and Charles L. Biederman, director
and Executive Vice President of the Company. The Current Hotels are, and the
Acquisition Hotels will be, managed by Sunstone Hotel Management, Inc. (the
"Management Company") pursuant to a management agreement between the Lessee and
the Management Company (the "Management Agreement") for a fee equal to 2% of
gross revenues of the Hotels. The Management Company is owned by Mr. Alter.
In order to minimize conflicts of interest inherent in the legal structure
required to maintain the Company's status as a REIT, Mr. Alter and Mr. Biederman
have entered into a pledge agreement (the "Third Party Pledge Agreement") that
requires each of them to pledge ownership units in the Partnership ("Units") to
the Company to secure the Lessee's obligations under the Percentage Lease
applicable to each hotel now leased or acquired in the future and leased to the
Lessee in an amount equal to four months' initial base rent for the Company's
hotels. Mr. Alter and Mr. Biederman have also entered into a unit purchase
agreement with the Company and the Lessee (the "Unit Purchase Agreement"), that
requires that the Lessee's income (net of shareholder tax liability) be used to
either accumulate reserves to pay rent under the Percentage Leases or to
purchase Units from the Partnership at the then current price of the Common
Stock. The Percentage Leases also contain cross-default provisions permitting
the Company to terminate one or more of the Percentage Leases at its election,
subject to certain conditions, upon a default by Mr. Alter or Mr. Biederman
under the Unit Purchase Agreement or any other agreement with the Company.
Further, the Management Company has agreed not to collect any payments from the
Lessee after receiving notice of an event of default under a Percentage Lease.
Mr. Alter has personally guaranteed the Lessee's obligation to return any
amounts received by the Management Company in violation of this agreement.
TAX STATUS
The Company will elect to be taxed as a REIT under Sections 856-860 of the
Code, commencing with its short taxable year ended December 31, 1995. If the
Company qualifies for taxation as a REIT, then under current federal income tax
laws the Company generally will not be taxed at the corporate level to the
extent it currently distributes at least 95% of its net taxable income to its
stockholders. Even if the Company qualifies for taxation as a REIT, the Company
may be subject to certain federal, state and local taxes on its income and
property and to federal income and excise tax on its undistributed income.
Failure to qualify as a REIT will render the Company subject to federal income
tax (including any applicable minimum tax) on its taxable income at regular
corporate rates and distributions to the holders of Common Shares in any such
year will not be deductible by the Company. Although the Company does not intend
to request a ruling from the Internal Revenue Service (the "Service") as to its
REIT status, the Company has obtained the opinion of its legal counsel, Brobeck,
Phleger & Harrison LLP, that the Company qualifies as a REIT, which opinion is
based on certain assumptions and representations and is not binding on the
Service or any court. In connection with the Company's election to be taxed as a
REIT, the Company's Certificate of Incorporation imposes restrictions on the
transfer of shares of Common Stock. The Company has adopted the calendar year as
its taxable year. See "Risk Factors -- Tax Risks" and "-- Ownership Limitation,"
"Federal Income Tax Considerations -- Taxation of the Company" and "Description
of Capital Stock -- Certificate of Incorporation and Bylaw
Provisions -- Restrictions on Transfer."
10
<PAGE> 19
THE OFFERING
<TABLE>
<S> <C>
Shares of Common Stock offered by the Company...... 4,800,000 shares
Shares of Common Stock and Units to be outstanding
after the Offering............................... 12,580,800 shares and Units(1)
Use of Proceeds.................................... To fund the purchase of the Acquisition
Hotels; to repay borrowings outstanding
under the Line of Credit; and the
balance for working capital.
Nasdaq National Market symbol...................... SSHI
Proposed New York Stock Exchange symbol(2)......... SSI
</TABLE>
- ---------------
(1) Includes 1,458,800 shares issuable at the option of the Company upon
redemption of the Units by Limited Partners and 7,500 shares of restricted
Common Stock owned by certain officers and directors of the Company.
Excludes shares of Common Stock issuable upon exercise of options to be
issued pursuant to the Company's 1994 Plan and the Directors Plan and upon
redemption of Units which are issuable upon exercise of outstanding warrants
issued to Messrs. Alter, Biederman and Enever and MYPC Partners ("MYPC"), an
affiliate of Montgomery Securities, one of the Representatives. See
"Management -- Compensation of Directors," "Management -- 1994 Stock
Incentive Plan," "Management -- The Directors Plan" and "Underwriting."
(2) The Company has applied for approval to list its Common Stock on the New
York Stock Exchange under the symbol "SSI," and expects to be listed on such
exchange prior to the closing of the Offering. No assurance can be made,
however, that the Company's listing application will be approved.
11
<PAGE> 20
SUMMARY FINANCIAL DATA
The following tables set forth summary historical and pro forma operating
and financial data for the Company and the Lessee. Such data should be read in
conjunction with the financial statements and notes thereto contained elsewhere
in this Prospectus. The pro forma operating and other data for the Company and
the Lessee is presented as if the acquisition of the Acquisition Hotels, and the
closing of the IPO and the Offering had occurred as of the beginning of the
periods presented and therefore incorporates certain assumptions that are
included in the Notes to the Unaudited Pro Forma Consolidated Statements of
Income included elsewhere in this Prospectus. The pro forma balance sheet data
is presented as if the acquisition of the Acquisition Hotels, the closing of the
Offering and the application of the proceeds of the Offering had occurred on
March 31, 1995.
SUNSTONE HOTEL INVESTORS, INC.
SUMMARY HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA(1)
HISTORICAL ---------------------------------------------------------------------------
------------------------ THREE
MONTHS
PERIOD FROM ENDED
AUGUST 16, MARCH
1995 THREE YEAR ENDED THREE MONTHS ENDED 31,
(INCEPTION) MONTHS DECEMBER 31, 1995 MARCH 31, 1995 1996
THROUGH ENDED ------------------------------- ------------------------------- -------
DECEMBER 31, MARCH 31, CURRENT ACQUISITION THE CURRENT ACQUISITION THE CURRENT
1995 1996 HOTELS HOTELS HOTELS HOTELS HOTELS HOTELS HOTELS
------------ --------- ------- ----------- ------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage Lease
revenue(2)................ $ 3,013 $ 3,190 $11,766 $ 3,254 $15,020 $ 3,288 $ 580 $ 3,868 $ 3,417
Net income.................. 1,181 1,337 5,156 684 5,840 1,715 (41) 1,674 1,672
Net income per Common Share
outstanding............... $ 0.19 $ 0.21 $ 0.53 $ 0.15
Weighted average number of
shares of Common Stock and
Common Stock equivalents
outstanding............... 6,322 6,322 11,122 11,122
OTHER DATA:
Lessee room revenue......... $ 7,060 $ 6,786 $27,914 $ 7,673 $35,587 $ 7,248 $ 1,468 $ 8,716 $ 7,207
Funds From Operations(3).... 2,592 2,479 8,634 3,307 11,941 2,584 588 3,172 2,542
Cash Available for
Distribution(4)........... 1,279 2,193 7,462 3,000 10,462 2,281 529 2,810 2,239
Cash provided by operating
activities................ 2,291 1,116
Cash used in investing
activities................ (32,899) (17,767 )
Cash provided by (used in)
financing activities...... 35,824 11,836
Occupancy................... 60.1% 63.7 % 67.4% 65.3%
ADR......................... $ 58.27 $ 63.51 $ 57.08 $ 58.50
REVPAR...................... $ 35.02 $ 40.46 $ 38.48 $ 38.22
<CAPTION>
ACQUISITION THE
HOTELS HOTELS
----------- -------
<S> <C> <C>
OPERATING DATA:
Percentage Lease
revenue(2)................ $ 643 $ 4,060
Net income.................. 13 1,685
Net income per Common Share
outstanding............... $ 0.15
Weighted average number of
shares of Common Stock and
Common Stock equivalents
outstanding............... 11,122
OTHER DATA:
Lessee room revenue......... $ 1,746 $ 8,953
Funds From Operations(3).... 753 3,295
Cash Available for
Distribution(4)........... 683 2,922
Cash provided by operating
activities................
Cash used in investing
activities................
Cash provided by (used in)
financing activities......
Occupancy................... 63.1%
ADR......................... $ 61.54
REVPAR...................... $ 38.82
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-----------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)(5)
------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Investment in Hotels at cost...................................................................... $67,076 $ 99,454
Total assets...................................................................................... 71,044 110,212
Total Long-term debt.............................................................................. 22,000 12,025
Minority interest in Partnership.................................................................. 8,722 11,251
Total shareholders' equity........................................................................ 38,632 85,246
</TABLE>
Notes located on subsequent page.
12
<PAGE> 21
- ---------------
(1) The pro forma information does not purport to represent what the Company's
or the Lessee's financial position or results of operations actually would
have been if the Company had, in fact, owned and leased to the Lessee the
Current Hotels and the Acquisition Hotels at the beginning of the periods
indicated, or to project the Company's or the Lessee's results of operations
for any future period.
(2) With respect to the pro forma information, Rent revenue from the Lessee to
the Company is calculated on a pro forma basis by applying the Rent
provisions of the Percentage Leases to the historical room revenue of the
Hotels as if the beginning of the periods were the beginning of the lease
year and assumes the Company owned and leased the Current Hotels and the
Acquisition Hotels throughout the periods presented.
(3) With respect to the presentation of Funds From Operations, management
elected early adoption of the "new definition" as recommended in the March
1995 NAREIT White Paper on Funds From Operations beginning January 1, 1995.
Management and industry analysts generally consider Funds From Operations to
be one measure of the financial performance of an equity REIT that provides
a relevant basis for comparison among REITs and it is presented to assist
investors in analyzing the performance of the Company. "Funds From
Operations" ("FFO") is defined as income before minority interest (computed
in accordance with generally accepted accounting principles), excluding
gains (losses) from debt restructuring and sales of property and real estate
related depreciation and amortization (excluding amortization of financing
costs). FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not
necessarily indicative of cash available to fund cash needs. FFO should not
be considered an alternative to net income as an indication of the Company's
financial performance or as an alternative to cash flows from operating
activities as a measure of liquidity.
(4) Cash Available for Distribution is computed by subtracting from FFO the sum
of (a) 4% of room revenues, which the Company is obligated by the Percentage
Leases to make available to the Lessee for the periodic refurbishment and
replacement of furniture, fixture and equipment at the Hotels, and (b)
amounts required to repay principal amortization on long-term debt.
(5) Pro forma balance sheet data reflects the sale of 4,800,000 shares of Common
Stock and the application of the net proceeds as set forth in "Use of
Proceeds."
13
<PAGE> 22
RISK FACTORS
In evaluating the Company's business, prospective investors should
carefully consider the following factors in addition to the other information
contained in this Prospectus.
THE COMPANY'S INABILITY TO EFFECTIVELY MANAGE GROWTH
The Company's success is in large part dependent upon the ability of the
Lessee to effectively operate all of the Hotels, as well as any additional
hotels in which the Company invests. The Lessee's capacity to operate additional
hotels under Percentage Leases with current staffing levels and office locations
will diminish as additional hotels are added to the Company's portfolio,
particularly in the context of hotel portfolio acquisitions. Such growth will
require the Lessee to hire and manage more staff, or to open more offices or to
operate in different locations than it has had in the past. There can be no
assurance the Lessee will effectively operate the Hotels. In the event the
Lessee fails to effectively operate the Hotels, the Company's internal growth
strategy and acquisition strategy would be more difficult to achieve and,
therefore, Cash Available for Distribution could be adversely affected.
CONFLICTS OF INTEREST BETWEEN THE COMPANY AND CERTAIN OFFICERS AND DIRECTORS
Because of Mr. Alter's and Mr. Biederman's ownership in and positions with
the Company and the Lessee and Mr. Alter's ownership of the Management Company,
there are inherent conflicts of interest between the Lessee and the Company in
the leasing, acquisition, disposition, operation and management of the Company's
hotels. Accordingly, the interests of stockholders may not have been, and in the
future may not be, reflected fully in all decisions made or actions taken by the
officers and directors of the Company. See "The Company" and "Policies and
Objectives with Respect to Certain Activities -- Conflict of Interest Policies."
No Arm's-Length Bargaining on Percentage Leases, Management Agreement,
Employment Agreements, or Acquisition Agreements
The terms of the Percentage Leases, the Management Agreement, the Alter
Employment Agreement, the Biederman Employment Agreement, and the acquisition
agreements pursuant to which the Company acquired the Sunstone Initial Hotels in
connection with the IPO were not negotiated on an arm's-length basis. In the
event revenues from the Company's hotels increase significantly over prior
periods and operating expenses with respect thereto are less than historical or
projected operating expenses, the Lessee could disproportionately benefit. In
the event incremental expenses exceed incremental increases in revenues,
conflicts of interest may arise between the Lessee and the Company. See "Certain
Transactions -- Percentage Leases" and "Policies and Objectives with Respect to
Certain Activities -- Conflict of Interest Policies -- Provisions of the
Employment Agreements and Development by Mr. Alter and Mr. Biederman." The
Company will not own any interest in the Lessee. Because Mr. Alter and Mr.
Biederman are the stockholders of the Lessee and Mr. Alter is the sole
stockholder of the Management Company, and each of them are officers of the
Company, there is a conflict of interest with respect to the enforcement and
termination of the Percentage Leases. Because of these conflicts, Mr. Alter's
and Mr. Biederman's decisions relating to the Company's enforcement of its
rights under the Percentage Leases may not solely reflect the interests of the
stockholders. See "The Lessee" and "The Management Company."
Conflicts Relating to Sunstone Initial Hotels
In connection with the IPO, the Company acquired the Sunstone Initial
Hotels from the affiliates of Messrs. Alter, Biederman and Enever (the "Sunstone
Affiliates"). The Sunstone Initial Hotels had a negative book value of $7.5
million. This resulted in Mr. Alter having approximately $3.5 million and Mr.
Biederman approximately $3.7 million in unrealized gain on the sale of their
interests in the Sunstone Initial Hotels, which was carried over into the
Partnership's basis in such hotels and reflected in their tax basis in the
Partnership. Such unrealized gain is specially allocated to Mr. Alter and Mr.
Biederman pursuant to the Partnership Agreement and, consequently, any sale of
such Sunstone Initial Hotels by the Partnership may
14
<PAGE> 23
cause adverse tax consequences to them and the Sunstone Affiliates. Therefore,
the interests of the Company, Mr. Alter and Mr. Biederman and the Sunstone
Affiliates could be different in connection with the sale of a Sunstone Initial
Hotel. In addition, the reduction of mortgage indebtedness by the Partnership at
any time below the amount of approximately $8.4 million would create adverse tax
consequences to Mr. Alter and Mr. Biederman and certain Sunstone Affiliates.
These conflicts may result in decisions relating to the sale of the Sunstone
Initial Hotels and/or the incurrence or repayment of indebtedness which do not
reflect solely the interests of the stockholders.
Conflicts Relating to Sale of Hotels Subject to Percentage Leases
The Company will generally be required under the Percentage Leases to pay a
lease termination fee to the Lessee if the Company elects to sell a hotel and
not replace it with another hotel. Where applicable, the termination fee is
equal to the net income of the Lessee for such hotel for the prior twelve month
period. The payment of a termination fee to the Lessee, which is owned by Mr.
Alter and Mr. Biederman, may result in decisions regarding the sale of a hotel
which do not reflect solely the interests of the Company. See "Certain
Transactions -- Percentage Leases."
Conflicts of Interest Relating to Acquisition Strategy
Because of Mr. Alter's ownership interest in the Lessee and the Management
Company, there may be a conflict of interest in the decisions to acquire
additional hotels which disproportionately benefit the operations of the Lessee
and the Management Company at the expense of the Company.
LACK OF CONTROL OVER OPERATIONS OF THE HOTELS
Certain tax rules relating to the qualification of a REIT prohibit the
Company from operating hotels. Therefore, the Company enters into Percentage
Leases with the Lessee, and the Lessee operates the hotels and pays Rent to the
Company based, in large part, on the revenues from the hotels. The Lessee
controls the daily operations of the hotels under the Percentage Leases, which
have non-cancelable initial terms of ten years. Although Mr. Alter and Mr.
Biederman are the sole stockholders of the Lessee, neither the Company nor the
Partnership has the authority to require the Lessee to operate the hotels in a
particular manner, or to govern any particular aspect of their operation (e.g.,
setting room rates), except as set forth in the Percentage Leases. Thus, even if
the Company's management believes the Lessee is operating the hotels
inefficiently or in a manner that does not result in a maximization of Rent to
the Partnership under the Percentage Leases and, therefore, negatively affects
Cash Available for Distribution, the Company may not require the Lessee to
change its method of operation. The Company is limited to seeking redress only
if the Lessee violates the
terms of the Percentage Leases, in which case the Company's primary remedy is to
terminate one or more of the Percentage Leases and seek to recover damages from
the Lessee pursuant to the applicable Percentage Lease or to enforce its
remedies under the Third Party Pledge Agreement. See "Business and Properties --
The Percentage Leases," and "Certain Transactions -- Third Party Pledge
Agreement."
RENOVATION AND REDEVELOPMENT RISKS
The Company faces risks arising from its strategy of acquiring hotels in
need of substantial renovation or redevelopment, particularly the risk that the
cost or time to complete the renovation or redevelopment will exceed the
budgeted amount. Such delays or cost overruns may arise from shortages of
materials or skilled labor, a change in the scope of the original project, the
need to comply with building code or other legal requirements, the discovery of
structural or other latent problems with a property once construction has
commenced and other risks inherent in the construction process. Delays or cost
overruns in connection with renovations or redevelopments could have a material
adverse effect on Cash Available for Distribution.
RISK THAT PENDING ACQUISITIONS WILL NOT CLOSE
The Company intends to acquire the Comfort Inn-South San Francisco,
California, and the Days Inn-Price, Utah, Acquisition Hotels concurrently with
the closing of the Offering. The Company has not, however,
15
<PAGE> 24
finalized its physical, environmental and economic analysis of these properties
and, therefore, could decide not to acquire such properties based on such
analysis. If the Company does not complete the acquisition of these two
Acquisition Hotels, for whatever reason, then following the closing of the
Offering approximately $16.1 million of the net proceeds of the Offering will
have no specific designated use. In such event, there can be no assurance that
the Company would be able to locate additional available acquisitions which meet
the Company's investment criteria and the Company's Cash Available for
Distribution would be adversely affected.
MULTI-PROPERTY ACQUISITION RISKS
Since the IPO, the Company has increasingly emphasized and intends to
continue to emphasize acquisitions of multiple hotels in a single transaction in
order to reduce acquisition expenses per hotel and enable the Company to more
rapidly expand its hotel portfolio. Multiple-property acquisitions are, however,
more complex than single-property acquisitions and the risk that a
multiple-property acquisition will not close may be greater than in a
single-hotel acquisition. In addition, the Company's costs for a portfolio
acquisition that does not close are generally greater than for an individual
property. If the Company fails to close hotel acquisitions, its ability to
increase Cash Available for Distribution will be limited. See "Risk Factors --
Dependence on Acquisitions to Increase Cash Available for Distribution." Another
risk associated with multiple-property acquisitions is that a seller may require
that a group of hotels be purchased as a package, even though one or more of the
hotels in the package does not meet the Company's investment criteria. In such
cases, the Company may purchase the group of hotels with the intent to re-sell
those which do not meet its criteria. This occurred in the first quarter of 1996
with the acquisition of the six Cypress Inn Hotels in Oregon and Washington, two
of which were re-sold by the Company within three months of the acquisition. In
such circumstances, however, there is no assurance as to how quickly the Company
could sell such hotels or the price at which they could be sold. Such hotels
might reduce Cash Available for Distribution if they operate at a loss during
the time the Company holds them for sale or if the Company sells them at a loss.
In addition, any gains on the sale of such hotels within four years of the date
of acquisition would be subject to a 100% tax.
HAWTHORN SUITES DEVELOPMENT RISKS
The Company intends to enter into a five-year master development agreement
with USFS to permit the Company to own properties operated under the Hawthorn
Suites brand. Pursuant to the letter of intent, executed in June 1996, the
Company will have the right to obtain franchise licenses in several major urban
markets on the West Coast. Under the proposed arrangement, certain development
rights will expire if the Company does not exercise them during each year of the
five-year term. This timetable may cause the Company to overcommit to building
and owning Hawthorn Suites at the expense of other growth opportunities. USFS
has not yet received the required governmental approvals in Oregon and
California to issue any franchise license for Hawthorn Suite brand. While USFS
anticipates obtaining such approvals in the near future, there can be no
assurance that USFS will obtain such approvals in a timely fashion or at all.
Further, as a relatively unproven franchisor the Company's focus on this brand
subjects it to greater risks than a more diversified approach.
COMPETITION FOR ACQUISITIONS
There will be competition for investment opportunities in mid-price and
upscale hotels from entities organized for purposes substantially similar to the
Company's objectives as well as other purchasers of hotels. The Company is
competing for such hotel investment opportunities with entities which have
substantially greater financial resources than the Company or better
relationships with franchisors, sellers or lenders. These entities may also
generally be able to accept more risk than the Company prudently can manage.
Competition may generally reduce the number of suitable hotel investment
opportunities offered to the Company and increase the bargaining power of
property owners seeking to sell. See "Business and Properties -- Competition."
16
<PAGE> 25
DEVELOPMENT RISKS
The Company is currently developing a 78-room Residence Inn in Highlands
Ranch (Denver), Colorado, which it estimates will be completed during the third
quarter of 1996, and has entered into a letter of intent to purchase a 166-room
hotel in Pueblo, Colorado, upon completion of construction by an unaffiliated
developer, which is expected to commence in the fourth quarter of 1996 and be
completed in the third quarter of 1997. In addition, under the proposed master
development agreement with USFS, the Company may develop extended-stay Hawthorn
Suites hotels in a number of major urban markets on the West Coast markets, or
may purchase extended-stay Hawthorn Suites hotels from unaffiliated developers
after they have been completed. The Company also intends to look for additional
opportunities to develop upscale and mid-price hotels in markets where room
supply and other competitive factors justify new construction. See "Business and
Properties -- Growth Strategy -- External Growth Strategy." New project
development is subject to a number of risks, including risks of construction
delays or cost overruns that may increase project costs, and new project
commencement risks such as receipt of zoning, occupancy and other required
governmental permits and authorizations and the incurrence of development costs
in connection with projects that are not completed. There can be no assurances
that the Highlands Ranch or Pueblo projects, any Hawthorn Suites projects or any
other future development projects will be completed in a timely manner or within
budget. Additional risks of development projects include the risks associated
with effectively marketing a hotel in order to ramp-up occupancy after the hotel
has been opened at projected room rates. Any failure to complete a development
project in a timely manner and within budget or to ramp-up occupancy after
completion of the project could have a material adverse effect on Cash Available
for Distribution.
SUBSTANTIAL RELIANCE ON MR. ALTER
The Company places substantial reliance on the hotel industry knowledge and
experience and the continued services of Robert A. Alter, the Company's Chairman
of the Board of Directors, President, Chief Financial Officer and Secretary. The
Company's future success and its ability to manage future growth depends in
large part upon the efforts of Mr. Alter and on the Company's ability to attract
and retain other highly qualified personnel. Competition for such personnel is
intense and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The loss of Mr. Alter's services or the
Company's inability to attract and retain highly qualified personnel may
adversely affect the operations of the Company and the Cash Available for
Distribution. See "Management -- Alter Employment Agreement."
TOTAL DEPENDENCE ON THE LESSEE AND PAYMENTS UNDER THE PERCENTAGE LEASES
The Company selected the Lessee without consideration of other lessees
because it believes that Mr. Alter and Mr. Biederman, who own the Lessee, will
be better able to direct the continuation of the management practices developed
by the Sunstone Affiliates who owned a number of the Current Hotels prior to the
IPO than would other lessees unfamiliar with these practices. The Lessee was
also selected because Mr. Alter and Mr. Biederman own significant Units in the
Partnership and options to acquire Common Stock of the Company, and therefore
have an incentive to cause the Lessee to maximize Rents that other lessees would
not have. The Company's primary source of revenue is Rent payments under the
Percentage Leases. Consequently, the Company relies entirely on the Lessee to
effectively operate the Company's hotels in a manner which generates sufficient
cash flow to enable the Lessee to timely make the Rent payments under the
applicable Percentage Leases. Ineffective operation of the hotels may result in
the Lessee being unable to pay Rent at the higher tier level necessary for the
Company to fund distributions to stockholders because payment of Base Rent alone
is insufficient for such purposes. In addition, the Lessee may determine that
maximizing revenue at the hotels is not in the best economic interest of the
Lessee and therefore the Lessee may not pursue operating strategies that would
solely be in the best interest of the Company. Finally, if the Lessee is unable
to generate an operating profit at the hotels, there is a greater risk that the
Lessee will default on its obligations under the Percentage Leases. In that
event, distributions to stockholders would be adversely affected. On a pro forma
basis for the year ended December 31, 1995, the Lessee incurred a net loss of
$373,000.
17
<PAGE> 26
Limited Guarantees and Security for the Performance of the Lessee's Obligations
under the Percentage Leases
Pursuant to the Third Party Pledge Agreement, the obligations of the Lessee
under the Percentage Lease for each hotel now owned or acquired in the future by
the Company and leased to the Lessee are secured with a pledge by Mr. Alter and
Mr. Biederman, the stockholders of the Lessee, of Units in the Partnership equal
in value to four months of initial Base Rent for each hotel. The obligations of
the Lessee under the Percentage Leases are not secured by any additional
security deposits or guarantees by third parties. Other than working capital to
operate the hotels, the Lessee will have only nominal assets in addition to its
rights and benefits under the Percentage Leases. As a result, the Lessee will
likely have insufficient assets to satisfy any claims the Company may have
against the Lessee if the Lessee defaults under the Percentage Leases.
Consequently, a material default under a Percentage Lease would have a material
adverse effect on Cash Available for Distribution. See "The Lessee," and
"Certain Transactions -- Third Party Pledge Agreement."
Insufficiency of Base Rent to Make Current Distributions
The receipt by the Company of Base Rent payments under the Percentage
Leases will not, by itself, provide the cash flow necessary to enable the
Company to continue to make such distributions at the current level. The Company
is therefore dependent on the receipt of Percentage Rent from the Lessee in
order to fund the proposed distributions at the current level. In the event that
all or a portion of such Percentage Rent is not received by the Company, the
Company may not be able to make such distributions to its stockholders. There
can be no assurance that the Company will receive Percentage Rent from the
Lessee or that the Lessee will be able to pay Base Rent as required by the
Percentage Leases.
DISTRIBUTION OF SUBSTANTIALLY ALL OF CASH AVAILABLE FOR DISTRIBUTION;
DISTRIBUTIONS INCLUDE RETURN OF CAPITAL
Consistent with the Company's practice of acquiring properties in need of
renovation or redevelopment, the Company's estimated annual distribution to
stockholders is approximately 110.7% of the Company's estimated pro forma Cash
Available for Distribution for the year ended December 31, 1995. See "Price
Range of Common Stock and Dividends." If the Company has distributed all or
substantially all of its Cash Available for Distribution, it will have retained
little or no cash from the Rent payments under the Percentage Leases. In that
event, expenditures for additional acquisitions or future capital improvements
would have to be funded from borrowings under the Line of Credit or other
lending facilities not yet obtained, or from proceeds from the sale of assets
(including the hotels) or equity securities. In addition, the Company estimates
that approximately 15% of the estimated annual distribution will constitute a
return of capital rather than a distribution of retained earnings. Consequently,
there is a risk that the initial distribution rate has been set too high and may
not be sustainable.
HOTEL INDUSTRY RISKS
Operating Risks
The Company's hotels are subject to all operating risks common to the hotel
industry. The hotel industry has experienced volatility in the past, as have the
Company's hotels (other than the Highlands Ranch (Denver) Residence Inn hotel,
which has not been completed). There can be no assurance that volatility will
not occur in the future. Hotel industry risks include, among other things,
competition from other hotels; over-building in the hotel industry which has
adversely affected occupancy, ADR and REVPAR; increases in operating costs due
to inflation and other factors, which may not necessarily be offset by increased
room rates; dependence on business and commercial travelers and tourism; strikes
and other labor disturbances of hotel employees for hotels owned by the Company;
increases in energy costs and other expenses of travel; and adverse effects of
general and local economic conditions. These factors could decrease room
revenues of the hotels and adversely affect the Lessee's ability to make
payments of Rent under the Percentage Leases to the Company, including payments
at the higher tier Percentage Rent levels, and therefore, reduce Cash Available
for Distribution.
18
<PAGE> 27
Seasonality of Hotel Business and the Hotels
The hotel industry is seasonal in nature. Generally, revenues for the
Company's hotels are greater in the first and third quarters than in the second
and fourth quarters. This seasonality can be expected to cause quarterly
fluctuations in the Company's Percentage Lease revenues, which, therefore, may
be insufficient to provide all of the Cash Available for Distribution necessary
to pay dividends on the Common Stock in a given quarter.
Concentration of Investments in California and Colorado
Eleven of the 20 Hotels are located in California and Colorado. See
"Business and Properties." The concentration of the Company's investments in
California and Colorado could result in adverse events or conditions which
affect those areas in particular, natural disasters and economic recessions,
having a more significant negative effect on the operations of the combined
Hotels, and ultimately Cash Available for Distribution, than if the Hotels were
more geographically diverse.
Limited Diversification of Hotels; Emphasis on Holiday Inn and Hampton Inn
Hotels
The Company intends to operate eight of the Hotels under Holiday Inn brands
and seven under the Hampton Inn brand. In its growth strategy, the Company
intends to continue to emphasize the acquisition or development of hotels which
can be operated under franchises similar to those of the Hotels. Therefore, the
Company will be subject to risks inherent in concentrating investments in any
franchise brand, in particular the Holiday Inn and Hampton Inn brands, such as a
reduction in business following any adverse publicity related to the brand,
which could have an adverse effect on Rent under the Percentage Leases and Cash
Available for Distribution.
Competition for Guests
The hotel industry is highly competitive. The Company's 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, which may negatively impact the
Company's growth strategy and consequently the Cash Available for Distribution.
See "Business and Properties -- Competition."
Investment Concentration in Single Industry
The Company's current strategy is to acquire additional hotels. The Company
will not seek to invest in assets selected to reduce the risks associated with
an investment in the hotel industry and will be subject to risks inherent in
concentrating investments in a single industry. Therefore, the adverse effect on
the Rents under the Percentage Leases and Cash Available for Distribution
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. See
"Business and Properties -- The Lodging Industry."
REAL ESTATE INVESTMENT RISKS
General Risks of Investing in Real Estate
The Company's hotels will be 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 stockholders
are dependent upon the ability of the Lessee to operate the Company's hotels in
a manner sufficient to maintain or increase room revenues and to generate
sufficient revenue in excess of operating expenses to make Rent payments to the
Partnership as required by the Percentage Leases. Income from the hotels may be
adversely affected by changes in national economic conditions, 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
19
<PAGE> 28
ongoing need for capital improvements, particularly in older structures, changes
in real estate tax rates and other operating expenses, 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, changes in zoning laws, and other factors which are beyond the
control of the Company.
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 market value of any of the
Company's hotels will not decrease in the future. In addition, there can be no
assurance that the Company will be able to dispose of a hotel when it finds
disposition advantageous or necessary or that the sale price of any hotel will
recoup or exceed the amount of the Company's investment.
Uninsured and Underinsured Losses
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. The Board of Directors will use its discretion in
determining amounts, coverage limits and deductibility provisions of insurance,
including title insurance with respect to the Company's hotels, with a view to
maintaining appropriate insurance coverage on the Company's investments at a
reasonable cost and on suitable terms. This may result in insurance coverage
that, in the event of a substantial loss, would not be sufficient to pay the
full current market value or current replacement cost of the Company's lost
investment. Inflation, changes in building codes and ordinances, environmental
considerations, and other factors also might make it infeasible to use insurance
proceeds to replace a damaged or destroyed hotel.
Environmental Matters
Operating costs at the Company's 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 compliance with 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 petroleum and hazardous
substances on, under or in such property. Such laws may impose liability without
fault or knowledge by the owner or operator. The cost of complying with
environmental laws could materially adversely affect Cash Available for
Distribution. 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. 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
Company's 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 Cash Available for Distribution could be adversely
affected.
Fluctuations in Property Taxes and Casualty Insurance Premiums
Each of the Company's hotels is subject to real property taxes. The real
property taxes on hotels in which the Company invests may increase or decrease
as property tax rates change and as properties are assessed or reassessed by
taxing authorities. Each of the Company's hotels will be covered by casualty
insurance. Like real property tax rates, insurance rates may increase or
decrease depending on the claims experience at the hotels and as the replacement
value of the hotels increases or decreases. The Company is obligated under the
Percentage Leases to pay for real property taxes and insurance.
20
<PAGE> 29
RISKS OF INCREASES IN OPERATING COSTS AND CAPITAL EXPENDITURES
Hotels in general, including the Company's hotels, 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 Percentage Leases, the Company is obligated to pay the cost of
certain capital expenditures at its hotels and to pay for furniture, fixtures
and equipment. The ability of the Company to fund these and other capital
expenditures and periodic replacement of furniture, fixtures and equipment will
depend in part on the financial performance of the Lessee and the hotels. If
these expenses exceed the Company's estimate, the additional expenses could have
an adverse effect on Cash Available for Distribution. Any inability or failure
to fund these expenditures could have a material adverse effect on occupancy
rates, ADRs and REVPAR and may constitute a breach under the Franchise
Agreements for the applicable hotels.
DEPENDENCE ON ACQUISITIONS TO INCREASE CASH AVAILABLE FOR DISTRIBUTION
The Company's success in implementing its growth plan will depend
significantly on the Company's ability to acquire additional hotels at
attractive prices. After the ramp up of certain of the Hotels which were
recently redeveloped or renovated and repositioned or which are expected to be
redeveloped or renovated and repositioned in the near future, internal growth in
ADR and occupancy for the Hotels is not expected to provide as much growth in
Cash Available for Distribution as will acquisition of additional hotels.
However, since the Company intends to borrow funds to purchase, redevelop or
renovate and reposition hotels, the Company will be subject to the risks
associated with increased indebtedness, such as paying debt service even if cash
flow from such additional hotels is not sufficient to pay it or cost overruns in
redeveloping or renovating such additional hotels. See "Risk Factors -- Risks of
Leverage" and "-- Renovation and Redevelopment Risks."
RISKS OF LEVERAGE
Under the Company's Articles of Incorporation, the Board of Directors has
the discretion to permit the Company to incur debt in an amount not to exceed
50% of its investment in hotel properties, at cost (the "Debt Limitation"). The
Line of Credit provides for borrowings of up to $50 million to implement the
Company's growth strategy and for other corporate purposes. The Line of Credit
is secured by mortgages on certain of the Hotels and may be secured by
additional hotels acquired by the Company in the future. Subject to the Debt
Limitation, 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
hotels owned by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Pro Forma Liquidity and Capital
Resources" and "Policies and Objectives with Respect to Certain
Activities -- Financing."
To the extent the Company incurs debt, the debt service requirements may
reduce Cash Available for Distribution. Variable rate debt, such as the Line of
Credit, will result in higher debt service requirements, if interest rates
increase, which may decrease Cash Available for Distribution. There can be no
assurance that the Company, upon the incurrence of debt, 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 its hotels, to
foreclosure, which could result in a financial loss to the Company. Adverse
economic conditions could result in higher interest rates on variable rate debt,
including borrowings under the Line of Credit, could decrease Cash Available for
Distribution and increase the risk of loss upon a sale or from a foreclosure.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
The Franchise Agreements or commitments to enter into Franchise Agreements
for eight of the Hotels condition the issuance of the license upon the
completion of certain redevelopment or renovation work in accordance with the
franchisor's standards. If the Company fails to satisfy such conditions, the
franchisor would not be required to issue the license. Such an occurrence could
have a material adverse effect on the results of operation of the affected Hotel
and thus reduce Percentage Rent payable by the Lessee for such Hotel.
21
<PAGE> 30
The continuation of the existing Franchise Agreements is, and any Franchise
Agreement entered into in the future will be, subject to specified operating
standards and other terms and conditions. Franchisors periodically inspect their
licensed hotels to confirm adherence to their operating standards. The failure
of the Company or the Lessee to maintain such standards respecting the Company's
hotels or to adhere to such other requirements of the applicable Franchise
Agreement could result in the loss or cancellation of the Franchise Agreement.
It is possible that a franchisor could condition the continuation of a Franchise
Agreement on the completion of capital improvements which 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
Lessee to permit the Franchise Agreement to lapse or be terminated. The
Courtyard by Marriott Franchise Agreements prohibit termination without the
franchisor's consent. Pursuant to an agreement among the franchisor, the Company
and the Lessee, the Company could be required to continue to cause the Courtyard
by Marriott hotels in Fresno and Riverside, California to be operated as a
Courtyard by Marriott. The loss of a Franchise Agreement could have a material
adverse effect upon the operations or the underlying value of the hotel covered
by the Franchise Agreement because of the loss of associated name recognition,
marketing support and centralized reservation systems provided by the
franchisor. See "Business and Properties -- Franchise Agreements."
TAX RISKS
Failure to Qualify as a REIT
The Company intends to operate so as to qualify as a REIT for federal
income tax purposes. 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
stockholders in computing its taxable income and would be subject to federal
income tax (including any applicable 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 would be reduced for each of the
years involved. Although the Company currently intends to operate 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 stockholders, to revoke the REIT election. See
"Federal Income Tax Considerations."
Adverse Effect of REIT Minimum Distribution Requirements
In order to qualify as a REIT, the Company generally will be required each
year to distribute to its stockholders at least 95% of its net taxable income
(excluding any net capital gain). In addition, the Company will be subject to a
4.0% 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, (ii) 95% of its capital gain net income for
that year and (iii) 100% of its undistributed taxable income from prior years.
The Company intends to make distributions to its stockholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise tax.
The Company's income will consist primarily of its share of the income of the
Partnership, and its Cash Available for Distribution will consist primarily of
its share of cash distributions from the Partnership. Differences in timing
between the recognition of taxable income and the receipt of Cash Available for
Distribution due to the seasonality of the hospitality industry could require
the Company through the Partnership, to borrow funds on a short-term basis under
the Company's borrowing arrangements (to the extent, if at all, permitted by the
lender) to meet the 95% distribution requirement and to avoid the nondeductible
excise tax. For federal income tax purposes, distributions paid to stockholders
may consist of ordinary income, capital gains, nontaxable return of capital, or
a combination thereof. The Company will provide its stockholders with an annual
statement as to its designation of the taxability of distributions. The
requirement to distribute a substantial portion of the Company's net taxable
income could cause the Company to distribute amounts that would otherwise be
spent on future acquisitions, unanticipated capital expenditures or repayment of
debt, which would require the Company to borrow or sell assets to fund the costs
of such items.
22
<PAGE> 31
Distributions by the Partnership will be determined by the Board of
Directors, in the Company's capacity as the general partner of the Partnership,
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."
Failure of the Partnership to be Classified as a Partnership for Federal Income
Tax Purposes;
Impact on REIT Status
If the Service were to challenge successfully the tax status of the
Partnership as a partnership for federal income tax purposes, the Partnership
would be taxable as a corporation. In such event, since the Company's ownership
interest in the Partnership constitutes more than 10% of the Partnership's
voting securities and exceeds 5% of the value of the Company's assets, the
Company would cease to qualify as a REIT. The imposition of corporate income tax
on the Company and the Partnership would substantially reduce the amount of Cash
Available for Distribution. See "Federal Income Tax Considerations -- Tax
Aspects of the Partnership."
Anti-Abuse Regulations
The United States Treasury Department recently issued regulations which
authorize 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 Regulations"). The Anti-Abuse
Regulations would apply where a partnership is formed or utilized in connection
with a transaction (or series of related transactions) with a principal purpose
of substantially reducing the present value of the partners' aggregate federal
tax liability in a manner inconsistent with the intent of the partnership
provisions of the Code. See "Federal Income Tax Considerations -- Requirements
for Qualification -- Anti-Abuse Regulations."
ABILITY OF BOARD OF DIRECTORS TO CHANGE CERTAIN POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, financing, executive compensation, growth, operations, debt
capitalization and distributions, are determined by the Board of Directors. The
Board of Directors may amend or revise these or other policies from time to time
without a vote of the holders of the Common Stock. Such amended or revised
policies may not achieve anticipated objectives which may have an adverse effect
on Cash Available for Distribution. The Company cannot change the provision of
its Articles of Incorporation limiting indebtedness to the Debt Limitation or
its policy of seeking to maintain its qualification as a REIT without the
approval of the holders of two-thirds of the outstanding voting shares. See
"Policies and Objectives with Respect to Certain Activities."
COMMON STOCK PRICE FLUCTUATIONS AND TRADING VOLUME
A number of factors may adversely influence the price of the Company's
Common Stock in public trading markets, many of which are beyond the control of
the Company. In particular, an increase in market interests rates will result in
higher yields on other financial instruments and may lead purchasers of Common
Stock to demand a higher annual distribution rate on the price paid for the
Common Stock, which could adversely affect the market price of the Common Stock.
Although the Common Stock is listed on the Nasdaq National Market and the
Company intends to list the Common Stock on the New York Stock Exchange, the
daily trading volume of shares of stock or beneficial interests in REIT's in
general and the Common Stock in particular may be lower than the trading volume
of securities of certain other industries. As a result, investors in the Company
who desire to liquidate substantial holdings at a single point in time may find
that they are unable to dispose of such shares in the market without causing a
substantial decline in the market value of such shares.
23
<PAGE> 32
ADVERSE EFFECT OF SHARES AVAILABLE FOR FUTURE ISSUANCE AND SALE ON MARKET PRICE
OF COMMON STOCK
The Company's Articles of Incorporation authorize the Board of Directors to
issue up to 60,000,000 shares of capital stock, consisting of 50,000,000 shares
of Common Stock and 10,000,000 shares of Preferred Stock. Upon the closing of
the Offering, the Board of Directors will be able to reclassify and issue an
aggregate of approximately 38,878,000 unissued or unreserved shares of Common
Stock and to classify and issue all 10,000,000 unissued shares of Preferred
Stock. The Company's acquisition strategy depends in part on access to
additional capital through sales and issuances of equity securities. The market
price of the Common Stock may be adversely affected by the availability for
future sale and issuance of such unissued and unreserved shares of Common Stock
and Preferred Stock.
In addition, the market price of the Common Stock may also be adversely
affected by the availability for future sale and issuance of approximately
1,458,800 shares of Common Stock that could be issued upon the redemption of
Units of the Partnership. The Company is required under the Partnership
Agreement to file a Registration Statement on Form S-3 to permit the limited
partners of the Partnership the ability to sell shares of Common Stock issued
upon redemption of Units. See "Shares Available for Future Sale."
LIMITATION ON ACQUISITION AND CHANGE OF CONTROL
Staggered Board
The Board of Directors of the Company has three classes. The terms of the
Company's initial directors will expire in 1997, 1998 and 1999, respectively.
Directors for each class will be elected for a three-year term upon the
expiration of that class's term. The staggered terms of directors may delay,
deter or prevent a change of control of the Company or other transaction, which
could involve holders of Common Stock receiving a premium for their shares of
Common Stock over the prevailing market price or which might otherwise be in
such holders' interest. See "Management -- Directors and Executive Officers."
Authority to Reclassify and Issue Common Stock and to Classify and Issue
Preferred Stock
As discussed above, the Company's Articles of Incorporation authorize the
Board of Directors to reclassify and issue any unissued shares of Common Stock
and to classify and issue up to 10,000,000 shares of Preferred Stock and to
establish the preferences and other terms of any shares issued. See "Description
of Capital Stock -- Preferred Stock." Although the Company has no current
intention to reclassify and issue any unissued shares of Common Stock or to
classify and issue shares of Preferred Stock in the foreseeable future, the
issuance of such reclassified shares of Common Stock or classified shares of
Preferred Stock could have the effect of delaying, deferring or preventing a
change of control of the Company even if a change of control were in the
interests of the stockholders. No shares of Preferred Stock will be issued or
outstanding as of the closing of the Offering.
Maryland Anti-Takeover Statutes
As a Maryland corporation, the Company is subject to various provisions of
Maryland law, 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 purchases by
certain holders. These provisions could have the effect of delaying, deferring
or preventing a change of control of the Company, even if a change of control
were in the best interests of the stockholders. These provisions are described
in "Certain Provisions of Maryland Law and of the Company's Articles of
Incorporation and Bylaws -- Business Combinations," "-- Control Share
Acquisitions" and "-- Anti-Takeover Effect of Certain Provisions of Maryland Law
and of the Articles of Incorporation and Bylaws."
Ownership Limit
In order for the Company to maintain its qualification as a REIT, not more
than 50% in value of its outstanding shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). Furthermore, if any stockholder or group of stockholders of
the Lessee owns, actually
24
<PAGE> 33
or constructively, 10% or more of the shares of beneficial interest of the
Company, the Lessee could become a related-party tenant of the Partnership,
which would result in loss of REIT status for the Company. For the purpose of
preserving the Company's REIT qualification, the Company's Articles of
Incorporation prohibit direct or indirect ownership of more than 9.8% of the
outstanding shares of Common Stock or the outstanding shares of the Preferred
Stock of the Company (the "Ownership Limit"). Generally, the shares of
beneficial interest owned by affiliated owners will be aggregated for purposes
of the Ownership Limit. The Ownership Limit could have the effect of delaying,
deferring or preventing 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 interests. See "Description
of Capital Stock -- Restrictions on Ownership" and "Federal Income Tax
Considerations -- Requirements for Qualification."
25
<PAGE> 34
THE COMPANY
The Company was incorporated in Maryland in August 1994 and is a
self-administered REIT. The Company's IPO occurred in August 1995. The Company
is the sole general partner of the Partnership and, after contributing all of
the net proceeds of the Offering to the Partnership, will own an approximately
88.3% general and limited partnership interest in the Partnership. The
Partnership owns the 17 Current Hotels and one of the Acquisition Hotels, and
intends to acquire the other two Acquisition Hotels concurrently with the
closing of the Offering.
In order to qualify as a REIT, neither the Company nor the Partnership can
operate hotels. The Partnership therefore leases the Current Hotels, and will
lease the Acquisition Hotels, to the Lessee, which is owned by Mr. Alter and Mr.
Biederman, pursuant to Percentage Leases designed to allow the Company to
participate in revenue growth by providing that between approximately 60% to 65%
of room revenues in excess of specified amounts, 5% of the Lessee's food and
beverage revenues, 100% of any sublease and concession rentals and certain other
net revenues in excess of Base Rent will be paid to the Partnership as
Percentage Rent. See "Business and Properties -- The Percentage Leases." The
Current Hotels are, and Acquisition Hotels will be, managed by the Management
Company, which is owned by Mr. Alter, for a fee equal to 2% of gross revenues of
the Hotels. See "The Management Company." The Company intends that any other
hotels acquired by it will be leased to the Lessee and Managed by the Management
Company on terms substantially similar to those described above, although the
provisions may be altered depending on the purchase price paid, economic
conditions and other factors deemed relevant at the time.
The Company has taken steps to mitigate the potential for conflicts of
interest which result from the structure of the Company and its Affiliates. See
"Certain Transactions."
The Company's executive offices are located at 115 Calle de Industrias,
Suite 201, San Clemente, California 92672 and its telephone number is (714)
361-3900.
Following the Offering, the structure and relationship among the Company,
the Partnership, the Lessee, the Management Company and the Company's hotels
will be as follows:
26
<PAGE> 35
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $48.3 million (approximately $55.6 million if the Underwriters'
over-allotment option is fully exercised). The Company will contribute the net
proceeds of the Offering to the Partnership, and after such contribution of the
net proceeds will own approximately 88.3% interest in the Partnership (89.0% if
the over-allotment option is fully exercised). The Partnership will use the net
proceeds as follows: (i) approximately $26.9 million to repay outstanding
borrowings under the Line of Credit, $8.1 million of which was borrowed to
acquire one of the three Acquisition Hotels; (ii) approximately $16.1 million to
purchase the other two Acquisition Hotels concurrently with the closing of the
Offering; (iii) approximately $2.3 million to pay for renovations and
redevelopment at certain of the Hotels expected to be incurred in the third
quarter of 1996; and (iv) the balance for working capital. After the Offering,
the Company will have approximately $9.0 million of borrowings outstanding under
the Line of Credit, which amount it intends to repay with proceeds of the
10-year fixed rate Term Loan when it closes, which is expected to occur in the
fourth quarter of 1996.
The Line of Credit currently bears interest at a rate of LIBOR plus 2.25%.
Upon the closing of the Offering, the interest rate on the Line of Credit will
decrease to LIBOR plus 1.90% (and upon satisfaction of certain other financial
conditions, LIBOR plus 1.75%). The Line of Credit has been utilized by the
Company to fund acquisitions and renovations of certain Hotels and for working
capital. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Pro Forma Liquidity and Capital Resources."
Pending the use of proceeds referenced above, the net proceeds will be
invested in interest-bearing, short-term investment grade securities or money
market accounts, which are consistent with the Company's intention to qualify
for taxation as a REIT. Such investments may include, for example, government
and government agency securities, certificates of deposit and interest-bearing
bank deposits.
27
<PAGE> 36
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Company's Common Stock commenced trading in the over-the-counter market
on August 16, 1995 and is listed for quotation on the Nasdaq National Market
under the symbol "SSHI." The Company has applied for approval to list its Common
Stock on the New York Stock Exchange under the symbol "SSI." The following table
sets forth, for the periods indicated, the high and low closing sales price
information for the Common Stock as reported on the Nasdaq National Market
composite tape, as well as cash distributions paid or anticipated to be paid per
share of Common Stock for the applicable periods.
<TABLE>
<CAPTION>
PER SHARE CASH
HIGH LOW DISTRIBUTION
------- ------ --------------
<S> <C> <C> <C>
1995
Third Quarter (from August 16, 1995)....................... $ 9.625 $8.875 $0.115(1)
Fourth Quarter............................................. $10.375 $8.250 $0.230
1996
First Quarter.............................................. $11.375 $9.875 $0.230
Second Quarter............................................. $11.250 $9.938 $0.230(2)
</TABLE>
- ---------------
(1) Represents the pro rata portion (for the period from August 16, 1995 to
September 30, 1995) of a quarterly distribution of $0.230.
(2) The Company expects to declare this dividend in July 1996, with a record
date prior to the closing of the Offering.
On July 2, 1996, the last reported sale price of the Common Stock quoted on
the Nasdaq National Market was $10.875 per share. As of June 17, 1996, the
Company had 34 shareholders of record and the Company believes that as of the
same date the Company had approximately 1,786 beneficial owners.
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, 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
quarterly distributions to its shareholders. The Company's ability to make
distributions will depend on the receipt of distributions from the Partnership.
The Company intends to cause the Partnership to distribute to its partners
substantially all of the Partnership's Cash Available for Distribution. The
Partnership's primary source of revenue is rent payments under the Percentage
Leases for the Hotels. The Company must rely on the operation of its Hotels to
generate sufficient cash flow to permit the Lessee to meet its rent obligations
under the Percentage Leases. The Lessee has only nominal assets and had an
operating loss of $1,031,000 for the year ended December 31, 1995. However, its
obligations under the Percentage Leases are secured by a blanket lien on
substantially all of its assets and a pledge of 258,311 Units by Mr. Alter and
Mr. Biederman pursuant to the Third Party Pledge Agreement, with a value on the
date pledged equal to four months of initial Base Rent under the Percentage
Lease for each of the hotels now owned or acquired in the future and leased to
the Lessee. See "Certain Transactions -- Unit Pledge Agreement." See "Business
and Properties -- The Percentage Leases."
Under the federal income tax provisions affecting REITs, the Company must
distribute at least 95% of its 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 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 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 for
federal income tax purposes. See "Federal Income Tax Considerations -- Taxation
of the Company."
In the future the Company may implement a dividend reinvestment program
under which holders of Common Stock may elect automatically to reinvest
dividends and make additional investments in shares of Common Stock. If a
dividend reinvestment and stock purchase program is implemented, the Company
may, from time to time, repurchase Common Stock in the open market for purposes
of fulfilling its obligations under the program, or may elect to issue
additional shares of Common Stock.
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<PAGE> 37
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
as of March 31, 1996, as adjusted to give effect to the sale on such date by the
Company of the shares of Common Stock offered in the Offering and the use of the
net proceeds therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
PRO
FORMA
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.......................................................... $22,000 $ 12,025
------- -------
Minority interest....................................................... 8,722 11,251
------- -------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, no
shares issued and outstanding...................................... -- --
Common stock, $.01 par value, 50,000,000 shares authorized; 6,322,000
shares issued and outstanding, 11,122,000 shares issued and
outstanding, as adjusted(1)........................................ 63 111
Additional paid-in capital............................................ 37,432 83,998
Retained earnings..................................................... 1,137 1,137
------- -------
Total stockholders' equity............................................ 38,632 85,246
------- -------
Total capitalization............................................... $69,354 $108,522
======= =======
</TABLE>
- ---------------
(1) Excludes 1,458,800 shares issuable upon redemption of Units of the
Partnership outstanding prior to the Offering. See
"Management -- Compensation of Directors," "Management -- 1994 Stock
Incentive Plan," "Management -- The Directors Plan" and "Underwriting."
29
<PAGE> 38
SELECTED FINANCIAL INFORMATION
The following tables set forth selected historical and pro forma operating
and financial data for the Company, the Lessee and the Sunstone Initial Hotels.
With respect to the Company, the following tables set forth (i) selected
historical operating and other financial data for the period August 16, 1995
(inception) through December 31, 1995 and the three months ended March 31, 1996,
(ii) selected historical balance sheet data as of March 31, 1996, (iii) selected
pro forma operating and other financial data for the year ended December 31,
1995, and the three months ended March 31, 1995 and 1996, and (iv) selected pro
forma balance sheet data as of March 31, 1996.
With respect to the Lessee, the following tables set forth (i) selected
historical financial data for the period August 16, 1995 (inception) through
December 31, 1995 and the three months ended March 31, 1996 and (ii) selected
pro forma financial information for the year ended December 31, 1995 and the
three months ended March 31, 1995 and 1996.
With respect to the Sunstone Initial Hotels, the following tables set forth
selected combined historical financial data for each of the years in the
five-year period ended December 31, 1994 and the period from January 1, 1995 to
August 15, 1995.
The selected historical financial data for the Company and the Lessee for
the period August 16, 1995 (inception) through December 31, 1995 has been
derived from the historical financial statements of the Company and the Lessee,
respectively, audited by Coopers & Lybrand L.L.P., independent accountants,
whose reports with respect thereto are included elsewhere in this Prospectus.
Under rules of the Securities and Exchange Commission, the Sunstone Initial
Hotels may be deemed to be a predecessor of the Company. The selected financial
data for the Sunstone Initial Hotels for each of the years in the three-year
period ended December 31, 1994 and the period from January 1, 1995 to August 15,
1995 was derived from the historical financial statements of the Sunstone
Initial Hotels audited by Coopers & Lybrand L.L.P., independent accountants,
whose reports with respect thereto are included elsewhere in this Prospectus.
The selected historical operating and financial data for the Company and
the Lessee for the three months ended March 31, 1996 were derived from unaudited
internal statements of operations of the Company and the Lessee, respectively.
In the opinion of the respective managements, the unaudited interim financial
information includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein. Due
to the seasonality of the hotel business, the results for the interim periods
are not necessarily indicative of the results of a full year.
The pro forma operating and other financial data is presented as if the
acquisition of the Hotels and the closing of the IPO and the Offering had
occurred as of the beginning of the periods presented and, therefore,
incorporates certain assumptions that are included in the notes to the pro forma
financial statements included elsewhere in this Prospectus. The pro forma
balance sheet data of the Company is presented as if the acquisition of the
Acquisition Hotels and the closing of the Offering had occurred on March 31,
1996. The pro forma information does not purport to represent what the Company's
financial position or results of operations or the Lessee's results of operation
actually would have been had such transactions, in fact, occurred on such date
or at the beginning of the periods indicated, or to project the Company or the
Lessee's financial position or results of operations at any future date or for
any future period.
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and all of the financial statements and notes thereto contained in
this Prospectus.
30
<PAGE> 39
SUNSTONE HOTEL INVESTORS, INC.
SELECTED HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
----------------------- PRO FORMA (1)
PERIOD FROM -----------------------------------------------------------------
AUGUST 16,
1995 THREE YEAR ENDED THREE MONTHS ENDED
(INCEPTION) MONTHS DECEMBER 31, 1995 MARCH 31, 1995
THROUGH ENDED ------------------------------- -------------------------------
DECEMBER 31, MARCH 31, CURRENT ACQUISITION THE CURRENT ACQUISITION THE
1995 1996 HOTELS HOTELS HOTELS HOTELS HOTELS HOTELS
------------ --------- ------- ----------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Lease revenue(2).................. $ 3,013 $ 3,190 $11,766 $ 3,254 $15,020 $3,288 $ 580 $ 3,868
Interest income................... 47 19 47 47
-------- -------- ------- ------- ------- ------- ------- -------
3,060 3,209 11,813 3,254 15,067 3,288 580 3,868
-------- -------- ------- ------- ------- ------- ------- -------
EXPENSES:
Real estate related
depreciation.................... 968 849 3,282 2,048 5,330 765 512 1,277
Interest expense and amortization
of financing costs.............. 47 324 1,018 1,018 241 241
Real estate and personal property
taxes and insurance............. 312 253 1,301 432 1,733 236 115 351
General and administrative........ 75 153 375 375 104 104
Board of Directors compensation... 34
-------- -------- ------- ------- ------- ------- ------- -------
1,436 1,579 5,976 2,480 8,456 1,346 627 1,973
-------- -------- ------- ------- ------- ------- ------- -------
Income before minority interest
and extraordinary item.......... 1,624 1,630 5,837 774 6,611 1,942 (47) 1,895
Minority interest................. 284 293 681 90 771 227 (6) 221
-------- -------- ------- ------- ------- ------- ------- -------
Income before extraordinary
item............................ 1,340 1,337 5,156 684 5,840 1,715 (41) 1,674
Extraordinary item due to early
extinguishment debt (net of
$34,000 minority interest)...... 159
-------- -------- ------- ------- ------- ------- ------- -------
Net Income.......................... $ 1,181 $ 1,337 5,156 684 5,840 1,715 (41) 1,674
======== ======== ======= ======= ======= ======= ======= =======
Net Income Per Share................ $ 0.19 $ 0.21 $ 0.53 $ 0.15
======== ======== ======= =======
Weighted average number of shares of
Common Stock and Common Stock
equivalents outstanding........... 6,322 6,322 11,122 11,122
Other Data:
Lessee room revenue................. $ 7,060 $ 6,786 $27,914 $ 7,673 $35,587 7,248 1,468 8,716
Funds From Operations(3)............ 2,592 2,479 8,634 3,307 11,941 2,584 588 3,172
Cash Available for
Distribution(4)................... 1,279 2,193 7,462 3,000 10,462 2,281 529 2,810
Cash provided by operating
activities........................ 2,291 1,348
Cash used in investing activities... (32,899) (17,999 )
Cash provided by (used in) financing
activities........................ 35,824 11,836
Occupancy........................... 60.1% 63.7 % 67.4% 65.3%
ADR................................. $ 58.27 $ 63.51 $ 57.08 $ 58.50
REVPAR.............................. $ 35.02 $ 40.46 $ 38.48 $ 38.22
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1996
-------------------------------
CURRENT ACQUISITION THE
HOTELS HOTELS HOTELS
------- ----------- -------
<S> <<C> <C> <C>
OPERATING DATA:
Revenue:
Lease revenue(2).................. $3,417 $ 643 $ 4,060
Interest income................... 19 19
------- ------- -------
3,436 643 4,079
------- ------- -------
EXPENSES:
Real estate related
depreciation.................... 876 512 1,388
Interest expense and amortization
of financing costs.............. 241 241
Real estate and personal property
taxes and insurance............. 274 116 390
General and administrative........ 153 153
Board of Directors compensation...
------- ------- -------
1,544 628 2,172
------- ------- -------
Income before minority interest
and extraordinary item.......... 1,892 15 1,907
Minority interest................. 220 2 222
------- ------- -------
Income before extraordinary
item............................ 1,672 13 1,685
Extraordinary item due to early
extinguishment debt (net of
$34,000 minority interest)......
------- ------- -------
Net Income.......................... 1,672 13 1,685
======= ======= =======
Net Income Per Share................ $ 0.15
=======
Weighted average number of shares of
Common Stock and Common Stock
equivalents outstanding........... 11,122
Other Data:
Lessee room revenue................. $7,207 $ 1,746 $ 8,953
Funds From Operations(3)............ 2,542 753 3,295
Cash Available for
Distribution(4)................... 2,239 683 2,922
Cash provided by operating
activities........................
Cash used in investing activities...
Cash provided by (used in) financing
activities........................
Occupancy........................... 63.1%
ADR................................. $ 61.54
REVPAR.............................. $ 38.82
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-----------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)(5)
------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Investment in Hotels at cost...................................................................... $67,076 $ 99,454
Total assets...................................................................................... 71,044 110,212
Total Long-term debt.............................................................................. 22,000 12,025
Minority interest in Partnership.................................................................. 8,722 11,251
Total shareholders' equity........................................................................ 38,632 85,246
</TABLE>
- ---------------
Notes follow "Sunstone Initial Hotels" table.
31
<PAGE> 40
LESSEE
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------ PRO FORMA(1)
PERIOD FROM ------------------------------------------------------------------------------------------
AUGUST 16,
THREE 1995 THREE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
MONTHS (INCEPTION) MARCH 31, 1996 MARCH 31, 1995 DECEMBER 31, 1995
ENDED THROUGH ---------------------------- ---------------------------- -----------------------------
MARCH 31, DECEMBER 31, CURRENT ACQUISITION THE CURRENT ACQUISITION THE CURRENT ACQUISITION THE
1996 1995 HOTELS HOTELS HOTELS HOTELS HOTELS HOTELS HOTELS HOTELS HOTELS
--------- ------------ ------- ----------- ------ ------- ----------- ------ ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating
Data:
Room
revenue... $ 6,786 $7,060 $ 7,207 $ 1,746 $8,953 $ 7,248 $ 1,468 $8,716 $27,914 $ 7,673 $35,587
Other
revenue... 550 865 635 513 1,148 837 554 1,391 3,221 2,452 5,673
------ ------ ------- ------- ------- ------ ------- ------ ------ ------ ------
Total
revenue... 7,336 7,925 7,842 2,259 10,101 8,085 2,022 10,107 31,135 10,125 41,260
Hotel
operating
expenses... 4,165 5,658 4,554 1,679 6,233 4,937 1,400 6,337 20,596 6,017 26,613
------ ------ ------- ------- ------- ------ ------- ------ ------ ------ ------
Income
before
overhead
expenses
and
Percentage
Lease
payments... 3,171 2,267 3,288 580 3,868 3,148 622 3,770 10,539 4,108 14,647
Percentage
Lease
payments... 3,190 3,013 3,190 870 4,060 -- 3,868 3,868 3,013 12,007 15,020
Net
income(6)... $ (19) $ (746) $ 98 $ (290) $ (192) $ 3,148 $(3,246) $ (98) $ 7,526 $(7,899) $ (373)
====== ====== ======= ======= ======= ====== ======= ====== ====== ====== ======
</TABLE>
- ---------------
SUNSTONE INITIAL HOTELS
(PREDECESSOR)
SELECTED COMBINED HISTORICAL FINANCIAL DATA(7)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR ENDED DECEMBER 31, JAN. 1, 1995
--------------------------------------------- TO
1990 1991 1992 1993 1994 AUG. 15, 1995
------- ------ ------ ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Room revenue..................................................... $ 6,679 $7,219 $8,768 $10,236 $11,965 $11,500
Other revenue.................................................... 1,071 1,206 1,609 1,701 1,898 437
------- ------- ------- -------- -------- --------
Total revenue.................................................... 7,750 8,425 10,377 11,937 13,863 11,937
Hotel operating expenses......................................... 4,668 5,219 6,718 7,510 9,165 7,133
Depreciation and amortization.................................... 1,659 1,033 1,132 1,299 1,247 1,298
Interest expense................................................. 2,617 2,555 2,426 2,261 2,360 2,261
Other corporate expenses......................................... 425 608 595 622 693 1,000
Income (loss) before extraordinary item.......................... (1,619) (990) (494) 245 398 245
Extraordinary item from forgiveness of interest.................. 536
------- ------- ------- -------- -------- --------
Net income (loss)................................................ $(1,619) $ (990) $ 42 $ 245 $ 398 $ 245
======= ======= ======= ======== ======== ========
</TABLE>
- ---------------
(1) The pro forma information does not purport to represent what the Company's
or the Lessee's financial position or results of operations actually would
have been if the Company had, in fact, owned and leased to the Lessee the
Current Hotels and the Acquisition Hotels at the beginning of the periods
indicated, or to project the Company's or the Lessee's results of operations
for any future period.
(2) With respect to the pro forma information, Rent revenue from the Lessee to
the Company is calculated on a pro forma basis by applying the Rent
provisions of the Percentage Leases to the historical room revenue of the
Hotels as if the beginning of the periods were the beginning of the lease
year. Assumes the Company owned and leased the Current Hotels and the
Acquisition Hotels throughout the periods presented.
32
<PAGE> 41
(3) With respect to the presentation of Funds From Operations, management
elected early adoption of the "new definition" as recommended in the March
1995 NAREIT White Paper on Funds From Operations beginning January 1, 1995.
Management and industry analysts generally consider Funds From Operations to
be one measure of the financial performance of an equity REIT that provides
a relevant basis for comparison among REITs and it is presented to assist
investors in analyzing the performance of the Company. "Funds From
Operations" ("FFO") is defined as income before minority interest (computed
in accordance with generally accepted accounting principles), excluding
gains (losses) from debt restructuring and sales of property and real estate
related depreciation and amortization (excluding amortization of financing
costs). FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not
necessarily indicative of cash available to fund cash needs. FFO should not
be considered an alternative to net income as an indication of the Company's
financial performance or as an alternative to cash flows from operating
activities as a measure of liquidity.
(4) Cash Available for Distribution is computed by subtracting from FFO the sum
of (a) 4% of room revenues, which the Company is obligated by the Percentage
Leases to make available to the Lessee for the periodic refurbishment and
replacement of furniture, fixture and equipment at the Hotels, and (b)
amounts required to repay principal amortization on long-term debt.
(5) Pro forma balance sheet data reflects the sale of 4,800,000 shares of Common
Stock and the application of the net proceeds as set forth in "Use of
Proceeds."
(6) The Lessee has elected status as a Subchapter S corporation for federal
income tax purposes and pays no corporate level tax on its net income.
(7) Sunstone Initial Hotels are deemed to be the predecessor of the Company and
do not include the Hampton Inn-Arcadia, California hotel, the Hampton
Inn-Silverthorne, Colorado hotel, the Doubletree-Santa Fe, New Mexico hotel
or any of the hotels acquired after the IPO.
33
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company completed a $60 million IPO on August 16, 1995 and contributed
all of the net proceeds of the IPO to the Partnership in exchange for an
approximately 82.5% aggregate equity interest in the Partnership. The Company
used the proceeds of the IPO to fund the purchase of three of the Current Hotels
and repay indebtedness incurred in connection with the acquisition of the
Sunstone Initial Hotels. Upon completion of the Offering the Company will
contribute an additional $48.3 million of net proceeds to the Partnership and
will own an approximately 88.3% interest in the Partnership. Following the
Offering, the Company will own 20 hotels with an aggregate of 2,612 rooms in
seven states, including Arizona (1 hotel), California (5), Colorado (6), New
Mexico (1), Utah (2), Oregon (2), and Washington (3), and will have doubled the
number of hotels in its portfolio in the 12 months since the IPO.
Since the IPO, the Company has implemented its growth strategy by (i)
acquiring underperforming hotels and redeveloping and repositioning certain of
such hotels into nationally franchised mid-price and upscale hotels and (ii)
enhancing the operating performance of its hotels through selective renovation
and improved management and marketing. Additionally, the Company has
significantly increased its franchise and geographic diversification within the
western United States and expanded its ability to finance future growth through
increased borrowing capacity on its Line of Credit.
The Company has implemented its external growth strategy, by (i) acquiring
six of the Current Hotels for purchase prices aggregating $19.3 million; (ii)
acquiring and substantially completing the construction of a Residence Inn for
approximately $5.0 million, which is expected to be opened during the third
quarter of 1996; (iii) acquiring one of the Acquisition Hotels, and contracting
to acquire the other two Acquisition Hotels, for purchase prices aggregating
$23.8 million, and with the Acquisition Hotels will have increased the number of
rooms in its portfolio by 96.7% since the IPO; and (iv) entering into a letter
of intent to acquire a 166-room full-service convention hotel for $8.4 million
upon completion of construction by an unaffiliated developer, which is expected
to occur in 1997.
The Company has implemented its internal growth strategy by (i) completing
an aggregate of $3.9 million in redevelopment to two of the Current Hotels; (ii)
completing $1.2 million in renovations to two other Current Hotels; (iii)
commencing redevelopment budgeted at $5.5 million to four of the Current Hotels;
and (iv) increasing REVPAR for the seven Current Hotels that were owned by the
Company or its predecessor for the entire first quarter of 1995 and 1996 and
were not undergoing redevelopment or significant renovation by 8.2%, from $50.43
to $54.58.
Additionally, the Company has increased availability under the Line of
Credit from $30 million to $50 million reducing its borrowing rate from LIBOR
plus 2.75% to LIBOR plus 2.25% with additional reductions to LIBOR plus 1.90%
after the Offering and to LIBOR plus 1.75% upon meeting certain other financial
conditions, and applied for a $9 million year fixed-rate Term Loan which will be
secured by two of the Current Hotels.
PRO FORMA RESULTS OF OPERATIONS OF THE COMPANY
Comparison of the Quarter ended March 31, 1996 to March 31, 1995
Lease revenue, which is based primarily on hotel room revenues, increased
$129,000, or 11.8%, for seven of the eight Current Hotels that were owned by the
Company or its predecessor for the entire first quarter of 1995 and 1996. This
increase was principally due to an 8.2% increase in REVPAR, from $50.43 to
$54.58, at the seven hotels during such periods. The lease revenue increase was
partially offset by a $90,000, or 20%, decrease in lease revenue from the eighth
Current Hotel that was owned by the Company or its predecessor which was
undergoing redevelopment during the first quarter of 1996. With respect to all
of the Current Hotels and Acquisition Hotels, REVPAR for those hotels not
undergoing redevelopment or renovation (i.e.,
34
<PAGE> 43
all except the Doubletree-Santa Fe, New Mexico hotel, Hampton Inn-Oakland,
California hotel and Holiday Inn-Steamboat Springs, Colorado hotel), rose 8.8%,
from $35.15 to $38.26.
Overall, lease revenue for the Company increased $192,000, or 5.0%, to $4.1
million for the three months ended March 31, 1996 as compared to the
corresponding period in 1995, based on an overall increase in REVPAR of 1.6%,
from $38.22 to $38.82. Room revenues at certain of the hotels, primarily those
undergoing or expected to undergo redevelopment or renovation, produced lease
revenue to the Company at approximately the Base Rent levels of the Percentage
Leases for such hotels. The Company expects that future increases in REVPAR for
those hotels will result in significantly increased lease revenue to the Company
due to the structure of the Percentage Leases.
Redevelopment Activity. During the first quarter of 1996, the Company
completed its redevelopment and conversion of the Best Western High Mesa Inn in
Santa Fe, New Mexico to a Doubletree Hotel and the redevelopment of the Holiday
Inn in Steamboat Springs, Colorado. REVPAR for these hotels decreased 38.8% for
the quarter ended March 31, 1996, when compared to the corresponding period in
1995. Both hotels are expected to generate increased revenue under their
Percentage Leases beginning in the second quarter of 1996.
For the first quarter ended March 31, 1996 compared to the corresponding
period in 1995, pro forma net income increased $11,000 to $1,685,000, while
revenues and depreciation increased $192,000 and $111,000, respectively.
Year Ended December 31, 1995
Lease revenue for the year ended December 31, 1995 was $15,020,000.
For those hotels not undergoing renovations in 1995, pro forma results for
the year ended December 31, 1995 reflect a REVPAR increase of 9.2%, from $35.04
to $38.27, when compared to the corresponding period in 1994. REVPAR for all of
the Current Hotels and Acquisition Hotels for such periods increased 5.3%, from
$36.53 to $38.48
Redevelopment Activity. During the fourth quarter of 1995 and the first
quarter of 1996, the Company redeveloped and converted the Best Western High
Mesa Inn in Santa Fe, New Mexico to a Doubletree Hotel. The Holiday Inn in
Steamboat Springs, Colorado was also redeveloped. REVPAR for these two hotels
decreased 38.8%, from $42.29 to $25.88, and 15.8%, from $47.54 to $40.05, for
the quarter and year ended December 31, 1995, respectively, when compared to the
corresponding periods in 1994.
For the year ended December 31, 1995, pro forma net income was $5.8
million, and on a per-share basis was $0.53 per share, and revenues were $15.1
million.
Internal Growth
Management believes that the increases in REVPAR for hotels other than the
renovated hotels in Santa Fe, New Mexico and Steamboat Springs, Colorado
resulted primarily from the success of the Company's renovation and
redevelopment program, from improvements in management and marketing and from
increases in demand for mid-price and upscale hotel rooms throughout the western
United States.
External Growth
Including the Acquisition Hotels, the Company will have acquired a total of
ten new hotels for $43.2 million representing a 97% growth in the number of
rooms in its hotel portfolio, from 1,328 to 2,612 rooms, in less than a one-year
period.
35
<PAGE> 44
PRO FORMA RESULTS OF OPERATIONS OF THE LESSEE
Three Months Ended March 31, 1996
For the three months ended March 31, 1996, the Lessee, on a pro forma
basis, would have had $10.1 million in total revenue. The Percentage Lease
payments and operating expenses would have been $4.1 million and $6.2 million,
respectively, and the net loss would have been $192,000. For further discussion
of the Lessee's operations see "Pro Forma Results of Operations" of the Company.
Year Ended December 31, 1995
For the fiscal year ending December 31, 1995, the Lessee, on a pro forma
basis, would have had $41.3 million in total revenue. The Percentage Lease
payments and operating expenses would have been $15.0 million and $26.6 million,
respectively, and net losses would have been $373,000. Management believes that
the completion by the Company of the redevelopment and conversion of the Best
Western-Santa Fe, New Mexico hotel to a Doubletree Hotel and the redevelopment
of the Holiday Inn-Steamboat Springs, Colorado hotel will improve the Lessee's
results of operation for such hotels.
SEASONALITY AND DIVERSIFICATION
Demand is affected by normally recurring seasonal patterns. Generally, the
Company's portfolio of hotels as a whole has performed better in the first and
third quarters due to the positive and negative effects of the winter season.
Future acquisitions may further affect the seasonality of the Company's current
portfolio.
The Company has implemented a business strategy of franchise and geographic
diversification. The following tables summarize certain information for the
Hotels, on a pro forma basis, with respect to franchise affiliations and
distribution of hotels throughout the western United States.
36
<PAGE> 45
FRANCHISE AFFILIATIONS
<TABLE>
<CAPTION>
GROSS REVENUES
NUMBER OF PERCENTAGE OF FOR THE YEAR ENDED PERCENTAGE OF
ROOMS ROOMS DECEMBER 31, 1995 GROSS REVENUES
--------- ------------- ------------------- --------------
<S> <C> <C> <C> <C>
CURRENT HOTELS
Courtyard by Marriott................... 279 10.7% $ 3,745,434 9.1%
Doubletree Hotels....................... 213 8.2 3,161,936 7.7
Hampton Inns............................ 939 35.9 15,103,141 36.6
Residence Inn........................... 78 3.0
Holiday Inns............................ 160 6.1 3,210,155 7.8
Holiday Inn Hotel & Suites.............. 291 11.1 4,105,263 9.9
Holiday Inn Express..................... 148 5.7 1,809,748 4.4
----- ----- ---------- -----
Subtotal........................... 2,108 80.7 31,135,677 75.5
----- ----- ---------- -----
ACQUISITION HOTELS
Comfort Suites.......................... 165 6.3 3,319,188 8.0
Days Inn................................ 151 5.8 2,270,609 5.5
Holiday Inn Select...................... 188 7.2 4,534,930 11.0
----- ----- ---------- -----
Subtotal........................... 504 19.3 10,124,727 24.5
----- ----- ---------- -----
Total......................... 2,612 100.0% $41,260,404 100.0%
===== ===== ========== =====
</TABLE>
See the table on page 3 for the status of franchise licenses.
GEOGRAPHIC DIVERSIFICATION
<TABLE>
<CAPTION>
GROSS REVENUES
NUMBER OF PERCENTAGE OF FOR THE YEAR ENDED PERCENTAGE OF
STATE ROOMS ROOMS DECEMBER 31, 1995 GROSS REVENUES
- ---------------------------------------- --------- ------------- ------------------- --------------
<S> <C> <C> <C> <C>
Arizona................................. 118 4.5% $ 2,206,150 5.3%
California.............................. 727 27.8 11,286,788 27.4
Colorado................................ 753 28.8 11,934,659 28.9
New Mexico.............................. 213 8.2 3,161,936 7.7
Oregon.................................. 199 7.6 2,051,518 5.0
Utah.................................... 229 8.8 3,614,142 8.8
Washington.............................. 373 14.3 7,005,211 17.0
----- ----- ---------- -----
Total......................... 2,612 100.0% $41,260,404 100.0%
===== ===== ========== =====
</TABLE>
ACTUAL RESULTS OF OPERATIONS OF THE COMPANY
Comparison of Year Ended December 31, 1994 to Year Ended December 31,
1993 -- Sunstone Initial Hotels, Predecessor
Room revenue for the Sunstone Hotels increased by $1.7 million, or 16.9%,
to $12.0 million in 1994 from $10.2 million in 1993. Approximately $304,000 of
this increase was due to the repositioning of the Holiday Inn in Provo, Utah;
approximately $324,000 of this increase was due to an increase in occupancy at
the Hampton Inn in Mesa, Arizona; and, approximately $261,000 of this increase
was due to new corporate business and other increased demand at the Hampton Inn
in Pueblo, Colorado. The remainder of the increase was primarily due to a 9.3%
increase in ADR to $54.65 in 1994 from $50.02 in 1993. Greater emphasis was
placed on setting room rates during 1994 in order to increase occupancy.
Occupancy increased from 70.4% in 1993 to 72.5% in 1994. Of the total room
revenue increase of $1.7 million, approximately $950,000 was attributable to
increases
37
<PAGE> 46
in ADR and approximately $778,000 was attributable to increases in occupancy.
REVPAR also increased 12.5% to $39.61 in 1994 from $35.21 in 1993. Net income
increased by $153,000 to $398,000 for 1994 from $245,000 for 1993, an increase
of 62.4%.
Accounting Policies
In March and October 1995, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of" and
No. 123 "Accounting for Stock-Based Compensation," respectively. These
statements shall be effective for financial statements for fiscal years
beginning after December 15, 1995. Management believes that adoption of Standard
No. 121 will not have a material effect on its financial position or results of
operations. Management intends to adopt the disclosure method on Standard No.
123 and, accordingly, there will be no impact on the Company's financial
position or results of operations.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
On a pro forma basis, as of March 31, 1996, after giving effect to the
Offering, the Company will have total debt outstanding of approximately $12.0
million resulting in a pro forma debt to investment in hotels, at cost, of
14.9%.
Cash Flows Provided by Operating Activities. The Company's operating
activities provide the principal source of cash to fund the Company's operating
expenses, interest expense, recurring capital expenditures and dividend
payments. The Company anticipates that its cash flow provided by leasing the
hotels to the Lessee will provide the necessary funds on a short and long term
basis to meet its operating cash requirements. The Company is required under the
Percentage Leases to make available to the Lessee for the repair, replacement
and refurbishment of furniture, fixtures and equipment an amount equal to 4% of
the room revenue per quarter on a cumulative basis, provided that such amount
may be used for capital expenditures made by the Company with respect to the
hotels. The Company expects that this reserve will be adequate to fund such
periodic repairs, replacements and refurbishments. Since inception, the Company
has paid dividends and distributions totaling $4.4 million representing $0.23
per share on a quarterly basis.
Cash flows from Investing and Financing Activities. Additionally, the
Company intends to finance the acquisition of additional hotels, hotel
renovations and non-recurring capital improvements principally through the Line
of Credit with Bank One of Arizona, N.A. and, when market conditions warrant, to
issue additional equity or debt securities. On a pro forma basis, as of March
31, 1996, the Company had $41.0 million available on its $50.0 million Line of
Credit. Interest accrues on advances under the Line of Credit at a rate equal to
LIBOR plus 2.25% reduced to LIBOR plus 1.90% upon completion of the Offering,
and further reduced to LIBOR plus 1.75% if the Company satisfies certain
financial requirements. The Line of Credit provides for a $5 million working
capital subfacility and a $5 million construction subfacility. The Company has
the option each year to extend the two-year revolving term period by an
additional year upon the payment of a 0.375% extension fee and certain other
conditions. Upon termination of the revolving term period, the Company may under
certain conditions, including payment of a 1% fee, convert the outstanding
balance into a three-year term loan. The Line of Credit is guaranteed by Mr.
Alter, Mr. Biederman and certain other individuals and is secured by first
mortgages on all of its Current Hotels. However, the Company has the option of
owning hotels not subject to the lien securing the Line of Credit so long as no
proceeds under the Line of Credit are used with respect to such hotel and any
other lender loaning against such hotel limits its liens to only that hotel.
This feature of the Line of Credit gives the Company the ability to separately
finance on a long-term basis certain of its Hotels. The Company has applied for
a $9 million 10-year fixed rate loan secured by the Hampton Inns in Denver,
Colorado, and Mesa, Arizona. The Line of Credit may be retired in whole or in
part from the proceeds of public or private issuances of equity or debt
securities by the Company and may be refinanced in whole or in part with
fixed-rate financing. However, because Messrs. Alter and Biederman and certain
affiliates would suffer adverse tax consequences if the Company's mortgage
indebtedness were reduced below $8.4 million, the Company does not anticipate
reducing its mortgage indebtedness below this amount.
The Company continues to pursue its strategy of redeveloping, renovating
and repositioning underperforming hotels. As of March 31, 1996, redevelopment
and renovation work was substantially completed at three hotels for $5.1
million. The Company expects that redevelopment of additional hotels
38
<PAGE> 47
will be completed by the first quarter of 1997 for an additional $5.7 million.
The redevelopment and renovation program is expected to be funded entirely by
excess operating cash flows and borrowings under the Line of Credit.
Since the IPO, the Company has expended over $27.5 million in acquiring
hotel assets. As part of its investment strategy, the Company plans to acquire
additional hotels. Future acquisitions are expected to be funded through the use
of the Line of Credit or other borrowings and the issuance of additional equity
or debt securities. The Company's Articles of Incorporation limits consolidated
indebtedness to 50% of the Company's investment in hotel properties, at cost on
a consolidated basis, after giving effect to the Company's use of proceeds from
any indebtedness. Management believes that it will have access to capital
resources sufficient to satisfy the Company's cash requirements and to expand
and develop its business in accordance with its strategy for future growth.
Funds From Operations. Management believes that FFO is one measure of
financial performance of an equity REIT such as the Company. On a pro forma
basis, FFO for the first quarter of 1996 grew by 3.9% to $3.3 million from $3.2
million for the corresponding period of 1995 based on an overall increase in
REVPAR of 1.6%, from $38.22 to $38.82. For the year ended December 31, 1995, on
a pro forma basis, FFO would have been $11.9 million. The Company expects its
FFO to increase due to the impact of its internal and external growth strategies
and particularly its recently completed and proposed redevelopment and
renovation activities.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, YEAR ENDED
----------------- DECEMBER 31,
1996 1995 1995
------ ------ ------------
<S> <C> <C> <C>
Income before minority interest.............................. $1,907 $1,895 $ 6,611
Real estate related depreciation............................. 1,388 1,277 5,330
------ ------ -------
Funds From Operations(1)..................................... $3,295 $3,172 $11,941
====== ====== =======
</TABLE>
- ---------------
(1) With respect to the presentation of FFO, management elected early adoption
of the "new definition" as recommended in the March 1995 NAREIT White Paper
on Funds From Operations beginning January 1, 1995. Management and industry
analysts generally consider funds from operations to be one measure of the
financial performance of an equity REIT that provides a relevant basis for
comparison among REITs and it is presented to assist investors in analyzing
the performance of the Company. Funds From Operations is defined as income
before minority interest (computed in accordance with generally accepted
accounting principles), excluding gains (losses) from debt restructuring and
sales of property and real estate related depreciation and amortization
(excluding amortization of financing costs). Funds From Operations does not
represent cash generated from operating activities in accordance with
generally accepted accounting principles and is not necessarily indicative
of cash available to fund cash needs. Funds From Operations should not be
considered an alternative to net income as an indication of the Company's
financial performance or as an alternative to cash flows from operating
activities as a measure of liquidity.
INFLATION
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures may limit the Lessee's ability to raise
room rates in the face of inflation.
39
<PAGE> 48
BUSINESS AND PROPERTIES
THE LODGING INDUSTRY
The fundamentals of the lodging industry have improved significantly in
each year since 1991. The industry as a whole generated record earnings in 1995,
with industry-wide pre-tax profits of $8.5 billion. This was up 55% from $5.5
billion in pre-tax profits in 1994, and represented the industry's third
consecutive year of profitability. Hospitality Directions projects that industry
pre-tax profits will reach $14.7 billion in 1998.
The industry's profitability has been fueled by four consecutive years in
which the growth in demand for hotel rooms has exceeded the growth in room
supply. Industry-wide growth in room demand exceeded the growth in total room
supply by 2.0%, 2.6%, 2.8% and 1.4% in 1992, 1993, 1994 and 1995, respectively.
This trend has continued in the first quarter of 1996, with demand growth
eclipsing supply growth by 1.2% despite harsh winter weather conditions
affecting many markets.
This sustained, favorable relationship between demand growth and supply
growth has enabled the industry to increase REVPAR every year since 1991. REVPAR
for the industry as a whole grew 2.4%, 5.7%, 6.9% and 5.6% in 1992, 1993, 1994
and 1995, respectively, and increased 7.4% in the first quarter of 1996 compared
to the first quarter of 1995. Hospitality Directions forecasts industry-wide
REVPAR gains averaging 5% annually in the period 1996 through 1998.
The fundamentals are similarly favorable in the mid-price segment in which
the majority of the Company's hotels operate. Demand for mid-price rooms grew at
3.8% in 1995, while the supply of new mid-price rooms increased only 2.4%.
Carrying this trend forward, demand for mid-price rooms grew at the same 3.8%
rate during the 12 months ended March 31, 1996, compared to a 2.6% increase in
mid-price room supply in the same period.
REVPAR at mid-price hotels grew 5.3% in 1995, and increased 6.4% in the 12
months ended March 31, 1996, compared to the 12 months ended March 31, 1995.
Hospitality Directions forecasts that the mid-price segment will achieve REVPAR
gains averaging 4.9% annually in the period 1996 through 1998.
The upscale segment of the industry, which represents a growing number of
the Company's hotels, is expected to achieve strong results in the near-term due
to limited growth in the supply of new upscale rooms. Demand growth should
exceed the rate of new upscale room supply by an average of 0.6% annually during
the 1996-1998 period, according to Hospitality Directions, translating into an
average 5.7% annual increase in REVPAR for the upscale segment for the same
1996-1998 period.
The Company believes near-term supply growth will be limited in the upscale
segment due to (i) the continued availability of upscale hotel acquisition
opportunities in most markets at prices below replacement cost, (ii) the high
relative cost of construction of upscale hotels, (iii) more limited financing
available for upscale hotel construction, and (iv) long construction lead times
for upscale hotels.
The graphs on the following page illustrate REVPAR growth over the previous
comparable period for all upscale and mid-price U.S. hotels.
40
<PAGE> 49
REVPAR GROWTH OF LODGING INDUSTRY
LOGO
Note: All REVPAR data has been obtained from the January 1996 issue of
Hospitality Directions except for Q1 1996 which the Company has calculated from
data provided by Smith Travel Research.
OVERVIEW OF THE COMPANY
The Company is a self-administered REIT that, through the Partnership, owns
mid-price and upscale hotels in the western United States. The hotels operate or
will operate under nationally recognized franchises, including Courtyard by
Marriott, Doubletree Hotel, Hampton Inn, Holiday Inn, Holiday Inn Hotel &
Suites, Holiday Inn Express, Holiday Inn Select and Residence Inn. The Company
owns 18 hotels, eight of which were acquired subsequent to the IPO in August
1995. The Company recently acquired one of the Acquisition Hotels and intends to
acquire the other two Acquisition Hotels concurrently with the closing of this
Offering. Following such acquisitions, the Company will own 20 hotels with an
aggregate of 2,612 rooms in seven states, including Arizona (1 hotel),
California (5), Colorado (6), New Mexico (1), Utah (2), Oregon (2), and
Washington (3), and will have doubled the number of hotels in its portfolio in
the 12 months since the IPO.
In addition to significantly expanding its portfolio, the Company has
generated internal revenue growth by renovating or redeveloping many of the
Current Hotels, and improving their management and marketing programs. REVPAR
for the seven Current Hotels that were owned by the Company or its predecessor
for the entire first quarter of 1995 and 1996 and were not undergoing
redevelopment or significant renovation during such periods increased 8.2%, from
$50.43 to $54.58. REVPAR for all of the Current Hotels and the Acquisition
Hotels during such periods increased 1.6%, from $38.22 to $38.82. The Company
believes that its recently completed and future redevelopment and renovation
activities, as well as improvements in management and marketing, will continue
to fuel REVPAR growth at its hotels, thereby increasing revenue to the Company.
GROWTH STRATEGY
The Company's growth strategy is to enhance shareholder value by increasing
Cash Available for Distribution by acquiring or selectively developing
additional hotels that meet the Company's investment criteria and by
participating, through Percentage Leases, in room revenue from its hotels. This
strategy is designed to capitalize on improving occupancy rates and ADRs
prevailing in the U.S. lodging industry.
41
<PAGE> 50
The Company's external growth strategy is to: (i) acquire underperforming
hotels located primarily in the western United States that are, or can be
redeveloped and repositioned into, nationally franchised mid-price and upscale
hotels, with an increasing emphasis on multi-property acquisitions; (ii) develop
extended-stay Hawthorn Suites hotels through property conversions or new
construction in several major urban markets on the West Coast pursuant to a
proposed master development agreement with USFS; and (iii) selectively develop
new mid-price and upscale hotels in markets where room demand and other
competitive factors justify new construction.
The Company's internal growth strategy is to enhance the operating
performance of hotels owned and acquired by the Company by: (i) selectively
renovating the hotels, and in some cases redeveloping and rebranding them under
national franchises; (ii) improving the marketing and management of the hotels;
(iii) leasing restaurants in the hotels to national or regional restaurant
companies; and (iv) in selective cases, expanding the number of rooms at certain
hotels where market conditions justify expansion.
External Growth Strategy
Acquisitions. The Company intends to acquire hotels located primarily in
the western United States which meet one or more of the following criteria: (i)
underperforming hotels which have the potential for improved performance through
the implementation of quality management and marketing programs, and/or
association with a national franchisor; (ii) hotels in a deteriorated physical
condition that would benefit significantly from renovation or redevelopment;
(iii) hotels in attractive locations that would benefit significantly by
changing franchises to a brand that can increase REVPAR, such as Courtyard by
Marriott, Doubletree Hotel, Hampton Inn, Holiday Inn, Holiday Inn Select,
Holiday Inn Hotel & Suites, Holiday Inn Express and Residence Inn; (iv) hotels
owned by franchisees who are unable or unwilling to meet capital improvement
requirements of the franchisor; (v) nationally franchised hotels in locations
with favorable room supply and demand fundamentals; and (vi) hotels in markets
where there are significant barriers to entry, such as limited opportunities to
change existing franchises at competitive hotels, scarcity of suitable hotel
sites or zoning restrictions.
Multiple Property Acquisitions. Since the IPO, the Company has positioned
itself to acquire multiple hotels in a single transaction, enabling it to more
quickly and efficiently expand its portfolio by accelerating the pace of growth
while reducing acquisition expenses per hotel. The Company has increased its
access to capital for multi-property acquisitions by increasing the availability
under its Line of Credit from $30 million to $50 million and by pursuing a $9
million, 10-year fixed rate Term Loan to be secured by two of the Current Hotels
(which would have otherwise been financed by borrowing, under the Line of
Credit). In addition, rather than paying cash, the Company also has the
flexibility of issuing its Common Stock or Units in the Partnership to acquire
hotels, which under certain circumstances allows the sellers to defer tax
liability which would otherwise arise upon a sale for cash. In addition to its
financial resources, the Company's experience successfully operating hotels in
seven states has given it significant knowledge of a variety of markets and the
ability to quickly identify strategic acquisition opportunities in them. The
Company believes that its increasing profile in the hotel industry and its
record of closing acquisitions will enable it to attract sellers of hotel
portfolios. Additionally, the Company expects its ability to attract such
sellers to be further enhanced by its proposed consulting arrangement with
Geller & Co. See "Management -- Strategic Consultant."
Hawthorn Suites Master Development Agreement. Under a proposed master
development agreement with USFS, the Company intends to develop extended-stay
Hawthorn Suites hotels in several major urban markets in California, Oregon and
Washington, including San Diego, San Francisco, San Jose, Portland, Seattle and
certain areas of Los Angeles. The Company entered into a letter of intent with
USFS in June 1996, intended to lead to a five-year master development agreement
under which the Company will have the first right to develop Hawthorn Suites in
the markets it selects. In the event that another party applies to USFS for a
Hawthorn Suites franchise license in one of the markets prior to the time the
Company has initiated a development opportunity in the market, USFS may grant a
franchise license for the market to such other party. If a license is granted to
such party, the Company may select an alternative market from the list of
available markets in which to develop a hotel. Development may consist of
conversions of existing properties or new construction and may be performed by
the Company, or by unaffiliated developers who will sell the
42
<PAGE> 51
project to the Company upon completion (and thus allow the Company to minimize
development risks). Under the proposed master development agreement the Company
will have to develop a certain number of hotels in each year of the five-year
term, or the right to develop those hotels will expire. It is intended that USFS
will be required to help the Company identify hotel sites, provide architectural
plans and development oversight and assist in marketing the hotels. The Hawthorn
Suites relationship is only in the letter of intent stage, and there is no
assurance that the Company will enter into a definitive master development
agreement, or, if it does, that the agreement will contain the terms described
herein. See "Risk Factors -- Hawthorn Suites Development Risks" and
"-- Development Risks."
Hawthorn Suites are upscale extended-stay hotels competing primarily with
Residence Inns and Homewood Suites. The franchise rights to this brand were
recently acquired by USFS, a hotel franchise company founded by Michael Leven,
the former President of Holiday Inn. The Company believes USFS intends to grow
the Hawthorn Suites brand into a leading national hotel chain from its current
base of 17 Hawthorn Suites hotels. The Company believes the arrangement with
USFS will give it a significant advantage in the growing extended-stay market in
the western United States.
Selective Development of Additional Hotels. In addition to its plans to
develop Hawthorn Suites hotels, the Company may selectively develop new upscale
and mid-price hotels which will operate under other national franchises in
markets where room demand and other competitive factors justify new
construction. The Company intends, however, to focus its development efforts on
Hawthorn Suites in the foreseeable future, and to develop other hotels only as a
secondary development strategy. As in the case of the intended development of
Hawthorn Suites, the Company may develop other hotels itself or may contract
with unaffiliated developers who will build hotels and then sell them to the
Company upon completion on pre-agreed terms. Such arrangements with developers
will enable the Company to minimize risks associated with development. Other
than the Company's current development of a 78-room Residence Inn hotel in
Highlands Ranch (Denver), Colorado, and the letter of intent to acquire a
166-room hotel to be developed by an unaffiliated developer in Pueblo, Colorado,
each of which is described under "Recent Developments" in the Prospectus
Summary, the Company is not currently involved in any development projects.
Internal Growth Strategy.
The Company's internal growth strategy is to improve the operating
performance of the hotels it acquires by improving their marketing and
management, and by renovating, redeveloping, rebranding, and in some cases
expanding the number of rooms, when the Company believes such improvements will
provide returns on investment and increased revenue.
Redevelopment and Renovation. In conjunction with the Company's strategy
of acquiring hotels that can benefit from extensive improvements, reflagging and
repositioning, the Company's principal internal growth strategy is to redevelop
or extensively renovate such hotels and reflag them with a national franchise
that the Company believes will generate higher REVPAR than that currently being
generated. In addition to the redevelopment strategy, the Company periodically
renovates its hotels, not only to satisfy requirements of the Franchise
Agreements, but to maintain or increase market share. The Company believes that
after taking into account the purchase price for each hotel in its portfolio and
the cost of renovating or redeveloping it, the overall expenditure for each
hotel is less than its replacement cost. The Company has and intends to the
extent practicable continue to keep hotels operational while conducting
renovation and redevelopment work by performing such work during off-peak
periods and in a manner least disruptive to hotel operations.
43
<PAGE> 52
SCOPE OF RENOVATION
For those hotels whose franchise affiliation will not be changed, the
Company typically makes renovations following acquisition in order to satisfy
the existing franchisor's product improvement plan. The Company also performs
periodic routine maintenance to all hotels in order to keep them competitive.
Renovations typically consist of many of the following:
<TABLE>
<CAPTION>
GUEST ROOMS PUBLIC AREAS EXTERIOR
-------------------------- -------------------------- --------------------------
<S> <C> <C>
selectively replacing replacing drapes and repainting
bedspreads, linens, drapes valences seal coating parking lot
and refinishing and adding lighting
valances selectively
refinishing and replacing furniture
selectively replacing wallpaper and
replacing furniture vinyl
adding televisions, wallcovering
telephones repainting
with data ports and recarpeting
voicemail, clock radios,
coffeemakers, irons and
ironing boards
replacing wallpaper and
vinyl
wallcovering
repainting
recarpeting
</TABLE>
SCOPE OF REDEVELOPMENT
Redevelopment is more extensive than renovation and is used to completely
upgrade a hotel so that in certain instances it can be branded with a national
franchise if it is not already, or rebranded with a national franchise that the
Company believes will generate higher REVPAR than that currently being generated
at its hotels. Redevelopment typically involves many of the following:
<TABLE>
<CAPTION>
GUEST ROOMS PUBLIC AREAS EXTERIOR
-------------------------- -------------------------- --------------------------
<S> <C> <C>
replacing all bedspreads, replacing drapes and repainting
linens, drapes and valances installing new window
valences replacing wallpaper and treatments and grill work
replacing all furniture vinyl modifying the facade
adding televisions, wallcovering constructing port-cochere
telephones repainting repaving or seal coating
with data ports and recarpeting parking lot
voicemail, clock radios, redecorating adding lighting
coffeemakers, irons and replacing furniture re-roofing
ironing boards rebuilding reception area
replacing wallpaper and redesigning lobby for
vinyl improved traffic flow
wallcovering remodeling restaurant to
repainting standards of regional or
recarpeting national restaurant
remodeling guestrooms, operator
including changing room installing fire safety
layout and modifying equipment, including
closets sprinklers and smoke
remodeling guest bathrooms detectors
with new countertops, tile
floors, plumbing fixtures,
lights and valances
installing fire safety
equipment, including
sprinklers and smoke
detectors
</TABLE>
44
<PAGE> 53
The following table sets forth certain information with respect to the
Company's completed, outstanding and planned renovation and redevelopment
activity. The table includes renovation and redevelopment work on the Sunstone
Initial Hotels, which was completed by the Sunstone Affiliates prior to the
transfer of the Sunstone Initial Hotels to the Company in connection with the
IPO. The table does not include work completed by any other prior owners of the
Hotels.
<TABLE>
<CAPTION>
SCOPE OF RENOVATION OR REDEVELOPMENT WORK
-------------------------------------------------------------------------------------
ADD/ ROOMS RENOVATION
COMPLETED OR REPLACE/ UPGRADE ------------------------- PRIOR
EXPECTED TO BE REFURBISH MEETING SOFT GUEST FRANCHISE
COMPLETED EXTERIOR RESTAURANT LOBBY SPACE GOODS FURNITURE BATH AFFILIATION
-------------- --------- ---------- ----- ------- ----- --------- ----- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS
Courtyard by Marriott:
Fresno, California.... February 1994 'X' 'X' 'X' 'X' 'X' 'X' Hampton Inn
Riverside,
California.......... June 1994 'X' 'X' 'X' 'X' 'X' 'X' 'X' Days Inn
Doubletree Hotel:
Santa Fe, New
Mexico.............. April 1996 'X' 'X' 'X' 'X' 'X' 'X' 'X' Best Western
Hampton Inn:
Mesa, Arizona.........
Arcadia, California...
Oakland, California... July 1996 'X' 'X' 'X' 'X' 'X'
Denver, Colorado......
Pueblo, Colorado......
Silverthorne,
Colorado............ June 1996 'X' 'X' 'X' 'X' 'X'
Clackamas (Portland),
Oregon.............. July 1996 'X' 'X' 'X' 'X' 'X' 'X' Cypress Inn(1)
Holiday Inn:
Steamboat Springs,
Colorado............ February 1996 'X' 'X' 'X' 'X' 'X'
Provo, Utah........... June 1994 'X' 'X' 'X' 'X' 'X' 'X'
Holiday Inn Hotel &
Suites:
Craig, Colorado....... August 1992 'X' 'X' 'X' 'X' 'X' 'X' 'X' Holiday Inn(1)
Kent (Seattle),
Washington.......... July 1996 'X' 'X' 'X' 'X' 'X' 'X' Cypress Inn(1)
Holiday Inn Express:
Portland, Oregon...... August 1996 'X' 'X' 'X' 'X' 'X' 'X' Cypress Inn(1)
Poulsbo, Washington... July 1996 'X' 'X' 'X' 'X' 'X' Cypress Inn(1)
Highlands Ranch
(Denver),
Colorado............ August 1996 CURRENTLY UNDER CONSTRUCTION
ACQUISITION HOTELS
Comfort Suites:(2)
South San Francisco,
California.......... --
Days Inn:(3)
Price, Utah........... --
Holiday Inn Select:
Renton (Seattle),
Washington.......... -- 'X' 'X' 'X' 'X' 'X' 'X' Holiday Inn(1)
</TABLE>
- ---------------
(1) The Company has obtained a franchise license from the franchisor to rebrand
the hotel with the brand listed in the left-hand column of this table
subject to the completion of renovation or redevelopment.
(2) The Company has not yet determined the scope of renovations or redevelopment
for this hotel.
(3) The Company has applied to Holiday Inn for a Holiday Inn Hotel & Suites
franchise license for the Days Inn-Price, Utah hotel, which has not yet been
granted. If a license is granted the Company expects it would be subject to
certain renovations and improvements, which the Company estimates would be
completed during the fourth quarter of 1996. The Company is currently
finalizing the scope of the proposed work.
45
<PAGE> 54
Comprehensive Marketing and Management Strategies. The hotels acquired by
the Company often lack adequate management and marketing programs. Through the
Management Company and the Lessee, the Company implements a full complement of
management and marketing programs at each acquired hotel designed to maximize
sales and operational efficiency. The Management Company developed a sales
program that the Lessee uses to direct and manage the sales activities of
personnel located at each hotel and a program to ensure that staff is properly
trained and that staffing levels are efficient. As part of the required
reporting process, each hotel must contact every business within a five-mile
radius to evaluate possible hotel use and revenue potential. The sales
department within each hotel reports to the Vice President -- Marketing and the
Director of Sales of the Lessee. The Lessee is required under the applicable
Percentage Lease to implement these programs. See "Business and
Properties -- The Percentage Leases" and "-- The Management Agreement."
Expansions. In certain cases, the Company may expand the number of rooms
at a hotel where occupancy, ADR and other market conditions justify such
expansion, and building permits can be obtained. The Company owns adjacent land
at five of the Current Hotels suitable for building additional rooms, however,
the Company currently believes that the Residence Inn in Highlands Ranch
(Denver), Colorado, and the Holiday Inn Hotel & Suites in Poulsbo, Washington,
are the only Hotels which are in markets that would support expansion. The
Residence Inn in Highlands Ranch has been designed to add a 42-room building if
and when market demand at the initial 78-room phase justifies the expansion. The
Holiday Inn Hotel & Suites in Poulsbo has land that can accommodate a 30- to
40-room expansion. The Company currently has no plans to expand either hotel.
Restaurant Leases. The Company's growth strategy includes encouraging the
Lessee to sublease restaurant facilities in the hotels (other than the Courtyard
by Marriott Hotels) to regional or national restaurant companies. The Company
believes this strategy is beneficial because it: (i) allows the Lessee to
concentrate on increasing room revenue, which benefits the Company because of
the higher Percentage Rent thresholds (from 60% to 65%) than the 5% of food and
beverage revenue; (ii) creates rents payable from the independent restaurant
company sublessee, which the Company believes will be greater than the
percentage rents from the Lessee for food and beverage because of the greater
expertise and resources of the restaurant company sublessee; and (iii) enhances
guest satisfaction by providing food service from experienced national or
regional restaurant companies. Eight of the Current Hotels have restaurant
facilities, of which the Lessee has subleased five to unaffiliated restaurant
companies including Old Chicago Bar & Grill, Mitzell American Restaurant, Rock
Bottom Restaurant, Ruby River Steak House and Village Inn, and is actively
seeking to sublease restaurants at two of the four other Current Hotels.
DESCRIPTION OF FRANCHISES
Courtyard by Marriott Hotels
Two of the Current Hotels are licensed to operate as Courtyard by Marriott
hotels. Courtyard by Marriott hotels seek to offer guests moderately-priced
lodging with superior accommodations. Courtyard by Marriott hotels feature
in-room coffee makers, a limited service restaurant and lounge and a toll-free
reservation number. According to Marriott, the first Courtyard by Marriott hotel
was opened in 1983, and, as of June 17, 1996, there were over 265 Courtyard by
Marriott hotels operating in the United States, Mexico and Canada.
Doubletree Hotels
One of the Current Hotels is licensed to operate as a full-service
Doubletree Hotel. Full-service Doubletree Hotels are targeted at business
travelers, group meetings and leisure travelers, and range in size from 120 to
720 rooms. Full-service Doubletree Hotels typically include a swimming pool,
gift shop, meeting and banquet facilities, at least one restaurant and cocktail
lounge, room service, parking facilities and other services. As of March 31,
1996, there were 60 full-service Doubletree Hotels in 22 states, the District of
Columbia and Mexico, with a total of 19,324 guest rooms.
46
<PAGE> 55
Hampton Inn Hotels
Seven of the Current Hotels are licensed to operate as Hampton Inn hotels.
Hampton Inn hotels seek to offer guests consistent quality and value at all
locations. Hampton Inn was among the first hotel companies to offer guests an
unconditional 100% satisfaction guarantee. Most Hampton Inn hotels are limited
service hotels that feature complimentary continental breakfasts, free local
telephone and in-room movie channel, a toll-free reservation number and a
special discount program for guests over 50 years of age, but do not generally
provide a restaurant or lounge. According to Hampton, the first Hampton Inn
hotel was opened August 1, 1984, and, as of March 31, 1996, there were over 531
Hampton Inn hotels operating in the United States, Mexico and Canada. In 1985,
Mr. Alter and Mr. Biederman developed and opened the Hampton Inn hotel in
Aurora, Colorado, which was the fourteenth hotel franchised in the Hampton Inn
system.
Holiday Inn Hotels
Seven of the Current Hotels are licensed to operate as Holiday Inn brand
hotels, and two of the Acquisition Hotels are licensed as Holiday Inn brands
subject to the completion of certain renovations and improvements. Mr. Alter is
the immediate past President of the International Association of Holiday Inns,
the franchisee association for Holiday Inn hotels, and, through his Affiliates,
has been a Holiday Inn franchisee since 1980. All Holiday Inn brand hotels
participate in the Holiday Inn Priority Club frequent guest program, and all
offer a toll-free reservation number. As of July 1, 1996, there were an
aggregate of 1,792 hotels with Holiday Inn brands. Each of the Holiday Inn
brands is described below.
Holiday Inn. Holiday Inn hotels offer a full service restaurant and
lounge, swimming pool, meeting and banquet facilities, optional fitness center,
and electronic locks. In-room amenities include a hairdryer, coffee maker, iron
and ironing board, alarm/clock radio and 25" televisions.
Holiday Inn Express. Holiday Inn Express is a limited service hotel that
offers comfortable guest rooms that include a 25" television, alarm/clock radio,
and free local phone calls. A free continental breakfast on the hallmark
"breakfast bar" is also included in the Great Room/Lobby.
Holiday Inn Select. Holiday Inn Select specializes in servicing the
business traveler. Each room offers a residential decor with a well lighted work
area including a dataport and voicemail, and an in-room coffee maker. Amenities
offered at the hotel are full business services such as photocopying and faxing,
meeting capabilities for small to mid size groups, swimming pool, exercise
facilities, and a full service restaurant and lounge.
Holiday Inn Hotel & Suites. Holiday Inn Hotel & Suites are designed for
extended stay travelers who desire more room than is offered in a typical hotel
room. At least 15% of a hotel's rooms generally must be suites in order to
qualify for this franchise. Suites include a hairdryer, coffee maker, iron and
ironing board, alarm/clock radio, microwave oven, refrigerator, 25" television,
sofa bed, and a free continental breakfast. Amenities at the hotel include guest
laundry, fitness center, restaurant and lounge, meeting facilities, and swimming
pool. Convenience store items are typically sold at a gift shop or other service
area.
Hawthorn Suites
The Company does not currently operate any hotels as Hawthorn Suites;
however, one of the Company's external growth strategies is to develop
extended-stay Hawthorn Suites hotels in several major urban markets on the West
Coast. See "Growth Strategy -- External Growth Strategy -- Hawthorn Suites
Master Development Agreement."
Hawthorn Suites offer extended stay travelers spacious suite
accommodations, a free breakfast buffet, swimming and fitness facilities and
other amenities designed to facilitate a more comfortable extended stay. Guest
suites include separate sleeping and living areas (many with fireplaces), fully
equipped kitchens, complimentary newspaper and manager's reception, irons and
ironing boards in every suite, on-site guest laundry facilities with available
valet service, on-site convenience store and grocery shopping services (at some
locations), business services, barbecue grills, airport shuttle service (at some
locations), and meeting facilities with full-service catering at most locations.
47
<PAGE> 56
Comfort Suites
One of the Acquisition Hotels is currently licensed to operate as a Comfort
Suites hotel. Comfort Suites have separate living and sleeping areas, a 60
square foot oversized bath, a sleeper sofa, television, a mini-refrigerator and
microwave. The hotels also generally feature a two-story vaulted lobby, on-site
convenience store, meeting space, fitness center and guest amenities such as a
complimentary newspaper and continental breakfast. According to Choice Hotels
International, currently a subsidiary of Manor Care and owner of the Comfort
Suites franchise, as of May 20, 1996 there were 81 Comfort Suites hotels.
48
<PAGE> 57
- --------------------------------------------------------------------------------
DESCRIPTION OF THE HOTELS
The following table contains descriptions of the Hotels, including
location, size, amenities, nearby points of interest and businesses, and
competition.
<TABLE>
<CAPTION>
NUMBER NUMBER
YEAR OF GUEST OF CORRIDOR LOT
HOTEL BUILT LOCATION ROOMS FLOORS DESIGN ACREAGE
-------------------------- ----- ------------------------- --------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
THE CURRENT HOTELS
----------------------
Courtyard by Marriott..... 1989 1551 N. Peach Avenue 116 4 interior 3.0
Fresno, California Fresno, CA 93727
Courtyard by Marriott..... 1988 1510 University Avenue 163 6 interior 2.6
Riverside, California Riverside, CA 92507
Doubletree Hotel.......... 1985 3347 Cerrillos Road 213 3 exterior 4.6
Santa Fe, New Mexico Santa Fe, NM 87505
Hampton Inn............... 1987 1563 S. Gilbert Road 118 4 interior 2.1
Mesa, Arizona Mesa, AZ 85204
Hampton Inn............... 1988 311 East Huntington Drive 131 4 interior 2.2
Arcadia, California Arcadia, CA 91006
Hampton Inn............... 1986 8465 Enterprise Way 152 3 interior 2.3
Oakland, California Oakland, CA 94621
<CAPTION>
LOCAL POINTS OF
HOTEL INTEREST/BUSINESS AMENITIES COMPETITION
-------------------------- ------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
THE CURRENT HOTELS
----------------------
Courtyard by Marriott..... Fresno Airport, Fresno Outdoor pool and spa, Holiday Inn, The Chateau
Fresno, California State University, 52 exercise room, two and The Piccadilly Inn.
miles south of Yosemite meeting rooms, voice mail
National Park and 57 and on command video.
miles from Kings Canyon
National Park.
Courtyard by Marriott..... University of California Outdoor heated pool and Holiday Inn, Hampton Inn
Riverside, California Riverside and Ontario spa. and Days Inn.
Airport.
Doubletree Hotel.......... Santa Fe, Taos, northern Restaurant and bar, Hilton, Hotel Santa Fe,
Santa Fe, New Mexico New Mexico and the State indoor swimming pool, and Inn of Loretto
Capitol. exercise room, two
whirlpools, guest laundry
facilities, six meeting
rooms, gift shop,
complimentary shuttle to
Historic Plaza, and
business center with
private conference
center.
Hampton Inn............... 20 miles from downtown Outdoor heated pool, Courtyard by Marriott,
Mesa, Arizona Phoenix and approximately whirlpool and two meeting Holiday Inn, Quality Inn,
14 miles from Phoenix rooms. Days Inn, Super 8 motel
International Airport, and Ramada Suites.
spring training for some
major league baseball
teams, local golf courses
and multiple business
parks.
Hampton Inn............... Commercial business Outdoor heated pool, a Holiday Inn and Wyndham
Arcadia, California related to companies hospitality suite and a Garden.
located in Pasadena, and meeting room.
group activities sports
events held at the Santa
Anita Racetrack, the Rose
Bowl and local
universities.
Hampton Inn............... Two miles from Oakland Deluxe complimentary Park Plaza Best Western,
Oakland, California International Airport, breakfast and snack in Holiday Inn and Hilton.
adjacent to the Coliseum, the evening,
five miles from Downtown complimentary 24 hour
Oakland, 16 miles from shuttle to and from the
San Francisco and 12 airport, Coliseum and Bay
miles from University of Areas Rapid Transit,
California-Berkeley. outdoor year-round heated
pool and spa and free
local calls.
</TABLE>
- --------------------------------------------------------------------------------
49
<PAGE> 58
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER NUMBER
YEAR OF GUEST OF CORRIDOR LOT
HOTEL BUILT LOCATION ROOMS FLOORS DESIGN ACREAGE
-------------------------- ----- ------------------------- --------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Hampton Inn............... 1986 9231 E. Arapahoe Road 152 5 interior 2.3
Denver, Colorado Englewood, CO 80112
Hampton Inn............... 1986 4703 North Freeway 112 2 exterior 4.0
Pueblo, Colorado Pueblo, CO 81008
Hampton Inn............... 1976 560 Silverthorne Lane 160 6 interior 5.4
Silverthorne, Colorado Silverthorne, CO 80498
Hampton Inn............... 1986 9040 SE Adams 114 4 interior 1.3
Clackamas (Portland), Clackamas, OR 97015
Oregon
Holiday Inn............... 1971 3190 S. Lincoln Avenue 82 2 interior 4.0
Steamboat Springs, Steamboat Springs, CO
Colorado 80477
Holiday Inn Express....... 1986 9707 SE Stark 85 3 interior 1.1
Portland, Oregon Portland, OR 97216
<CAPTION>
LOCAL POINTS OF
HOTEL INTEREST/BUSINESS AMENITIES COMPETITION
-------------------------- ------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Hampton Inn............... Denver Tech Center, Outdoor heated pool, Courtyard by Marriott,
Denver, Colorado Fiddlers Green Park exercise room, two Woodfield Suites, Holiday
Meadows Mall, Arapahoe meeting rooms, local Inn, Radisson and La
Racing Park, 20 miles to shuttle service, in-room Quinta.
factory outlet stores, coffee maker and
and near major business complimentary use of a
district. local health club.
Hampton Inn............... Colorado State Fair and Outdoor heated pool, in- Holiday Inn, Comfort Inn,
Pueblo, Colorado Exposition, University of room coffee maker, Ramada Inn and Best
Southern Colorado and meeting room and Western Inn.
Pueblo Industrial Park, complimentary use of a
nearby golfing, biking, local health club.
Pueblo Reservoir,
Greenway and Nature
Center, Colorado State
Fair, Greyhound Racing
and Royal Gorge
Hampton Inn............... Winter sport resorts Common areas on the main Luxury Suites, Days Inn,
Silverthorne, Colorado including Keystone, lobby level, game room, Holiday Inn, Best Western
Copper Mountain and indoor swimming pool, Old and The Inn in Keystone.
Breckenridge, fishing and Chicago Bar & Grill,
mountain climbing. guest laundry facilities,
gift/ski shop and meeting
room.
Hampton Inn............... 11 miles south of Complimentary breakfast Days Inn, Best Western
Clackamas (Portland), Portland International buffet and hospitality Sunnyside Inn, Monarch
Oregon Airport and 15 miles hour, indoor spas, Hotel and Holiday Inn
southeast of downtown exercise room and small Express.
Portland, near Clackamas conference room.
Town Center Mall, the
gateway to Mt. Hood
recreation areas and
Eastern Oregon.
Holiday Inn............... Steamboat Ski Area and Completely renovated Harbor Hotel, Sheraton
Steamboat Springs, winter sports, Steamboat outdoor heated pool, hot Hotel, Comfort Inn and
Colorado special events in the tub, exercise facility, Super 8.
summer time, Routt meeting room and ski
National Forest, fishing, shop, restaurant leased
mountain climbing, hot to Village Inn and
air-ballooning and Fireside Cocktail Lounge.
hunting.
Holiday Inn Express....... Four miles south of the Complimentary continental Chestnut Tree Inn,
Portland, Oregon Portland International breakfast buffet, heated Sunnyside Best Western,
Airport, across the outdoor pool, meeting Quality Inn, Travel Lodge
street from Mall 205 and room and complimentary and Days Inn.
six miles from downtown. shuttle service to and
from Portland
International Airport.
</TABLE>
- --------------------------------------------------------------------------------
50
<PAGE> 59
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER NUMBER
YEAR OF GUEST OF CORRIDOR LOT
HOTEL BUILT LOCATION ROOMS FLOORS DESIGN ACREAGE
-------------------------- ----- ------------------------- --------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Holiday Inn............... 1968 1460 S. University Ave. 78 2 interior 4.9
Provo, Utah Provo, UT 84601
Holiday Inn............... 1981 300 S. Highway 13 169 2 interior 47.0
Hotel & Suites Craig, CO 81625
Craig, Colorado
Holiday Inn Hotel......... 1986 22218 84th Avenue South 122 2 interior & 3.8
& Suites, Kent, WA 98032 exterior
Kent, Washington
Holiday Inn Express....... 1986 19801 NE 7th 63 2 interior 2.7
Poulsbo, Washington Poulsbo, WA 98370
Residence Inn............. 1996 93 Centennial Blvd. 78 4 interior 3.5
Highlands Ranch Highlands Ranch, CO 80126
(Denver), Colorado
<CAPTION>
LOCAL POINTS OF
HOTEL INTEREST/BUSINESS AMENITIES COMPETITION
-------------------------- ------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Holiday Inn............... East Bay Industrial Park, Complimentary continental Fairfield Inn, Comfort
Provo, Utah headquarters of Novell, breakfast, in-room Inn, Days Inn, Best
Sundance ski area and ironing boards/iron, Western, Hampton Inn and
Brigham Young University. outdoor heated pool, Provo Park.
exercise room, meeting
room, 600 square foot
boardroom and Ruby River
Steak House.
Holiday Inn............... Hunting, fishing, Holidome with indoor Best Western and four
Hotel & Suites bicycling, guided heated pool, whirlpool, independent hotels.
Craig, Colorado wilderness tours, near children's play area and
Steamboat Ski Area, arcade, fitness center,
corporate group and meeting room and 300
leisure business. square foot boardroom.
Holiday Inn Hotel......... 20 miles south of Complimentary continental Two small Best Western
& Suites, downtown Seattle, four breakfast buffet, large affiliates, Hawthorne
Kent, Washington miles from Boeing, eight seasonal outdoor pool and Suites, Value Inn,
miles from the airport, spa, comfortable meeting Embassy Suites, Residence
15 miles from facilities and exercise Inn, Hampton Inn,
Donnas/Supermall, 20 room, and Mitzel's Courtyard by Marriott,
miles from International American Kitchen. Homewood Suites and
Raceway and 90 miles from Doubletree Suites.
Mount Ranier.
Holiday Inn Express....... 35 miles via ferry or 70 Complimentary continental Silverdale on the Bay
Poulsbo, Washington miles via roadway from breakfast, buffet and Hotel and Resort and
downtown Seattle, seasonal outdoor pool. Poulsbo Inn.
extensive leisure market,
30 miles from Olympic
National park, one mile
from Historic Poulsbo
Norwegian Marine Science
Center, six miles from
Keyport Naval Museum and
18 miles from Bremerton
Naval Shipyard.
Residence Inn............. Chatfield reservoir, Fully-equipped kitchen Holtz Executive Village,
Highlands Ranch Fiddlers Green Park with full-sized Residence Inn and Embassy
(Denver), Colorado Meadows Mall, Arapahoe appliances in each unit, Suites.
Racing Park and 20 miles exercise room,
to factory outlet stores Continental breakfast,
and Roxborough State pool, spa, evening social
park. hour, sports court, guest
laundry, and grocery
shopping service.
</TABLE>
- --------------------------------------------------------------------------------
51
<PAGE> 60
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER NUMBER
YEAR OF GUEST OF CORRIDOR LOT
HOTEL BUILT LOCATION ROOMS FLOORS DESIGN ACREAGE
-------------------------- ----- ------------------------- --------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
THE ACQUISITION HOTELS
----------------------
Comfort Suites............ 1985 121 E. Grand Avenue 165 3 interior & 2.7
South San Francisco, South San Francisco, CA exterior
California 94003
Days Inn.................. 1984 838 Westwood Boulevard 151 2 interior 4.5
Price, Utah Price, Utah 84501
Holiday Inn Select........ 1968 800 Rainier Avenue South 188 1 6-story interior 5.2
Renton (Seattle), Renton, WA 98057-0487 1 3-story
Washington
<CAPTION>
LOCAL POINTS OF
HOTEL INTEREST/BUSINESS AMENITIES COMPETITION
-------------------------- ------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
THE ACQUISITION HOTELS
----------------------
Comfort Suites............ Two miles from San Television, VCR and mini- La Quinta Inn, Ramada,
South San Francisco, Francisco Airport, 13 bar. Holiday Inn, Travelodge
California miles from downtown San North and Best Western
Francisco and Gateway Grosvenor.
Business Park.
Days Inn.................. Coal mining, agriculture, Restaurant and lounge Super 8, National 9,
Price, Utah tourism, camping and (Golden Rock Cafe and Carriage House, Greenwell
trail rides through Nine Rockie's Lounge). Inn and Budget Host Inn.
Mile Canyon, Dinosaur
Museum, Margi-La Sal
National Forest and
College of Eastern Utah.
Holiday Inn Select........ Five miles from Sea-Tac Whirlpool, outdoor pool Embassy Suites, Homewoods
Renton (Seattle), Int'l Airport, one mile and restaurant on Suites, Hampton Inn,
Washington from South Center Mall, location. Residence Inn, Doubletree
12 miles from Downtown Suites and Doubletree
Seattle and waterfront, Inn.
eight miles from
Bellevue, next door to
six-plex movie theater.
</TABLE>
- --------------------------------------------------------------------------------
52
<PAGE> 61
OPERATING PERFORMANCE OF THE HOTELS
The following table sets forth certain information with respect to the
Current Hotels by franchise:
SUMMARY OF KEY OPERATING STATISTICS BY FRANCHISE
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
ADR OCCUPANCY REVPAR(1)
$ % ($)
NO. OF ----------------------- ----------------- -----------------------
ROOMS 1993 1994 1995 1993 1994 1995 1993 1994 1995
------ ----- ----- ----- --- --- --- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Courtyard by Marriott....... 279 44.21 51.49 53.01 59.1 50.4 61.0 26.13 25.95 32.34
Doubletree Hotel............ 213 72.62 73.12 72.14 71.6 64.0 51.8 51.99 46.80 37.37
Hampton Inn(2).............. 939 55.83 55.71 57.75 70.5 71.2 72.4 39.36 39.67 41.81
Holiday Inn brands.......... 599 49.56 52.17 55.22 62.4 61.4 61.2 30.93 32.03 33.79
Residence Inn(3)............ 78 N/A N/A N/A N/A N/A N/A N/A N/A N/A
------
Total.............. 2,108
======
</TABLE>
- ---------------
(1) REVPAR is determined by dividing room revenues by available rooms for the
applicable period.
(2) The Hampton Inn-Silverthorne, Colorado hotel was closed during most of 1993
for a complete renovation and reopened in the fourth quarter of 1993.
(3) This Hotel is currently under construction, which the Company expects to be
completed during the third quarter of 1996.
The following table sets forth certain information with respect to each
Current Hotel and the Current Hotels on a combined basis:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- ----------------
HOTELS(1)(2) 1991 1992 1993 1994 1995 1995 1996
- --------------------------------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Courtyard by Marriott --
Fresno, California
Occupancy...................... 71.8% 69.2% 75.7% 64.6% 72.5% 70.2% 67.3%
ADR............................ $46.69 $49.71 $48.26 $60.21 $58.11 $58.83 $66.01
REVPAR......................... $33.52 $34.40 $36.53 $38.90 $42.13 $41.30 $44.43
Courtyard by Marriott --
Riverside, California
Occupancy...................... N/A N/A 47.3% 40.4% 52.9% 57.3% 55.2%
ADR............................ N/A N/A $39.59 $41.56 $48.04 $47.91 $51.04
REVPAR......................... N/A N/A $18.73 $16.79 $25.41 $27.45 $28.17
Doubletree Hotel --
Santa Fe, New Mexico
Occupancy...................... 57.5% 61.3% 71.6% 64.0% 51.8% 44.6% 21.0%
ADR............................ $71.64 $72.62 $72.62 $73.12 $72.14 $60.43 $55.16
REVPAR......................... $41.19 $44.52 $51.99 $46.80 $37.37 $26.95 $11.58
Hampton Inn --
Mesa, Arizona
Occupancy...................... 58.6% 61.1% 71.6% 81.8% 82.3% 93.4% 90.9%
ADR............................ $48.94 $48.68 $51.71 $53.68 $59.35 $76.44 $91.00
REVPAR......................... $28.68 $29.74 $37.02 $43.91 $48.85 $71.39 $82.72
</TABLE>
53
<PAGE> 62
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
HOTELS(1)(2) 1991 1992 1993 1994 1995 1995 1996
- --------------------------------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Hampton Inn --
Arcadia, California
Occupancy...................... 68.6% 70.9% 65.3% 75.9% 64.2% 73.3% 59.0%
ADR............................ $52.64 $54.06 $57.02 $56.95 $60.78 $60.18 $66.51
REVPAR......................... $36.11 $38.33 $37.23 $43.23 $39.02 $44.11 $39.24
Hampton Inn --
Oakland, California
Occupancy...................... 68.7% 66.1% 64.9% 60.6% 85.0% 73.2% 88.3%
ADR............................ $53.18 $56.66 $55.98 $55.28 $47.13 $47.96 $46.30
REVPAR......................... $36.53 $37.45 $36.33 $33.50 $40.06 $35.11 $40.88
Hampton Inn --
Denver, Colorado
Occupancy...................... 65.3% 73.4% 77.0% 83.3% 80.2% 76.3% 73.6%
ADR............................ $45.70 $48.07 $51.82 $55.51 $62.32 $59.71 $67.01
REVPAR......................... $29.84 $35.28 $39.90 $46.24 $49.98 $45.56 $49.32
Hampton Inn --
Pueblo, Colorado
Occupancy...................... 68.5% 72.5% 82.0% 88.6% 87.4% 86.9% 80.7%
ADR............................ $45.31 $46.28 $48.06 $51.67 $57.38 $51.04 $52.78
REVPAR......................... $31.04 $33.55 $39.41 $45.78 $50.15 $44.35 $42.59
Hampton Inn --
Silverthorne, Colorado(3)
Occupancy...................... N/A N/A N/A 53.2% 58.6% 80.3% 84.0%
ADR............................ N/A N/A N/A $69.92 $69.57 $89.65 $87.73
REVPAR......................... N/A N/A N/A $37.20 $40.77 $71.99 $73.69
Hampton Inn --
Clackamas, Oregon
Occupancy...................... N/A 54.5% 57.1% 60.0% 48.9% 47.7% 44.9%
ADR............................ N/A $39.92 $42.74 $45.01 $47.95 $45.69 $48.26
REVPAR......................... N/A $21.76 $24.40 $27.01 $23.45 $21.79 $21.67
Holiday Inn --
Steamboat Springs, Colorado
Occupancy...................... 75.4% 74.3% 77.9% 72.6% 66.3% 91.0% 71.7%
ADR............................ $62.48 $63.45 $64.67 $68.14 $70.94 $90.24 $87.94
REVPAR......................... $47.11 $47.14 $50.38 $49.47 $47.03 $82.12 $63.05
Holiday Inn --
Provo, Utah
Occupancy...................... N/A 48.0% 59.7% 67.3% 78.5% 77.9% 76.8%
ADR............................ N/A $47.25 $49.09 $51.97 $54.67 $49.95 $51.75
REVPAR......................... N/A $22.68 $29.31 $34.98 $42.92 $38.91 $39.74
Holiday Inn Hotel & Suites --
Kent, Washington
Occupancy...................... N/A 55.0% 51.9% 49.3% 52.3% 47.4% 42.7%
ADR............................ N/A $48.49 $51.77 $53.05 $59.58 $56.24 $67.97
REVPAR......................... N/A $26.67 $26.87 $26.15 $31.16 $26.66 $29.02
</TABLE>
54
<PAGE> 63
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
HOTELS(1)(2) 1991 1992 1993 1994 1995 1995 1996
- --------------------------------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn Hotel & Suites --
Craig, Colorado
Occupancy...................... 37.6% 51.2% 51.2% 53.0% 55.7% 46.5% 42.9%
ADR............................ $50.33 $41.32 $43.71 $46.18 $47.54 $45.07 $45.30
REVPAR......................... $18.92 $21.16 $22.38 $24.48 $26.48 $20.96 $19.43
Holiday Inn Express --
Portland, Oregon
Occupancy...................... N/A 79.9% 78.4% 76.7% 63.5% 60.6% 65.1%
ADR............................ N/A $39.23 $42.54 $45.30 $49.89 $44.18 $46.87
REVPAR......................... N/A $31.34 $33.35 $34.75 $31.68 $26.77 $30.51
Holiday Inn Express --
Poulsbo, Washington
Occupancy...................... N/A 70.2% 75.7% 65.9% 62.1% 39.9% 49.1%
ADR............................ N/A $42.74 $46.53 $51.12 $52.90 $49.79 $52.95
REVPAR......................... N/A $30.00 $35.22 $33.69 $32.85 $19.87 $26.00
Combined Totals --
Occupancy...................... 61.9% 64.2% 66.6% 64.7% 65.4% 65.6% 61.5%
ADR............................ $53.73 $51.53 $54.59 $56.09 $57.64 $60.46 $63.40
REVPAR......................... $33.26 $33.08 $36.36 $36.29 $37.70 $39.66 $38.99
ACQUISITION HOTELS
Comfort Suites --
South San Francisco, California
Occupancy...................... N/A 67.3% N/A 77.8% 83.3% 74.2% 85.2%
ADR............................ N/A $58.46 N/A $62.57 $63.91 $58.32 $58.84
REVPAR......................... N/A $39.34 N/A $48.68 $53.24 $43.27 $50.13
Days Inn --
Price, Utah
Occupancy...................... N/A N/A N/A 70.3% 69.0% 58.0% 55.5%
ADR............................ N/A N/A N/A $41.47 $40.85 $36.30 $37.38
REVPAR......................... N/A N/A N/A $29.15 $28.19 $21.05 $20.75
Holiday Inn Select --
Renton (Seattle), Washington
Occupancy...................... 55.0% 68.3% 66.9% 63.8% 74.3% 60.3% 66.6%
ADR............................ $57.37 $50.73 $51.78 $52.22 $57.18 $52.75 $62.12
REVPAR......................... $31.55 $34.64 $34.64 $33.32 $42.48 $31.81 $41.37
Total Hotels --
Occupancy...................... 61.0% 64.8% 66.7% 65.8% 67.4% 65.3% 63.1%
ADR............................ $54.16 $52.00 $54.35 $55.54 $57.08 $58.50 $61.54
REVPAR......................... $33.04 $33.70 $36.25 $36.55 $38.47 $38.20 $38.83
</TABLE>
- ---------------
(1) See the first table and footnotes thereto under the heading "The Hotels" in
the Prospectus Summary for information on the status of franchise licenses.
(2) Information with respect to the Sunstone Initial Hotels was obtained from
the owners of the Sunstone Initial Hotels and is only for the period such
Hotels were managed by the Sunstone Affiliates.
(3) The Hampton Inn-Silverthorne, Colorado hotel was closed during most of 1993
for a complete renovation and reopened in the fourth quarter of 1993.
55
<PAGE> 64
THE PERCENTAGE LEASES
In order for the Company to qualify as a REIT, neither the Company nor the
Partnership can operate any hotels. See "Risk Factors -- Lack of Control Over
Operations of the Hotels." The Partnership, therefore, leases the Current
Hotels, and will lease the Acquisition Hotels, to the Lessee for an initial term
of ten years pursuant to Percentage Leases which provide for Rent equal to the
greater of Base Rent or Percentage Rent. The Lessee is a corporation in which
Mr. Alter and Mr. Biederman are the sole stockholders. Other than working
capital sufficient to operate the Lessee and the Hotels, the Lessee has only
nominal assets. Each Percentage Lease will contain the provisions generally
described below, and the Company intends that future Percentage Leases with
respect to additional hotels it may acquire will contain substantially similar
provisions, although the Independent Directors may, in their 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 Lessee will not lease or operate any hotel other than
those owned by the Partnership. The following summary is qualified in its
entirety by the Percentage Leases, the form of which has 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 initial term of ten years,
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"). In instances
where the Company buys a group of hotels which includes a hotel the Company does
not intend to retain, the Percentage Lease will be a month to month tenancy with
a right to terminate without a termination fee.
Amounts Payable Under the Percentage Leases
During the term of each Percentage Lease, the Lessee is obligated to pay to
the Partnership (i) the greater of Base Rent or Percentage Rent (which includes
a specified percentage of room revenues, 5% of the Lessee's food and beverage
revenues, 100% of any sublease and concession rentals and other net revenues
described in the Percentage Leases at the applicable hotels) 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 in
arrears. Both the Base Rent and the threshold room revenue amount in each
Percentage Rent formula is adjusted annually for inflation beginning January 1,
1996. The adjustment is calculated at the beginning of each calendar year based
upon the change in the CPI during the prior calendar year. Percentage Rent (if
any) is due monthly within forty-five days after the end of each calendar month
and is reconciled on a quarterly basis.
Except for the Doubletree-Santa Fe, New Mexico, hotel which was under
renovation in 1995 and 1996, and the recently acquired Holiday Inn
Express-Poulsbo, Washington hotel and the Holiday Inn Hotel & Suites-Kent,
Washington hotel, for the 12-month period ended December 31, 1995, room revenues
from each Current Hotel on an actual basis exceeded the revenue threshold for
the payment of the higher tier Percentage Rent under the applicable Percentage
Lease.
The following table sets forth (i) the annual Base Rent, (ii) Percentage
Rent formulas and (iii) the pro forma Rent that would have been paid for each
Current Hotel pursuant to the terms of the Percentage Leases based on historical
revenues for the twelve months ended December 31, 1995, as if the Company had
owned the Current Hotels and the Percentage Leases had been in effect since
January 1, 1995. For each Current Hotel other than the Hampton Inn-Clackamas,
Oregon hotel, Percentage Rent would have been greater than Base Rent, and the
pro forma rents shown below represent such Percentage Rent.
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PERCENTAGE LEASE SUMMARY
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
YEAR ENDED
ANNUAL DECEMBER
PERCENTAGE LEASE 31, 1995
ANNUAL ----------------- ROOM -----------
BASE FIRST SECOND REVENUE ROOM PERCENTAGE
LOCATION RENT(1) TIER(2) TIER(3) BREAKPOINT(1) REVENUE RENT(5)
- -------------------------------------- ---------- ------- ------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS:
Courtyard by Marriott:
Fresno, California.................. $ 405,000 30.0% 63.0% $ 1,350,000 $ 1,784,403 $ 768,590
Riverside, California............... 426,000 30.0% 60.0% 1,420,000 1,510,480 524,250
Doubletree Hotel:
Santa Fe, New Mexico................ 660,000 30.0% 63.0% 2,200,000 2,904,098 1,108,599
Hampton Inn:
Mesa, Arizona....................... 476,000 34.0% 63.0% 1,400,000 2,103,230 980,574
Arcadia, California................. 396,000 36.0% 63.0% 1,100,000 1,866,039 896,010
Oakland, California................. 418,000 22.0% 63.0% 1,900,000 2,178,429 593,410
Denver, Colorado.................... 566,250 37.5% 63.0% 1,510,000 2,771,499 1,412,344
Pueblo, Colorado.................... 450,000 36.0% 63.0% 1,250,000 2,050,358 993,912
Silverthorne, Colorado.............. 483,000 30.0% 63.0% 1,610,000 2,380,277 980,809
Clackamas (Portland), Oregon........ 437,000 38.0% 63.0% 1,150,000 976,469 464,312
Holiday Inn:
Steamboat Springs, Colorado......... 375,000 30.0% 60.0% 1,250,000 1,408,569 504,593
Provo, Utah......................... 160,000 20.0% 65.0% 800,000 1,222,237 536,023
Holiday Inn Hotel & Suites:
Craig, Colorado..................... 426,000 30.0% 60.0% 1,420,000 1,632,494 646,100
Kent (Seattle), Washington.......... 567,000 36.0% 63.0% 1,575,000 1,386,483 641,062
Holiday Inn Express:
Portland, Oregon.................... 363,000 33.0% 63.0% 1,100,000 983,719 372,309
Poulsbo, Washington................. 323,750 35.0% 63.0% 925,000 755,818 343,022
Residence Inn:
Highlands Ranch (Denver),
Colorado.......................... N/A N/A N/A N/A N/A N/A
----------- -----------
Totals (Current Hotels)...... 6,932,000 27,914,602 11,765,919
----------- -----------
ACQUISITION HOTELS:
Comfort Suites:
South San Francisco,
California(4)..................... 720,000 30.0% 60.0% 2,400,000 3,204,950 1,272,963
Days Inn:
Price, Utah(4)...................... 270,000 24.0% 60.0% 1,125,000 1,553,590 714,696
Holiday Inn Select:
Renton (Seattle), Washington........ 810,000 30.0% 62.0% 2,700,000 2,914,026 1,266,454
----------- -----------
Totals (Acquisition
Hotels).................... 1,800,000 7,672,566 3,254,113
---------- ----------- -----------
Totals (Hotels).............. $8,732,000 $35,587,168 $15,020,032
========== =========== ===========
</TABLE>
- ---------------
(1) Effective January 1, 1996, Rent payable under the Percentage Leases were
adjusted based upon change in the CPI.
(2) Represents percentage of room revenue to be paid as Percentage Rent up to
room revenue breakpoint.
(3) Represents percentage of room revenue to be paid as Percentage Rent in
excess of room revenue breakpoint.
(4) Represents payments of rent from the Lessee to the Company calculated on a
pro forma basis by applying the rent provisions in the Percentage Leases
using historical revenues of the Hotels as if January 1, 1995 were the
beginning of the lease year. For pro forma expenses associated with the
operation of the Lessee
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and Current Hotels, see Sunstone Hotel Properties, Inc. -- Unaudited Pro
Forma Combined Statements of Operations and the notes thereto, and for pro
forma expenses related to the Company, see "Sunstone Hotel Investors,
Inc. -- Statements of Estimated Revenues and Expenses" and the notes
thereto, included in the financial statements elsewhere in this Prospectus.
(5) Includes Percentage Rent earned related to food and beverage operations,
sublease revenues and other net revenues at four of the Current Hotels.
Other than real estate and personal property taxes, ground lease rent
(where applicable), the cost of certain furniture, fixtures and equipment and
capital expenditures, and insurance (other than workers' compensation
insurance), which are obligations of the Partnership, the Percentage Leases
require the Lessee to pay Base Rent, Percentage Rent, Additional Charges and the
operating expenses of the Hotels (including workers' compensation insurance,
utility, repairs and maintenance costs and other charges incurred in the
operation of the Hotels) during the terms of the Percentage Leases. The
Percentage Leases also provide for Rent reductions and abatements in the event
of damage 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 pay for capital
improvements at each Hotel. In addition, the Percentage Leases obligate the
Partnership to 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, an amount equal to 4.0% of room revenue per
quarter on a cumulative basis, provided that such amount may be used for capital
expenditures made by the Company respecting the Hotels. The amount in the
reserve is carried forward to the extent that the Lessee or the Partnership has
not expended such amount, and any unexpended amounts will remain the property of
the Partnership upon termination of the Percentage Leases. In addition, 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 Agreement and otherwise to the extent that the Company deems such
expenditures to be in the best interests of the Company. Otherwise, the Lessee
will be required, at its expense, to maintain the Hotels in good order and to
repair and to pay for all operating expenses of the Hotels subject to a
Percentage Lease with the Lessee.
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 will own
substantially all personal property (other than inventory, linens and other
nondepreciable personal property which shall be owned by the Lessee) including
that portion affixed to, or deemed a part of, the real estate or improvements
thereon, except to the extent that ownership of such personal property not so
affixed 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, casualty,
comprehensive general public liability (naming the Lessee as an additional named
insured) and other insurance appropriate and customary for properties similar to
the Hotels, as determined by the Partnership. The Lessee is required to pay for
workers' compensation insurance. The Company believes that the coverage
specified in the Percentage Leases are of the type and amount customarily
obtained by owners of hotels similar to the Hotels.
Assignment and Subleasing
The Lessee will not be permitted to sublet all or any part of the Hotels or
assign its interest under any of the Percentage Leases, other than to an
Affiliate of the Lessee, without the prior written consent of the
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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 occurring prior to
the last 24 months of the term of the Percentage Lease covered by insurance
which renders the Hotel unsuitable for the Lessee's use and occupancy, the
Lessee will be obligated to repair, rebuild, or restore the Hotel 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 which 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. Rent payable under the Percentage Lease shall be equitably abated during
any period required for repair or restoration of any damaged or destroyed Hotel.
If any such damage or destruction rendering the Hotel unsuitable for the
Lessee's use and occupancy occurs during the last 24 months of the Percentage
Lease, then either party may terminate the Percentage Lease upon 30 days prior
notice to the other party.
Condemnation of Hotels
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 will be entitled to the condemnation award. In the event of a
partial taking which does not render the Hotel unsuitable for the Lessee's use,
the Lessee shall restore the untaken portion of the Hotel to a complete
architectural unit and the Partnership shall contribute to the cost of such
restoration that part of the condemnation award specified for restoration.
Events of Default
Each of the Percentage Leases is cross-defaulted so that a default under
one Percentage Lease constitutes a default under all of the Percentage Leases.
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 or any Affiliate of the
Lessee;
(ii) the failure by the Lessee to pay Base Rent when due and the
continuation of such failure for a period of 10 days thereafter;
(iii) the failure by the Lessee to pay Percentage Rent when due and
the continuation of such failure for a period of 10 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 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;
(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
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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;
(vii) if the Franchise Agreement 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 pursuant to the Franchise Agreement because the Partnership
fails to provide funds for such improvements; or
(viii) if the Lessee or any shareholder of the Lessee defaults under
the Unit Purchase Agreement, the Third Party Pledge Agreement or any other
agreement entered into by and between such shareholder and the Company or
the Partnership.
If an Event of Default occurs and continues beyond any curative period, the
Partnership will have the option of terminating the Percentage Lease or any or
all other Percentage Leases by giving the Lessee 10 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 is required to surrender possession of each affected Hotel.
Termination of Percentage Leases on Disposition of the Hotels
In the event the Partnership enters into an agreement to sell a Hotel, the
Partnership will have the right to terminate the Percentage Lease with respect
to such Hotel upon at least 90 days' notice. Within six months of such
termination of any long-term Percentage Lease the Partnership shall either (i)
unless Mr. Alter and Mr. Biederman no longer own, collectively, 50% or more of
the Lessee or the Lessee has been in default in the payment of Base Rent for
more than 30 days with respect to such Hotel, pay the Lessee a termination fee
in an amount equal to the Lessee's net profit for such Hotel for the 12 month
period ended as of the last day of the calendar month immediately prior to date
of such termination (or, in the case of a bulk sale of all of the Hotels, 50% of
such amount payable at the closing of such bulk sale), or (ii) lease to the
Lessee one or more substitute Hotels on terms that would create a leasehold
interest in such Hotel 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.
Subordination of Management Fees
The Lessee is permitted to engage a management company to assist the Lessee
in the operation and maintenance of the Hotels. The Percentage Leases provide
that effective upon written notice by the Lessee of any Event of Default under
the Percentage Leases, and during the continuance thereof, no payments will be
made to any management company with respect to any Hotel. In addition, each
management agreement which the Lessee enters into must provide that the
management company will repay to the Company any payments made to it by the
Lessee while any such Event of Default has occurred and is continuing. This
obligation is personally guaranteed by Mr. Alter during the term of the
Management Agreement. See "The Management Company -- The Management Agreement."
Franchise Agreement
The Lessee will be the franchisee under the Franchise Agreements with
respect to the Hotels. Upon the occurrence of certain events of default by the
Lessee under a Franchise Agreement, certain of the franchisors have agreed,
subject to certain terms and conditions, to issue a new Franchise Agreement for
the affected Current Hotels. See "Business and Properties -- Franchise
Agreements."
Other Lease Covenants
The Lessee may only incur debt associated with ordinary operating expenses
related to the operation of the Hotels.
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Breach by Partnership
Upon notice from the Lessee that the Partnership has breached the Lease,
the Partnership has 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 and Personal Property
All inventory required in the operation of the Hotels will be purchased at
the Lessee's expense and owned by the Lessee. The Partnership will have the
option to purchase all personal property related to such Hotel and owned by the
Lessee at fair market value upon termination of the Percentage Lease for that
Hotel. Any inventory used by Lessee in the operation of the respective Hotel
shall, upon termination of the Percentage Lease, become the property of the
Company.
Security Interest
The Partnership will have a blanket lien on substantially all assets of the
Lessee, subject to the rights of any lender financing the purchase of personal
property by the Lessee.
THE MANAGEMENT AGREEMENT
Pursuant to the terms of the Management Agreement, the Management Company
will provide management and administrative services to the Lessee with respect
to the Hotels for a fee equal to 2% of the Hotels' gross revenues and
reimbursement of expenses by the Lessee. The Lessee anticipates that if
additional Hotels are acquired, the Lessee and the Management Company will enter
into similar management agreements with respect to such additional Hotels.
However, the Lessee is not obligated to enter into any additional management
agreements with the Management Company with respect to such additional Hotels.
See "The Management Company -- The Management Agreement." Neither the
Partnership nor the Company have any contractual or other obligations to the
Management Company.
FRANCHISE AGREEMENTS
The Company has either existing Franchise Agreements (12 of the Hotels), or
commitments executed by the franchisor and the franchisee to issue Franchise
Agreements subject to completion of renovations or construction (six of the
Hotels). See the first table and footnotes thereto under the heading "The
Hotels" in the Prospectus Summary for information on existing franchise licenses
and commitments to issue licenses.
The Company anticipates that each of the additional hotels which it
acquires will be operated under franchise agreements with strong national
franchisors. 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.
Franchise agreements generally specify certain management, operational,
recordkeeping, accounting, reporting and marketing standards and procedures with
which the franchisee must comply. The Franchise Agreements 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.
Holiday Inn announced in September 1994, that franchisees that had entered
the system prior to January 1, 1989, and had not undertaken a recent major
product improvement plan would have to make significant capital expenditures to
conform to Holiday Inn's revised franchise compliance standards. These
requirements do not apply to the Holiday Inn-Provo hotel, the Holiday Inn-Craig
hotel and the Holiday Inn-Steamboat Springs hotel.
The Franchise Agreements for the Current Hotels expire at various times
ranging between 2000 and 2016. The Franchise Agreements 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
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Franchise Agreement, bankruptcy, abandonment of the franchise, commission of a
felony, assignment of the Franchise Agreement without the consent of the
franchisor, or failure to comply with applicable law in the operation of the
applicable Hotel. The Lessee will be entitled to terminate the Franchise
Agreement (other than the Courtyard by Marriott Franchise Agreements) only by
giving prior written notice and only by paying a significant amount of
liquidated damages. The amount of liquidated damages payable upon a termination
of the Franchise Agreement for the Hampton Inn-Arcadia, California hotel is
significantly higher if terminated during the first five years of the term of
such Franchise Agreement. The Franchise Agreements do not renew automatically
upon expiration. The Lessee will be responsible for making all payments under
the Franchise Agreements to the franchisors, except that pursuant to three-party
agreement among Marriott, the Lessee and the Partnership, the Partnership and
the Lessee are jointly and severally liable for the material obligations of the
franchisee under the Courtyard by Marriott Franchise Agreements. Mr. Alter has
executed certain personal guaranties covering the obligations of the Lessee
under the Holiday Inn and Hampton Inn Franchise Agreements. Mr. Alter has also
agreed to indemnify the Company for defaults by the Lessee with respect to
unpaid franchise fees and termination fees under all Franchise Agreements for so
long as the Percentage Leases are in effect.
Under the Holiday Inn Franchise Agreements, the Lessee will pay a royalty
generally of between 4% and 5% of room revenue from the Holiday Inn Current
Hotels, plus additional charges for services of up to $5.90 per room and
additional fees for sales, gross receipts or similar taxes imposed upon the
franchisor and for Travel Agent Commission Programs and Hotel Marketing
Association fees. In addition, the Lessee will pay a reservation fee of 1% of
room revenue and a marketing fee of 1.5% of room revenue.
Under the Hampton Inn Franchise Agreements, the Lessee will pay a franchise
fee of 4% of room revenue (plus additional fees for sales, gross receipts or
similar taxes imposed upon the franchisor) from the Hampton Inn Current Hotels.
In addition, the Lessee will pay a reservation and marketing fee of 4% of room
revenue.
Under the Courtyard by Marriott Franchise Agreement, the Lessee will pay an
initial royalty fee of 4% of room revenue, increasing to 5% of room revenue
after the first two years. In addition, subject to possible annual system-wide
increases, the Lessee will pay a marketing fee of between 2% and 3% of room
revenue, a reservation fee of approximately $4.90 per average reservation from
the Courtyard by Marriott Current Hotel, a communication support fee equal to
the lesser of $4.00 per room or $600 per year and a Property Management System
fee equal to the lesser of $3.00 per room or $400 per year to update and
maintain proprietary software programs of the franchisor.
Under the Doubletree Hotel Franchise Agreement, the Lessee would pay a
royalty fee of 2% of room revenue for the first year of the term of the
Franchise Agreement, 3% of room revenue for the second year and 4% of room
revenue for the third year and every year thereafter from the Doubletree hotel
in Santa Fe, New Mexico. In addition, the Lessee would pay a reservation and
marketing fee of 3.5% of room revenue.
Under the Comfort Suites Franchise Agreement, the Lessee will pay a royalty
fee of 4% of gross room revenue plus a marketing assessment of $8.00 per room
plus 1.3% of gross room revenues. There is an additional supplemental marketing
fee equal to $0.28 per day times the number of rooms. The Lessee is also
required to pay a reservation fee of 1% of the gross room revenues and a
reservations delivered charge of $1.00 per room night confirmed through the
franchisor's reservations system.
Holiday Inn, Hampton, Doubletree and Marriott have each agreed that, in the
event of certain events of default by the Lessee under the Franchise Agreement
or the Partnership's termination of a Percentage Lease, upon request by the
Partnership and the curing of all existing franchisee events of default, such
franchisor will allow that Current Hotel to be operated by a designee of the
Partnership acceptable to such franchisor for a specified period of time.
HOLIDAY INN(R), HOLIDAY INN EXPRESS(SM), HOLIDAY INN SELECT(SM) AND HOLIDAY
INN(R) HOTEL & SUITES ARE REGISTERED TRADEMARKS OF HOLIDAY INNS FRANCHISING,
INC. HAMPTON INN(R) IS A REGISTERED TRADEMARK OF PROMUS HOTELS, INC. COURTYARD
BY MARRIOTT(R) AND RESIDENCE INN(R) ARE REGISTERED TRADEMARKS OF MARRIOTT
INTERNATIONAL, INC. DOUBLETREE HOTEL(R) IS A REGISTERED TRADE-
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MARK OF DOUBLETREE CORPORATION. COMFORT SUITES(R) IS A REGISTERED TRADEMARK OF
CHOICE HOTELS INTERNATIONAL, INC. DAYS INN IS A REGISTERED TRADEMARK OF HFS,
INC. NEITHER HOLIDAY INNS, INC., PROMUS HOTELS, INC., DOUBLETREE CORPORATION,
MARRIOTT INTERNATIONAL, INC., CHOICE HOTELS INTERNATIONAL, INC. OR HFS, INC. HAS
ENDORSED OR APPROVED THE OFFERING. A GRANT OF A FRANCHISE LICENSE BY SUCH
COMPANIES FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE
INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY SUCH COMPANIES
(OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE
PARTNERSHIP OR THE COMMON STOCK OFFERED HEREBY.
OPERATING PRACTICES
The Company's management recognizes the need for aggressive, market driven,
creative management given the competition in the hospitality industry.
Management of the Company has owned and managed hotels since 1976. Employees of
Affiliates of Mr. Alter and Mr. Biederman will be employed by the Lessee and by
the Management Company, who manage each of the Current Hotels and will manage
the Acquisition Hotels and any other hotels acquired in the future. The
Management Company intends to implement management systems developed by
affiliates of the Company. Such affiliates have also developed systems for
marketing, ADR enhancement, expense management, physical facility maintenance,
human resources, accounting and internal auditing. The general manager of each
hotel will report to lead managers, who in turn report to the Vice President of
Marketing and the Director of Sales of the Management Company. The Management
Company's strategy is to place responsibility and authority in the hands of the
on-site general manager with supervision by senior staff of the Management
Company. See "The Management Company" for a description of the management
systems to be used by the Management Company at the hotels.
EMPLOYEES
The Company intends to be self-advised and thus the Company will retain Mr.
Alter and Mr. Biederman as officers and employees in accordance with the terms
of the Alter Employment Agreement and Biederman Employment Agreement,
respectively, rather than retain an advisor. See "Management -- Alter Employment
Agreement" and "-- Biederman Employment Agreement." In addition to Mr. Alter and
Mr. Biederman, the Company has added two project managers. The Lessee currently
employs approximately 744 people, and upon the closing of the Acquisition Hotels
will employ approximately 867 people. The Lessee and each of the current owners
of the Acquisition Hotels have advised the Company that their relationship with
their respective employees is good and that they are not parties to any
collective bargaining agreement or other similar agreement.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner or
operator of real property may be liable for the costs of assessment and
remediation of petroleum and hazardous substances present on, in or under such
property. Such laws often impose liability without regard to fault. Further, a
person that arranges for the disposal or transports for disposal or treatment of
a hazardous substance to or at another property may be liable for the costs of
assessment and remediation of hazardous substances released into the environment
at that property. Response costs for assessment and/or remediation 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 the
property or to borrow using the property as collateral. Thus, if such potential
liability were to arise in connection with the ownership and operation of the
Hotels, the Company, the Partnership or the Lessee may be potentially liable for
such costs.
Phase I environmental site assessments ("ESAs") were performed on all of
the Hotels and the Holiday Inn-Renton (Seattle), Washington hotel by an
independent environmental engineering firm. The Phase I ESAs were completed in
accordance with ASTM standards for Phase I ESAs, as amended by supplemental
criteria. The Phase I ESAs were intended to identify any potential sources of
contamination. No assurance can be given that the Phase I ESAs identified all
significant environmental issues or that no potential
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environmental liabilities exist. The Phase I ESAs included historical reviews of
the Hotels, reviews of certain public records, preliminary investigations of the
sites and surrounding properties, screening for the presence of asbestos, PCBs,
radon, underground storage tanks, and in one applicable case, wetlands, followed
by the preparation and issuance of written reports. The Phase I ESAs did not
include invasive procedures, such as soil or groundwater sampling and analysis.
The Phase I ESAs disclosed that three of the Current Hotels (the Holiday
Inn-Provo, Utah hotel, the Holiday Inn-Craig, Colorado hotel and the Hampton
Inn-Silverthorne, Colorado), and the Holiday Inn-Renton (Seattle), Washington
hotel have asbestos containing materials ("ACM") on or in the insulation, floor
or ceiling coverings and in various other items. While the precise amounts of
ACM contained in these Hotels cannot be accurately determined without incurring
additional expense, the environmental engineer reported to the Company that the
existing ACM presents no threat to human health if managed in-place in
accordance with applicable laws. The Company has no plans, and is not required
by law, to remove ACM unless such material would be affected by proposed
renovation or demolition work and is or would become friable. The Company
intends to manage ACM in-place in accordance with applicable laws.
The Phase I ESAs have not revealed any environmental liability or
compliance concerns that the Company believes would have a material adverse
effect on the Company's business, assets, results of operations or liquidity,
nor is the Company aware of any such liability. Nevertheless, it is possible
that these Phase I ESAs do not reveal all environmental liabilities and there
may be material environmental liabilities or compliance concerns of which the
Company is unaware. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability,
or (ii) the current environmental condition of the Current Hotels will not be
affected by the condition of the properties in the vicinity of the Current
Hotels (such as the presence of leaking underground storage tanks) or by third
parties unrelated to the Partnership, the Lessee or the Company.
The Company believes that the Current Hotels are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous substances and other environmental matters.
Neither the Company nor, to the knowledge of the Company, any of the current
owners of the Current Hotels have been notified by any governmental authority of
any material noncompliance, liability or claim relating to hazardous or toxic
substances or other environmental matter in connection with any of its present
or former properties.
COMPETITION
The hotel industry is highly competitive. Each of the Company's hotels is
located in a developed area that includes other hotels, many of which are
competitive with the Company's hotels in their locality. The number of
competitive hotels in a particular area could have a material adverse effect on
occupancy, ADR and REVPAR of the Hotels or at hotels acquired in the future. See
"Business and Properties."
There will be competition for hotel investment opportunities in mid-price
and upscale hotels from entities organized for purposes substantially similar to
the Company's objectives as well as other purchasers of hotels. The Company may
be competing for such hotel investment opportunities with entities which have
substantially greater financial resources than the Company and better
relationships with franchisors, lenders and sellers. These entities may
generally be able to accept more risk than the Company prudently can manage.
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.
DEPRECIATION
Concurrently with the closing of the IPO, the Company made a cash
contribution to the Partnership in exchange for general and limited partnership
interests in the Partnership. The Partnership concurrently acquired for cash
certain of the Current Hotels and the Holiday Inn-Renton, Washington hotel. To
that extent, the Partnership's initial basis for federal income tax purposes
generally was equal to the purchase price paid by the Partnership to acquire
those Hotels. The Partnership is depreciating such depreciable Hotel properties
for federal income tax purposes under the alternative depreciation system of
depreciation ("ADS"). Under ADS, the Partnership generally (i) depreciates
buildings and improvements over a 40-year recovery
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<PAGE> 73
period using a straight-line method and a mid-month convention, and (ii)
depreciates personal property over a 12-year recovery period using a
straight-line method and a half-year convention.
To the extent that the Partnership acquired its ownership interest in the
Sunstone Initial Hotels and in any other Hotel in exchange for Units, the
Partnership's initial basis in each such hotel for federal income tax purposes
was the same as the transferor's basis in that hotel on the Partnership's date
of acquisition. The Partnership is depreciating such hotel properties for
federal income tax purposes over the same remaining useful lives and under the
same methods used by the transferors. The Partnership's tax depreciation
deductions are being 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 Sunstone Initial Hotels or other
contributed properties that results in the Company receiving a
disproportionately larger share of such deductions). Because the Partnership's
initial basis in the Sunstone Initial Hotels and such other Hotels 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 such hotels entirely for cash.
LEGAL PROCEEDINGS
Neither the Company nor the Partnership is currently involved in any
material litigation nor, to the Company's knowledge, is any material litigation
currently threatened against the Company or the Partnership or any of the
Current Hotels. The Lessee and the Management Company have each advised the
Company that it currently is not involved in any litigation. The current owners
of the Acquisition Hotels have advised the Company that there is no material
litigation threatened against or affecting the Acquisition Hotels.
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. The
policies with respect to these activities have been determined by the Board of
Directors and may be amended or revised from time to time at the discretion of
the Board of Directors without a vote of the stockholders, 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, (iii) the Company cannot amend the Debt
Limitation provided for in its Articles of Incorporation without the approval of
the holders of two-thirds of the outstanding shares of Common Stock and (iv) 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.
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate
The Company's investment objective is to increase Cash Available for
Distribution. The Company intends to pursue this objective by acquiring
additional hotels that meet the Company's investment criteria and by leasing the
hotels to the Lessee pursuant to Percentage Leases. The Board of Directors has
appointed Mr. Alter and Mr. Biederman and other representatives of the Company
to review potential hotel acquisitions, visit the sites of proposed hotel
acquisitions, review market studies, review the terms of proposed percentage
leases for proposed hotel acquisitions and make recommendations to the Board of
Directors with respect to proposed acquisitions.
The Company intends to consider hotel acquisitions in the mid-price and
upscale market segments located primarily in the western United States, which
meet some or all of the Company's investment criteria (as more particularly
described above in "Business and Properties -- Growth Strategy -- External
Growth").
Such policies may be changed from time to time by the Company's Board of
Directors. There can be no assurance that the Company will be able to acquire
hotels which meet its investment criteria. See "Risk Factors -- Risk that
Pending Acquisitions Will Not Close," "-- Competition for Acquisition," "Hotel
Industry Risks" and "Real Estate Investment Risks."
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<PAGE> 74
Investments in Other Entities
The Company 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 which may have
priority over the equity interest of the Company.
Investments in Real Estate Mortgages
While the Company will emphasize hotel investments, it may, in its
discretion, invest in mortgage and other real estate interests, including
securities of other REITs. The Company does not presently intend to invest in
mortgages or securities of other REITs. The Company also does not presently
intend to trade or underwrite securities or to make investments for purposes of
exercising control over other issuers. The Company may invest in participating
or convertible 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.
FINANCING
The Company intends to make additional acquisitions of hotels and intends
to incur indebtedness under the Line of Credit to make such acquisitions. In
addition, the Company may from time to time fix the interest rate on a portion
of the Company's indebtedness when the Company determines it is advantageous to
do so. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Pro Forma Liquidity and Capital Resources."
The Company's Articles of Incorporation limit consolidated indebtedness to
the Debt Limitation. Subject to the Debt Limitation, the Company intends to
consider methods of debt financing other than, or in addition to, the proposed
Line of Credit. Any such future borrowings may be incurred through the
Partnership or the Company subject to certain limitations described below.
Indebtedness incurred by the Company may be in the form of bank borrowings,
secured and unsecured, and publicly and privately placed debt instruments.
Indebtedness incurred by the Partnership may be in the form of purchase money
obligations to the sellers of properties, publicly or privately placed debt
instruments, financing from banks, institutional investors or other lenders, any
of which indebtedness may be unsecured or may be secured by mortgages or other
interests in the hotels and other property owned by the Partnership. Such
indebtedness may be recourse to all or any part of the property of the Company
or the Partnership, or may be limited to the particular property to which the
indebtedness relates. The proceeds from any borrowings by the Company must be
re-lent to the Partnership on identical terms and conditions, except for
borrowings required to satisfy REIT qualification requirements, which are
approved by a majority of the Independent Directors. Subject to the applicable
terms of the loan documents, the proceeds of any borrowing by the Partnership
may be used to pay distributions or dividends, working capital, to refinance
existing indebtedness or to finance acquisitions, expansions, additions or
renovations of hotels. See "Federal Income Tax Considerations -- Requirements
for Qualification -- Distribution Requirements."
If the Board of Directors determines to raise additional equity capital,
the Board has the authority, without stockholder approval, to issue additional
shares of Common Stock, preferred 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. Existing stockholders have no
preemptive right to purchase shares issued in any offering, and any such
offering might cause a dilution of a stockholder's investment in the Company.
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies and entered into certain
agreements designed to minimize potential conflicts of interest. The Board of
Directors is subject to certain provisions of Maryland law, which are designed
to eliminate or minimize certain potential conflicts of interest. However, there
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 stockholders.
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Provisions of the Company's Articles of Incorporation and Bylaws
The Company's Articles of Incorporation and Bylaws, with limited
exceptions, requires that a majority of the Board of Directors be comprised of
persons who are not officers or employees of the Company, Affiliates of officers
or employees of the Company or Affiliates of any advisor to the Company under an
advisory agreement, any lessee or contract manager of any property of the
Company, any of its subsidiaries, or any partnership which is an Affiliate of
the Company. The Articles of Incorporation provide that such Independent
Director requirement may not be amended, altered, changed or repealed unless
approved and advised by not less than 80% of the Board of Directors and only
with the affirmative vote of not less than two-thirds of the outstanding shares
of capital stock of the Company entitled to vote. In addition, the Company's
Articles of Incorporation and Bylaws provide that any agreement or transaction
in which the Company is purchasing, selling, leasing or mortgaging any real
estate asset, and any other agreement or transaction, in which an advisor,
director or officer of the Company, or any Affiliate of the foregoing, has any
direct or indirect interest, must, after disclosure of the interested party
relationship, be authorized, approved or ratified by a majority of the
directors, including a majority of the Independent Directors, even if the
Independent Directors constitute less than a quorum, or authorized, approved or
ratified by a majority of the votes entitled to be cast by the stockholders,
other than votes of the shares held of record by the interested person, or the
agreement or transaction is established to be fair and reasonable to the
Company.
Provisions of the Employment Agreements and Development by Mr. Alter and Mr.
Biederman
Pursuant to the Alter Employment Agreement and the Biederman Employment
Agreement, while any Percentage Lease is in effect, and for a specified period
thereafter, neither Mr. Alter nor Mr. Biederman nor any of their respective
Affiliates (including, in the case of Mr. Alter, the Lessee or the Management
Company), may (i) own, develop, invest in (other than any publicly-traded hotel
company in which they are not officers, directors or controlling shareholders)
or have any interest in any hotel and, with respect only to Mr. Biederman, any
other hotel is within a 20-mile radius of a hotel in which the Company has
invested or has the right to acquire, or (ii) with respect to Mr. Alter, manage
or lease any hotel or, with respect to Mr. Biederman, manage or lease any hotel
within a 20-mile radius of a hotel in which the Company has invested or has the
right to acquire, other than hotels owned directly or indirectly by an existing
client of the Management Company as of the closing of the IPO, provided, that
the total number of such hotels that can be so managed may not exceed one-half
of the number of hotels owned by the Company. See "Management -- Alter
Employment Agreement," and "-- Biederman Employment Agreement."
Each of Mr. Alter and Mr. Biederman has agreed that neither he nor any of
his Affiliates will receive any brokerage commissions or other fees with respect
to the acquisition of hotels by the Company.
The Partnership
A conflict of interest may arise between the Company, as general partner of
the Partnership, and certain of the Limited Partners of the Partnership,
including Mr. Alter and Mr. Biederman, due to the differing potential tax
liabilities to the Company and such Limited Partners from the sale of certain of
the Sunstone Initial Hotels resulting from the special allocation to such
partners of unrealized gain upon the sale of such Sunstone Initial Hotels. In an
effort to address this conflict of interest, the Company's bylaws provide that
the Company's decisions with respect to the sale of such Sunstone Initial Hotels
will be made by the Independent Directors. 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 Maryland Law
Pursuant to Maryland law (the jurisdiction under which the Company is
organized), each director of the Company is required to discharge his duties in
good faith with the care an ordinarily prudent person in a like position would
exercise under similar circumstances and in a manner he reasonably believes to
be in the best interest of the Company. In addition, under Maryland law, a
transaction with the Company in which a director or officer of the Company has a
direct or indirect interest is not voidable solely because of the directors' or
officers' interest in the transaction if (i) the transaction is authorized,
approved or ratified after disclosure of the interest, by the affirmative vote
of a majority of the disinterested directors, or by the affirmative vote of a
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majority of the votes cast by disinterested stockholders, or (ii) the
transaction is fair and reasonable to the Company.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company's Articles of Incorporation authorize the Company to offer
shares of Common Stock or other securities and to repurchase or otherwise
reacquire its shares or any other securities and the Company may engage in such
activities in the future. As described under "Shares Available for Future Sale,"
the Company expects to issue shares of Common Stock to holders of Units upon
exercise of their Redemption Rights. The Company has not issued shares of Common
Stock, interests or any other securities to date, except in connection with the
formation of the Company and the issuance of restricted shares of Common Stock
to Mr. Enever and the Independent Directors. 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
Treasury Regulations), the Company's Board of Directors, with the approval of
the holders of at least two-thirds of the outstanding shares of all votes
entitled to be cast on the matter, determines to terminate its status as a REIT.
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves in amounts that the
Board of Directors determines to be adequate to meet normal contingencies in
connection with the operation of the Company's business and investments.
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<PAGE> 77
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors consists of seven members, four of whom are
Independent Directors. The Board of Directors is divided into three classes. Mr.
Alter serves as the Company's Chairman of the Board, President, Chief Financial
Officer and Secretary and Mr. Biederman serves as the Company's Executive Vice
President.
Certain information regarding those individuals who serve as the directors
and executive officers of the Company is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION CLASS EXPIRES
- -------------------------- --- ------------------------------------- ---------- -------
<S> <C> <C> <C> <C>
Robert A. Alter........... 45 Chairman of the Board, President, Class I 1998
Chief Financial Officer and Secretary
Charles L. Biederman...... 62 Executive Vice President Class II 1997
C. Robert Enever.......... 68 Director Class III 1999
H. Raymond Bingham........ 51 Independent Director Class II 1997
Fredric H. Gould.......... 61 Independent Director Class I 1998
David Lambert............. 43 Independent Director Class III 1999
Edward H. Sondker......... 48 Independent Director Class III 1999
</TABLE>
ROBERT A. ALTER has served as Chairman of the Board of Directors,
President, Chief Financial Officer, and Secretary since August 1994. From 1990
until August 1995, Mr. Alter served as President of the Management Company,
which currently manages all of the Hotels owned by the Company. Mr. Alter also
serves as Chairman of the Board of Directors of both the Management Company and
the Lessee. Mr. Alter has been engaged in the hotel ownership, development and
management business since 1976. Affiliates of Mr. Alter owned interests in seven
of the ten hotels sold to the Company in the formation transactions consummated
at the IPO in August 1995. In 1991, the general contractor for the Courtyard by
Marriott-Fresno, California hotel, a corporation owned by Mr. Alter and Mr.
Biederman, was dissolved and liquidated pursuant to a bankruptcy proceeding. Mr.
Alter is a Certified Hotel Administrator, as designated by the American Hotel
and Motel Association, and is currently the immediate past President and a
member of the Board of Directors of the International Association of Holiday
Inns, the franchisee association for Holiday Inn hotels. Mr. Alter holds a
Bachelor of Science degree in Hotel Administration from Cornell University.
CHARLES L. BIEDERMAN has served as the Executive Vice President and a
director since September 1994. From 1990 until August 1995, Mr. Biederman served
as Executive Vice President of the Management Company. Mr. Biederman has
previously served as President of Provident Development Group Corporation which
engaged in the design, development and sale of luxury homes in South Florida,
from 1989 until 1992 and as President of Colorado Home Improvements, Inc., which
engaged in general contracting, renovation and related services for existing
homes in the Denver, Colorado area, since 1989. He is currently the President of
Woodstone Homes, Inc., which is engaged in luxury home construction in the Vail,
Colorado area, and a director of One Liberty Properties, Inc., a real estate
investment trust specializing in the purchase and leasing of single tenant net
leased properties throughout the United States. Mr. Biederman has been engaged
in the real estate development business since 1962. Affiliates of Mr. Biederman
owned interests in five of the ten hotels sold to the Company in the formation
transactions consummated in August 1995. In 1991, the general contractor for the
Courtyard by Marriott-Fresno, California hotel, a corporation owned by Mr. Alter
and Mr. Biederman, was dissolved and liquidated pursuant to a bankruptcy
proceeding. Mr. Biederman holds a Bachelor of Arts degree from Colgate
University, and a Bachelor of Architecture degree and a Masters in Architecture
degree from Columbia University and is a registered architect.
C. ROBERT ENEVER has served as a director since August 1995. Since 1983,
Mr. Enever has served as President of CRE Investments Ltd., a portfolio
management company, and has been engaged in the real estate development business
since 1972. Mr. Enever holds a Bachelor of Science degree in Economics from the
University of London, and a Masters in Business Administration degree in Finance
and Accounting from Northwestern University. Mr. Enever is a Certified Public
Accountant licensed in the State of Illinois.
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FREDRIC H. GOULD has served as a director since August 1995. Mr. Gould has
served for the past five years as the General Partner of Gould Investors L.P., a
master limited partnership engaged in the ownership and operation of various
types of income-producing real property located throughout the United States and
which holds substantial interests in publicly held real estate investment trusts
and savings and commercial banks. Mr. Gould is currently a director of BFS
Bankers. In addition, Mr. Gould is currently the Chairman of the Board of
Trustees of BRT Realty Trust, a publicly-traded mortgage real estate investment
trust, and Chairman of the Board of Directors of One Liberty Properties, Inc.
Mr. Gould holds a Bachelor of Business Administration degree from Lehigh
University and an L.L.B. degree from New York University Law School.
H. RAYMOND BINGHAM has served as a director since August 1995. Mr. Bingham
has served since 1993 as the Chief Financial Officer and Executive Vice
President of Cadence Design Systems, a publicly traded computer aided design
company. Prior to joining Cadence Design Systems, Mr. Bingham served as
Executive Vice President and Chief Financial Officer of Red Lion Hotels & Inns
for eight years. Mr. Bingham is the former Chairman of the American Hotel &
Motel Association Industry Real Estate Finance Council and a former Director of
the National Realty Committee. Mr. Bingham holds a Bachelor of Science degree in
Economics from Weber State College and a Masters in Business Administration
degree from Harvard Business School.
DAVID LAMBERT has served as a director since August 1995. Mr. Lambert has
served as Chief Financial Officer of Preview Media, a San Francisco Bay Area
media production and sales company, since June 1995. Prior to joining Preview
Media, from 1992 to 1995 Mr. Lambert served as the Chief Financial Officer of
Excalibur Technologies Corporation, a publicly traded computer software company
specializing in the indexing and retrieval of information, including electronic
filing systems for documents and applications for emerging markets in image,
video and voice technology, such as fingerprint and facial matching. Prior to
joining Excalibur Technologies, Mr. Lambert served as a private consultant in
marketing, strategic planning, operations and computer systems from 1991 to 1992
and as Chairman of the Board, President and Chief Executive Officer of Grand
American Fare, Inc., a restaurant company with 32 locations in four states and
approximately 1,000 employees, from 1985 to 1991. Prior to 1985, Mr. Lambert
served as Vice President of Operations for Colony Hotels. Mr. Lambert holds a
Bachelor of Arts degree in Physics and Mathematics from Occidental College and a
Masters in Business Administration degree from the University of California, Los
Angeles, and is a real estate broker licensed in the State of California.
EDWARD H. SONDKER has served as a director since August 1995. Mr. Sondker
is currently President and Chief Executive Officer of Bayview Financial
Corporation, a publicly traded bank-holding company located in the San Francisco
Bay Area. Prior to joining Bayview Financial, Mr. Sondker served from 1990
through June 1995 as the President and Chief Executive Officer of Independence
One Bank of California. During the fifteen years prior to such time, Mr. Sondker
has served in senior executive positions with several independent financial
institutions having assets ranging in size from $200 million to over $1 billion.
Mr. Sondker holds a Bachelor of Arts degree and a J.D. degree from Washburn
University.
AUDIT COMMITTEE
The Audit Committee consists of Messrs. Gould, Bingham, Lambert and
Sondker. The Audit Committee will make recommendations concerning the engagement
of independent public accountants, review with the independent public
accountants the plans and results of the audit engagement, approve professional
services provided by the independent public accountants, review the independence
of the independent public accountants, consider the range of audit and non-audit
fees and review the adequacy of the Company's internal accounting controls. The
Audit Committee, with advice from the Company's attorneys and independent public
accountants, establishes procedures to monitor compliance with the REIT
provisions of the Code and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and such other laws and regulations applicable to the Company.
The Company has engaged its independent public accountants for a period of two
years following the IPO to monitor compliance with the REIT provisions of the
Code.
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COMPENSATION COMMITTEE
The Compensation Committee consists of Messrs. Gould, Bingham, Lambert and
Sondker. The Compensation Committee determines compensation for the Company's
executive officer and administers the Company's 1994 Stock Incentive Plan (the
"1994 Plan").
EXECUTIVE COMPENSATION
The table below sets forth the annual base compensation to be paid to Mr.
Alter, the President, Chairman of the Board, Chief Financial Officer and
Secretary, and Mr. Biederman, the Executive Vice President and a director of the
Company.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------- LONG-TERM
OTHER ANNUAL ALL OTHER COMPENSATION
NAME OF INDIVIDUAL SALARY COMPENSATION(1) COMPENSATION(2) AWARDS
----------------------------------- ------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Robert A. Alter.................... $60,000 $ 5,976 $ 2,025 185,000(3)
Charles L. Biederman............... 30,000 5,100 8,235 55,000(4)
</TABLE>
- ---------------
(1) Represents payment of health insurance premiums by the Company on behalf of
the named Executive Officers.
(2) Represents life insurance premiums paid by the Company on behalf of the
named Executive Officers.
(3) Mr. Alter was granted incentive stock options to purchase 45,000 shares of
Common Stock and nonqualified stock options to purchase 140,000 shares of
Common Stock prior to the closing of the IPO. The terms of such options,
including the exercise price thereof, are described below under "1994 Stock
Incentive Plan -- ISO Awards."
(4) Mr. Biederman was granted incentive stock options to purchase 45,000 shares
of Common Stock and nonqualified stock options to purchase 10,000 shares of
Common Stock prior to the closing of the IPO. The terms of such options,
including the exercise price thereof, are described below under "1994 Stock
Incentive Plan -- ISO Awards."
It is anticipated that as the Company makes hotel acquisitions increasing
the size of its asset base, the Compensation Committee will increase the annual
compensation of Mr. Alter. It is also anticipated that, based on recommendations
to the Compensation Committee by the President of the Company for performance of
special assignments, Mr. Biederman's compensation will also be increased. It is
further anticipated that future compensation of Mr. Alter, Mr. Biederman and
other employees of the Company will contain an incentive or bonus component
designed to reward improved operating performance of the Company. The
compensation paid to the officers and employees shall be commensurate with their
position and determined with reference to compensation paid to similarly
situated employees and officers of other REITs which the Compensation Committee
deems comparable to the Company and such other factors as the Compensation
Committee deems relevant.
The Company's Bylaws provide that an annual meeting of stockholders shall
be held each year. At the annual meeting, the stockholders will vote on the
election of directors and transaction of such other business as may be properly
brought before the meeting. In addition, special meetings of the stockholders
may be called by the President, a majority of the directors, a majority of the
Independent Directors, or stockholders entitled to cast not less than 10% of all
the votes entitled to be cast at such meeting. The matters acted upon at any
meeting of stockholders shall be set forth in a notice from the Secretary
provided to each stockholder no less than 10 days and no more than 60 days
before the meeting.
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The following table contains information concerning the grant of stock
options made under the Company's 1994 Plan for the fiscal year ended December
31, 1995 to the named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
SECURITIES OF STOCK PRICE
UNDERLYING PERCENT OF TOTAL APPRECIATION
OPTIONS OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERM(S)(3)
GRANTED EMPLOYEES IN BASIC PRICE EXPIRATION --------------------------
NAME (#)(1) 1995 ($/SH)(2) DATE 5%($) 10%($)
- --------------------- ---------- ------------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Alter...... 185,000(4) 77.0% $ 9.50 08/09/05 $1,105,282 $2,801,002
Charles L.
Biederman.......... 55,000(4) 23.0% 9.50 08/09/05 328,597 832,730
</TABLE>
- ---------------
(1) All of the options were granted under the Company's 1994 Plan. Each of the
options will vest annually over five years from the grant date and are first
exercisable for up to 20% of the shares covered thereby one year from the
grant date. In addition, each of the options will automatically accelerate
in full in the event of an acquisition of the Company by a merger or asset
sale in which such option is not to be assumed or replaced by the successor
corporation. Each option includes a limited stock appreciation right which
provides the optionee with the right, exercisable upon the successful
completion of a hostile tender offer for more than 50% of the Company's
outstanding voting securities, to surrender the option to the Company, to
the extent the option is exercisable for vested shares, in return for a cash
distribution per surrendered option share equal to the excess of (i) the
fair market value on the surrender date over (ii) the option exercise price
payable per share. Each option will have a maximum term of 10 years, subject
to earlier termination following the optionee's cessation of service with
the Company.
(2) The exercise price may be paid in cash, in shares of the Common Stock valued
at fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. The Company may
also finance the option exercise by loaning the optionee sufficient funds to
pay the exercise price for the purchased shares, together with any federal
and state income tax liability incurred by the optionee in connection with
such exercise. The Compensation Committee of the Board of Directors, as the
Plan Administrator of the Company's 1994 Plan, has the discretionary
authority to reprice the options through the cancellation of those options
and the grant of replacement options with an exercise price based on the
fair market value of the option shares on the grant date.
(3) There is no assurance provided to any executive officer or any other holder
of the Company's securities that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the Common Stock does in
fact appreciate over the option term, no value will be realized from the
option grants made to the executive officers.
(4) The Company granted 130,000 of the non-qualified stock options granted to
Mr. Alter and 10,000 of the non-qualified stock options granted to Mr.
Biederman, together with an additional 32,500 non-qualified stock options
granted to Charles Biederman on March 12, 1996, to provide a source of
income with which to fund payments required by the Lessee under the Stock
Appreciation Rights Plan (the "SAR Plan"). See "Lessee -- Stock Appreciation
Rights Plan." Under the terms of the SAR Plan, the Lessee's employees will
be entitled to a cash payment equal to the increase in the share price of
the Common Stock over the base price at which the stock appreciation right
is granted. In order to fund this cash obligation of the Lessee, Mr. Alter
and Mr. Biederman have each agreed to contribute, in an 80/20 proportion
reflecting their stock ownership of the Lessee, an amount of money necessary
to make such payments to the extent that the Lessee does not otherwise have
sufficient cash.
There have been no options exercised for the fiscal year ended December 31,
1995 with respect to the above-named Executive Officers. No stock appreciation
rights were exercised by any such officer during such year and, except for the
stock appreciation rights described in footnote (1) above, no stock appreciation
rights were outstanding on December 31, 1995.
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COMPENSATION OF DIRECTORS
Mr. Enever and each Independent Director is awarded Common Stock and is
granted options to purchase Common Stock pursuant to the 1994 Directors' Plan,
described below. See "Management -- The Directors Plan." In addition, the
Company will reimburse all directors for their out-of-pocket expenses incurred
in connection with their service on the Board of Directors. Neither Mr. Alter
nor Mr. Biederman will receive any compensation as a director, other than
reimbursement for their respective out-of-pocket expenses incurred in connection
with their attendance at meetings of the Board of Directors.
ALTER EMPLOYMENT AGREEMENT
In connection with the IPO, Mr. Alter entered into the Alter Employment
Agreement with the Company. Pursuant to the Alter Employment Agreement, Mr.
Alter serves as President of the Company. The Alter Employment Agreement
provided for an initial term of one-year, which term will renew automatically
until terminated. The Alter Employment Agreement provides for annual base
compensation of $60,000, subject to any increases in base compensation approved
by the Compensation Committee. The Alter Employment Agreement also provides for
certain severance payments upon termination by the Company without cause or by
Mr. Alter with cause. The Company maintains a comprehensive medical plan for the
benefit of Mr. Alter and provides life insurance and certain other fringe
benefits to Mr. Alter. The Alter Employment Agreement also contains the
agreement of Mr. Alter that he will devote substantially all of his time to the
business of the Company and that neither he nor his Affiliates will compete with
the Company for any development or management opportunities.
BIEDERMAN EMPLOYMENT AGREEMENT
In connection with the IPO, Mr. Biederman entered into the Biederman
Employment Agreement with the Company. Pursuant to the Biederman Employment
Agreement, Mr. Biederman serves as Executive Vice President of the Company. The
Biederman Employment Agreement provided for an initial term of one-year, which
term will renew automatically until terminated. The Biederman Employment
Agreement provides for annual base compensation of $30,000, subject to any
increases in such compensation based on recommendations by the President for
performance of special assignments. The Biederman Employment Agreement also
provides for certain severance payments upon termination by the Company without
cause or by Mr. Biederman with cause. The Company maintains a comprehensive
medical plan for the benefit of Mr. Biederman and will provide life insurance
and certain other fringe benefits to Mr. Biederman. The Biederman Employment
Agreement also contains the agreement of Mr. Biederman that neither he nor any
of his Affiliates will compete with the Company for any development or
management opportunities. It is not anticipated that Mr. Biederman will devote
substantially all of his time to the business of the Company.
1994 STOCK INCENTIVE PLAN
Administration
The Company has implemented the 1994 Plan to provide incentives to attract
and retain the services of executive officers and other employees and
consultants in the Company's service. The 1994 Plan is administered by the
Compensation Committee of the Board with respect to individuals who are subject
to the short-swing profit restrictions of the federal securities laws and may be
administered with respect to all other eligible individuals by either the
Compensation Committee or a secondary committee of two or more Board members. As
used in this summary, the term "Administrator" means the Compensation Committee
and any secondary committee acting within the scope of its administrative
discretion under the 1994 Plan. The Administrator generally has the authority,
within limitations described in the 1994 Plan, (i) to establish rules and
policies concerning the 1994 Plan, (ii) to determine the eligible individuals to
whom stock options, stock appreciation rights ("SARs"), restricted shares of
Common Stock and performance shares may be granted, (iii) to fix the number of
shares of Common Stock to be subject to each award and (iv) to set the terms and
provisions of each award.
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Eligibility
Employees of the Company or its Affiliates, including officers and any
employees who are members of the Board, and consultants and other independent
advisors (including their respective employees) in the service of the Company
are eligible to participate in the 1994 Plan. Individuals selected by the
Administrator for participation in the 1994 Plan ("Participants") may, from time
to time, be granted stock options, SARs, restricted shares or performance
shares.
Options
Options granted under the 1994 Plan may be incentive stock options ("ISOs")
or nonqualified stock options ("NQSOs"). The exercise price will be equal to the
fair market value per share of Common Stock on the grant date and will be
payable in cash or with shares of Common Stock. No option may have a maximum
term in excess of 10 years, and each option will generally become exercisable in
a series of installments over the optionee's period of service with the Company.
SARs
SARs may be granted under the 1994 Plan in tandem with or independently of
options and will entitle the Participant to receive a payment from the Company
equal to the number of shares of Common Stock underlying the exercised stock
appreciation right multiplied by the excess of the fair market value per share
of Common Stock on the exercise date over the base price per share in effect for
the SAR. The base price per share in effect for each SAR may not be less than
the fair market value per share of Common Stock on the grant date of that SAR.
The amount payable upon the exercise of an SAR may be paid in cash or in shares
of Common Stock.
Restricted Direct Share Awards
Participants also may be awarded shares of Common Stock directly under the
1994 Plan, with the issue price payable in cash or by promissory note or as a
bonus for past services. The issued shares may either be fully vested upon
issuance or subject to a vesting schedule tied to the performance of certain
objectives established by the Administrator. These objectives may include a
minimum service requirement with the Company or the attainment of certain
performance milestones such as earnings per share, market price appreciation of
the Common Stock or return on assets.
Performance Share Awards
The 1994 Plan also provides for the award of performance shares which will
entitle the Participant to receive a payment equal to the fair market value of a
specified number of shares of Common Stock if certain objectives established by
the Administrator are met. Those objectives may be based on the appreciation on
the market price of the Common Stock, return on assets or earnings per share
targets. To the extent that performance shares are earned on the basis of the
attainment of the established objectives, payment of those awards may be made in
cash or in shares of Common Stock.
Share Authorization
A maximum of 500,000 shares of Common Stock may be issued under the 1994
Plan. However, no Participant may be granted, in any calendar year, options or
SARs that cover more than 250,000 shares of Common Stock. Options granted with
tandem SARs will be treated as a single award for purposes of applying such
limitation. The maximum number of shares of Common Stock that may be issued to a
Participant under the 1994 Plan in any calendar year pursuant to direct share
awards or in settlement of performance share awards is limited to 50,000 shares
of Common Stock in the aggregate. These share limitations and the terms of
outstanding awards will be adjusted, as the Compensation Committee deems
appropriate, in the event of a share dividend, share split, combination,
reclassification, recapitalization or other similar event.
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Acceleration
In the event the Company is acquired by merger or asset sale, each
outstanding option which is not assumed by the successor corporation or replaced
with a cash incentive program which preserves the spread existing on the option
shares at the time of such acquisition will automatically accelerate in full,
and all unvested shares will immediately vest, except as otherwise provided in
the agreement evidencing the issuance of those shares. The Administrator will
have the discretion to provide for the accelerated vesting of any options or
unvested shares which do not otherwise vest at the time of the acquisition
should the service of the holder of those options or shares be terminated within
a designated period following the acquisition. The Administrator will also have
the discretion to provide for the accelerated vesting of all outstanding options
and unvested share issuances upon a hostile change in control of the Company
(whether effected by successful tender offer for more than 50% of the
outstanding voting stock or by proxy contest for the election of Board members)
or upon termination of the holder's service within a designated period following
such change in control.
Termination and Amendment
No option or SAR may be granted and no direct issuance or performance
shares may be made under the 1994 Plan after September 22, 2004. The Board may
amend or terminate the 1994 Plan at any time, but an amendment will not become
effective without stockholder approval if the amendment changes the eligibility
requirements or increases the benefits that may be provided under the 1994 Plan.
ISO and NQSO Awards
The Compensation Committee approved in connection with the IPO the grant of
ISOs covering 45,000 shares of Common Stock and NQSOs covering 140,000 shares of
Common Stock to Mr. Alter and the grant of ISOs covering 45,000 shares of Common
Stock and NQSOs covering 10,000 shares of Common Stock to Mr. Biederman. Both
the ISOs and the NQSOs will become exercisable in five successive equal annual
installments upon his completion of each year of service with the Company,
measured from the date of the closing of the IPO. The options have a maximum
term of 10 years and an exercise price per share equal to the fair market value
of the Common Stock on the grant date of the option.
Federal Income Taxes
No income is recognized by a Participant at the time an option is granted.
If the option is an ISO, no income will be recognized upon the Participant's
exercise of the option. Income is recognized by a Participant when he or she
disposes of shares acquired under an ISO. The exercise of a NQSO generally is a
taxable event that requires the Participant to recognize, as ordinary income,
the difference between the shares' fair market value on the exercise date and
the option price.
No income is recognized upon the grant of an SAR. The exercise of an SAR
generally is a taxable event. A Participant generally must recognize income
equal to any cash that is paid and the fair market value of the shares of Common
Stock that are received in settlement of an SAR.
A Participant will recognize income on account of a restricted share award
on the first day that the shares are either transferable or not subject to a
substantial risk of forfeiture. The amount of income recognized by the
Participant is equal to the fair market value of the shares of Common Stock on
that date.
A Participant will recognize income on account of the settlement of a
performance share award. A Participant will recognize income equal to any cash
that is paid and the fair market value of the shares of Common Stock (on the
date that the shares are first transferable or not subject to a substantial risk
of forfeiture) that is received in settlement of the award.
The employer (either the Company or its Affiliate) will be entitled to
claim a federal income tax deduction on account of the exercise of a NQSO or
SAR, the vesting of a restricted share award and the settlement of a performance
share award. The amount of the deduction is equal to the ordinary income
recognized by the Participant. The employer will not be entitled to a federal
income tax deduction on account
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of the grant or the exercise of an ISO. The employer may claim a federal income
tax deduction on account of certain dispositions of Common Stock acquired upon
the exercise of an ISO.
THE DIRECTORS PLAN
The Company has also implemented the 1994 Directors Plan (the "Directors
Plan") to provide incentives to attract and retain Independent Directors and
other nonemployee directors. 150,000 shares of Common Stock have been reserved
for issuance under the Directors Plan.
Eligibility
The Directors Plan provides for the award of shares of Common Stock and the
grant of options to purchase shares of Common Stock to each eligible director of
the Company. No director who is an employee of the Company or an Affiliate
(other than Mr. Enever) is eligible to participate in the Directors Plan. As a
non-employee director, Mr. Enever will be eligible to participate in the
Directors Plan. However, due to Mr. Enever's extensive personal relationship
history with Mr. Alter and as former general partner of certain of the Sunstone
Affiliates, Mr. Enever will not be deemed to be an Independent Director for
other purposes.
Options
In accordance with the Directors Plan, each eligible director who was a
member of the Board as of the closing of the IPO (a "Founding Director") was
granted an option covering 1,500 shares of Common Stock at the first Board
meeting following the first annual meeting of the Company's stockholders. An
option covering 1,500 shares of Common Stock will also granted to each other
eligible director at the first Board meeting following the annual meeting of the
Company's stockholders at which such director is first elected (the date of each
such Board meeting to be designated an "Award Date"). In addition, on the annual
anniversary of the date on which such eligible director became a member of the
Board, provided that such director is still a member of the Board on such date,
such eligible director will be granted an option covering an additional 1,500
shares of Common Stock. The exercise price per share of Common Stock subject to
each option will be the fair market value per share of Common Stock on the date
the option is granted. The exercise price may be paid in cash or in shares of
Common Stock. Options issued under the Directors Plan are exercisable for 10
years from the date of grant. The share reserve, the number of shares and
exercise price subject to outstanding options and the number of shares for which
options will thereafter be awarded will be subject to adjustment in the event of
a share dividend, share split, combination, reclassification, recapitalization
or other similar event.
Exercise of Options
An option granted under the Directors Plan is immediately exercisable and
may be exercisable for all the option shares as fully vested shares whether or
not the director is a member of the Board of Directors on the date of exercise.
Stockholder Rights
A director will have no rights as a stockholder with respect to shares of
Common Stock subject to his or her option until the option is exercised. A
director will have the right to vote all shares of Common Stock awarded to him
or her under the Directors Plan and will receive all dividends paid with respect
to the shares.
Share Awards
Each eligible Founding Director who was a member of the Board of Directors
(i.e., each Independent Director and Mr. Enever) as of the closing of the IPO
was awarded 1,500 shares of Common Stock on that date. Each individual who first
joins the Board as a non-employee Director thereafter the IPO Closing will also
receive a 1,500 share award on the date of the first Board meeting following the
first annual shareholders meeting at which such individual is elected to the
Board. In addition, each eligible director will receive, on each anniversary of
the date on which he or she became a member of the Board of Directors, provided
that such director is still a member of the Board of Directors on such
anniversary date, a number of whole shares of
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Common Stock having a fair market value that as nearly as possible equals, but
does not exceed, $15,000. Any eligible director who, during the term of the
Directors Plan, ceases to be a member of the Board of Directors but is
subsequently reelected to the Board of Directors (a "Re-elected Director") will
receive, on the first Award Date after he or she is re-elected to the Board of
Directors, a number of shares of Common Stock having a fair market value on that
date that as nearly as possible equals, but does not exceed, $15,000.
Vesting of Awards
Each Founding Director immediately and fully vested in the shares awarded
to him at the closing of the IPO. Subsequent awards of shares under the
Directors Plan will be subject to a six-month vesting period. Accordingly, such
shares will be forfeited in the event the director does not complete at least
six months of service as a member of the Board of Directors following the award
date of such shares. All shares outstanding under the Directors Plan will
immediately vest upon certain changes in control or ownership of the Company.
Amendment and Termination
The Directors Plan provides that the Board may amend or terminate the Plan,
but the Plan may not be amended more than once every six months other than to
comport with changes in the Internal Revenue Code or the rules and regulations
promulgated thereunder. An amendment will not become effective without
stockholder approval if the amendment changes the eligibility requirements or
increases the benefits that may be provided under the Directors Plan. The
Directors Plan will terminate on September 22, 2004.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation and Bylaws limit the liability of
the Company's directors and officers for money damages to the Company and its
stockholders to the fullest extent permitted from time to time by Maryland law.
Maryland law presently permits the liability of directors and officers to a
corporation or its stockholders for money damages to be limited, except (i) to
the extent that it is proved that the director or officer actually received an
improper benefit or profit, or (ii) to the extent that a judgment or other final
adjudication is entered in a proceeding based on a finding that the director's
or officer's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action, as adjudicated in the
proceeding. This provision does not limit the ability of the Company or its
stockholders to obtain other relief, such as an injunction or rescission.
The Company's Articles of Incorporation and Bylaws require the Company to
indemnify its directors and officers to the fullest extent permitted from time
to time by Maryland law. The Company's Articles of Incorporation and Bylaws also
permit the Company to indemnify employees, agents and other persons acting on
behalf of or at the request of the Company. The MGCL permits a corporation to
indemnify its directors, officers and certain other parties against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the Company, unless it is established
that: (i) the act or omission of the indemnified party was material to the
matter giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; (ii) the indemnified party actually
received an improper personal benefit; or (iii) in the case of any criminal
proceeding, the indemnified party had reasonable cause to believe that the act
or omission was unlawful. Indemnification may be made against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by the
director or officer in connection with the proceeding; provided, however, that
if the proceeding is one by or in the right of the Company, indemnification may
not be made with respect to any proceeding in which the director or officer has
been adjudged to be liable to the Company. In addition, a director or officer
may not be indemnified with respect to any proceeding charging improper personal
benefit to the director or officer in which the director or officer was adjudged
to be liable on the basis that the personal benefit was improperly received. The
termination of any proceeding by conviction, or upon a plea of nolo contendere
or its equivalent, or an entry of any order of probation prior to judgment,
creates a rebuttable presumption that the director or officer did not meet the
requisite standard of conduct required for indemnification to be permitted.
Indemnification under the provisions of the MGCL is not deemed exclusive to any
other rights, by indemnification or otherwise, to which an officer or director
may
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be entitled under the Company's Articles of Incorporation or Bylaws, or under
resolutions of shareholders or directors, contract or otherwise. It is the
position of the Securities and Exchange Commission (the "Commission") that
indemnification of directors and officers for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), is against public
policy and is unenforceable pursuant to Section 14 of the Securities Act.
The Company has entered into indemnification agreements with each of its
directors and officers that require the Company to indemnify such directors and
officers to the fullest extent permitted by applicable provisions of the MGCL,
provided that any settlement of a third party action against a director or
officer is approved by the Company, and subject to limitations for actions
initiated by the director or officer, penalties paid by insurance, and
violations of Section 16(b) of the Securities Exchange Act of 1934, as amended,
and similar laws.
CERTAIN EVENTS WITH RESPECT TO MR. ALTER AND MR. BIEDERMAN
In 1991, the general contractor for the Courtyard by Marriott-Fresno,
California hotel, a corporation owned by Mr. Alter and Mr. Biederman, was
dissolved and liquidated pursuant to a bankruptcy proceeding.
In 1992, the loan secured by the Hampton Inn -Mesa, Arizona hotel went into
default and a receiver was appointed. The Sunstone Affiliate that owns this
Hotel renegotiated the loan and the receiver was discharged.
STRATEGIC CONSULTANT
The Company has a preliminary consulting agreement with Geller & Co., a
leading hotel consulting firm, to provide strategic advice to the Company in
connection with its external growth strategy, and anticipates entering into a
definitive consulting agreement following the closing of the Offering. Under the
proposed consulting agreement, Laurence Geller, principal of Geller & Co., will
help the Company identify acquisition and development opportunities and may also
assist the Company in negotiating such opportunities. The consulting agreement
will require that Geller & Co. and Laurence Geller be prohibited from entering
into certain engagements which are competitive with the Company. It is intended
that the consulting arrangement will be for an initial term of two years with
one option to extend for an additional year at the Company's election. The
Company will pay Geller & Co.'s expenses in connection with its consulting to
the Company, and will pay fees only in the form of grants of the Company's
Common Stock and options to acquire Common Stock. It is anticipated that the
Common Stock and options to acquire Common Stock will be granted in the
following amounts: (i) a restricted stock grant of 5,000 shares of Common Stock
per year, issued in blocks of 1,250 at the beginning of each quarter; and (ii)
non-qualified options to purchase 50,000 shares of Common Stock, which will vest
in equal installments each month over 24 months. Of the options to acquire
50,000 shares, 25,000 will be exercisable at the market price per share of
Common Stock on the date of grant, and 25,000 will be exercisable at the market
price at the time of the grant plus $5.00. The Company is currently discussing
with Geller & Co. the terms of the consulting arrangement, and there can be no
assurance that an agreement will be entered into.
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CERTAIN TRANSACTIONS
The Company and the Partnership have entered or will enter into a number of
transactions with Messrs. Alter, Biederman, Enever and the Sunstone Affiliates,
including the Lessee. Mr. Alter, the Chairman of the Board of Directors and the
President of the Company, is the sole stockholder of the Management Company, and
an 80% shareholder of the Lessee. Mr. Biederman, a director and Executive Vice
President of the Company, is a 20% shareholder of the Lessee.
MINIMIZING THE RISKS OF POTENTIAL CONFLICTS OF INTEREST
In order to minimize conflicts of interest inherent in the legal structure
required to maintain the Company's status as a REIT, Mr. Alter and Mr. Biederman
each have entered into several agreements. Their respective Employment
Agreements restrict competitive activities and the Third Party Pledge Agreement
require each of Mr. Alter and Biederman to pledge Units to the Company to secure
obligations of the Lessee under the Percentage Leases with a value equal to four
months initial Base Rent for the hotels now leased or which are acquired in the
future and leased to the Lessee. In addition, Messrs. Alter and Biederman
entered into a Unit Purchase Agreement with the Company and the Lessee requiring
that the Lessee's income (net of shareholder tax liability) be used to either
accumulate reserves to pay Rent under the Percentage Leases or to purchase Units
from the Partnership at the then current price of the Common Stock. The
Percentage Leases also contain cross-default provisions permitting the Company
to terminate the Percentage Leases, subject to certain conditions, upon a
default by the Lessee under any Percentage Lease, Mr. Alter or Mr. Biederman
under the Unit Purchase Agreement or any other agreement with the Company.
Further, the Management Company has agreed not to collect any payments from the
Lessee after receiving notice of an event of default under a Percentage Lease.
Mr. Alter has personally guaranteed the Lessee's obligation to return any
amounts received by the Management Company in violation of this agreement.
INITIAL CAPITALIZATION
In connection with the incorporation and initial capitalization of the
Company, Mr. Alter and Mr. Biederman purchased for $123,000 and $90,000,
respectively, 12,300 Units and 9,000 Units, respectively, and Mr. Enever
purchased 3,200 shares of Common Stock for $32,000 (which shares were exchanged
for Units upon the closing of the IPO). In connection with such initial
capitalization, Messrs. Alter, Biederman and Enever were granted warrants to
purchase 17,042 Units, 12,470 Units and 4,434 Units at $9.50 per Unit,
respectively, having an aggregate estimated value of $123,000. The warrants are
exercisable for up to five years at a purchase price per share of $9.50.
PERCENTAGE LEASES
In order to qualify as a REIT, the Company has leased each of its Hotels to
the Lessee pursuant to the Percentage Leases. Each Percentage Lease has been
approved by a majority of the Independent Directors. The Percentage Leases are
designed to allow the Company to participate in revenue growth by providing that
(i) between approximately 60% to 65% of room revenues in excess of specified
amounts, (ii) 5% of the Lessee's food and beverage revenues, (iii) 100% of any
sublease and concession rentals, and (iv) 100% of other net revenues described
in the Percentage Lease for the applicable Hotel in excess of Base Rent will be
paid to the Partnership as Percentage Rent. Once such expenses together with all
other operating expenses of each hotel is paid by the Lessee, the Lessee will be
entitled to all of the net income from the Hotels.
ACQUISITION OF THE SUNSTONE INITIAL HOTELS
The Company acquired the seven Sunstone Initial Hotels from the Sunstone
Affiliates, in exchange for an aggregate consideration consisting of (i) the
assumption of approximately $23.5 million of mortgage indebtedness and other
obligations relating to the Sunstone Initial Hotels, (ii) approximately $832,000
in cash distributed to non-continuing investors for their equity interests, and
(iii) the issuance of approximately 1,288,500 Units in the Partnership, valued
at approximately $12.2 million based on the IPO price of $9.50 per share of
Common Stock. Each of the Units is exchangeable, at the option of the holder
thereof, at any time
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after August 16, 1996 (other than 219,068 Units issued to one of the Affiliates
of Mr. Alter and Mr. Enever, which are immediately redeemable for Common Stock),
for the same number of shares of Common Stock. Accordingly, consideration with a
value of approximately $10,250,605 was provided by the Partnership to acquire
assets having a net tangible book value deficit as of March 31, 1995 of
($7,166,000). Upon exercise of their redemption rights, the Sunstone Affiliates
would receive an aggregate of 1,288,500 shares of Common Stock or, at the
Company's option, an equivalent amount of cash or a combination thereof, except
that Common Stock cannot be issued to such persons if such issuance would cause
the Company to violate certain REIT restrictions. In addition, the Sunstone
Affiliates were released from approximately $6 million of joint and several
liability relating to the third party indebtedness paid by the Partnership in
the formation transactions related to the IPO.
MANAGEMENT AGREEMENT
The Lessee has entered into the Management Agreement with the Management
Company for each of the Hotels it leases from the Partnership. Pursuant to the
Management Agreement, the Management Company provides management and
administrative services to the Lessee in consideration for 2% of gross revenue
and reimbursement of certain direct expenses incurred by the Management Company
for the Lessee. As the sole shareholder of the Management Company, Mr. Alter is
entitled to the net income of the Management Company.
EMPLOYMENT AGREEMENTS
At the IPO, the Company entered into Employment Agreements with each of Mr.
Alter and Mr. Biederman that will continue in effect until August 16, 1996, and
will renew automatically each year until terminated. Mr. Alter serves as
President and is required to devote substantially all of his time to the
business of the Company with an annual base compensation of $60,000 a year
subject to any increases approved by the Compensation Committee. Mr. Biederman
serves as Executive Vice President for an annual base compensation of $30,000,
subject to any increases based on recommendations by the President of the
Company for performance of special assignments. Mr. Biederman is not required to
devote substantially all of his time to the business of the Company. Each of the
Employment Agreements restrict competitive activities by Mr. Alter, Mr.
Biederman or any of their affiliates.
THIRD PARTY PLEDGE AGREEMENT
Mr. Alter and Mr. Biederman, as the stockholders of the Lessee, have
pledged to the Partnership Units with a value on the date of the pledge equal to
four months of initial Base Rent (or approximately $2.6 million) under each
Percentage Lease for each Current Hotel and the Holiday Inn Select-Renton,
Washington hotel, to secure the Lessee's obligations under the Percentage
Leases. Since the IPO, the amount of pledged Units has been increased by $0.6
million and will be further increased by an amount equal to four months Base
Rent for each additional hotel leased by the Lessee from the Partnership.
Provided no event of default under one or more of the Percentage Leases exists,
these pledged Units will be returned to the pledgors on the third anniversary of
each such Percentage Lease.
UNIT PURCHASE AGREEMENT
Mr. Alter and Mr. Biederman entered into the Unit Purchase Agreement with
the Company, the Lessee and the Partnership to use distributions from the
Lessee, in excess of their tax liability for earnings of the Lessee, to either
accumulate reserves for the Lessee's rental obligations due under the Percentage
Leases or purchase from the Partnership additional Units at the then current
market price of the Common Stock. The Unit Purchase Agreement will remain in
effect so long as there is a Percentage Lease in effect.
PURCHASE OF COURTYARD BY MARRIOTT-RIVERSIDE, CALIFORNIA HOTEL
On April 1, 1996, the Partnership acquired the Courtyard by
Marriott-Riverside Hotel, California hotel subject to the existing first and
second trust deed with an outstanding principal balance of approximately
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$3 million together with the agreement to issue Units representing the
difference between the purchase price and the assumed indebtedness. The purchase
price was calculated based on an 11% capitalization rate times the "Net
Operating Income" for the 12 months ended March 31, 1996 and is being audited by
Coopers & Lybrand L.L.P. in accordance with the Option Agreement. An Affiliate
of Mr. Alter and Mr. Biederman purchased this hotel in 1994 for $2.7 million and
spent $950,000 substantially renovating and converting the hotel from a Days Inn
hotel to a Courtyard by Marriott hotel.
In connection with the acquisition by Mr. Alter's and Mr. Biederman's
Affiliate of the Courtyard by Marriott-Riverside, California hotel, Independence
One Bank of California made a loan in the amount of approximately $2.1 million
which is secured by this hotel. Edward H. Sondker, a director of the Company,
was the president and chief executive officer of Independence One Bank of
California at the time such loan was made, but was not then a director of the
Company.
PURCHASE OF RESIDENCE INN-HIGHLANDS RANCH, COLORADO HOTEL
The Company exercised the option to purchase the Highlands Ranch, Colorado
hotel in December 1995. To consummate the exercise of the option, an Affiliate
of Mr. Alter and Mr. Biederman assigned all of its right, title and interest in
and to a purchase agreement for the real property that comprised the building
site for the Residence Inn-Highlands Ranch, Colorado hotel and all rights under
any development agreements or related documents to the Company in exchange for
reimbursement of all out-of-pocket expenses incurred by such entity in an amount
of approximately $50,000.
PERSONNEL AND OFFICE SHARING ARRANGEMENT AND CERTAIN REIMBURSEMENTS
The Company shares offices with the Lessee and the Management Company and
shares the costs thereof, including rent, salaries of all office personnel
(except Mr. Alter and Mr. Biederman), office supplies and telephones. During
1995, the Company paid to the Lessee approximately $5,000 per month for its
portion of such costs. Such allocations of shared costs are subject to the
approval of a majority of the Independent Directors of the Company. In addition,
the Company reimburses, subject to approval of a majority of the Independent
Directors, the Lessee for certain due diligence costs, transactional costs and
allocated costs of certain Lessee employees relating to acquisitions of hotels
by the Company. In 1995, the Company paid approximately $115,000 of such
expenses to the Lessee.
INDEMNIFICATION AGREEMENTS
The Company has entered into an Indemnification Agreement with each of its
directors (the "Indemnification Agreements") which provides that, with certain
exceptions, the Company will hold harmless and indemnify its directors to the
fullest extent permitted under Maryland Law. Under the Indemnification
Agreements, the Company is obligated to indemnify each of its directors against
all expenses (including attorneys' fees), fines, judgments and settlement
amounts that such director may incur in connection with any action or proceeding
(other than an action by or in the right of the Company) to which the director
is or may be made a party to by reason of such director's position as a
director, officer, employee or agent of the Company or any other company or
enterprise to which the person provides services at the request of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company 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
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
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THE LESSEE
GENERAL
The Lessee leases the Current Hotels and one of the Acquisition Hotels
pursuant to the Percentage Leases and it is anticipated that the Lessee will
lease the remaining Acquisition Hotels and any additional hotels acquired by the
Company pursuant to similar percentage leases. The Lessee presently employs
approximately 744 people and upon the closing of the Acquisition Hotels will
employ approximately 867 people. Under the Percentage Leases, the Lessee
generally will be required to perform all operational functions necessary to
operate the Current Hotels and the acquired Acquisition Hotel. Such functions
include ordering supplies, maid service, laundry and maintenance.
The Lessee will be entitled to all gross revenue from the Current Hotels
and the acquired Acquisition Hotel after payment of Rent and other amounts due
under the Percentage Leases, payment of a management fee to the Management
Company, initially equal to 2% of gross revenues, and of all accounting-related
expenses and all out-of-pocket expenses of the Management Company incurred in
connection with the performance of its obligations under the Management
Agreement, and other operating expenses. The Lessee is required to provide
operating information about each of the Current Hotels and the acquired
Acquisition Hotel, quarterly financial statements, annual audited financial
statements and any other information material to the Lessee's continuing ability
to perform its obligations under the Percentage Leases. The Company will include
this information in its periodic reports filed with the Commission under the
Exchange Act. Kenneth J. Biehl serves as Chief Financial Officer and Secretary
of the Lessee. Carol A. Verret serves as the Vice President -- Marketing of the
Lessee and David R. Kinkade serves as Vice President -- Acquisitions of the
Lessee.
The Partnership must rely on the Lessee to generate sufficient cash flow
from the operation of the Current Hotels and the acquired Acquisition Hotel to
enable the Lessee to pay the higher tier Percentage Rent necessary for the
Company to fund the distributions to holders of the Common Stock. The
obligations of the Lessee under the Percentage Leases are secured and
cross-defaulted so that a default under one Percentage Lease constitutes a
default under all of the Percentage Leases. Other than working capital
sufficient to operate the Current Hotels and the acquired Acquisition Hotel, the
Lessee has only nominal assets in addition to its rights and benefits under the
Percentage Leases. See "Business and Properties -- The Percentage Leases."
MANAGEMENT
Certain information with respect to key personnel of the Lessee is set
forth below.
Kenneth J. Biehl (age 42) is currently the Chief Financial Officer and
Secretary and has served in such position since February 1995. Prior to joining
the Lessee, Mr. Biehl served as Vice President and Corporate Controller of
Starwood Lodging Corporation, the hotel operating company for one of the largest
hotel REIT's in the United States. Prior to joining the Lessee, Mr. Biehl served
with E & Y Kenneth Leventhal Real Estate Group, Price Waterhouse and KPMG Peat
Marwick. Mr. Biehl has ten years of experience in the real estate and
hospitality industry. Mr. Biehl holds a Bachelor of Science degree in Accounting
from Brigham Young University and is a Certified Public Accountant licensed in
the State of California.
Carol A. Verret (age 46) is currently the Vice President -- Marketing of
the Lessee and has served in such position since 1990. During the seven years
prior to joining the Lessee, Ms. Verret served as a Director of Marketing for
Radisson, Ramada and Sheraton Hotels and The Warwick, an independent hotel in
Denver, Colorado. Ms. Verret holds a Bachelor of Arts degree and a Master of
Arts degree in Political Science from McGill University in Montreal, Quebec.
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David R. Kinkade (age 58) is currently the Vice President -- Acquisitions
of the Lessee and has served in such position since December 1995. During the
six years prior to joining the Lessee, Mr. Kinkade served as Director of Systems
Development -- Western Region for Hampton, Director of Development for
Crossroads Hospitality Company and Director of Operations for Oceanside Pier
Restaurant. Mr. Kinkade holds a Bachelor of Business Administration degree from
the University of Oregon and a Master of Business Administration degree in
Hotel, Restaurant and Institutional Management from Michigan State University.
Mr. Kinkade is also a Certified Public Accountant licensed in the State of
California.
Sheila Bowen (age 34) is Director of Sales of the Lessee. Prior to
employment with the Lessee, Ms. Bowen was Director of Sales for Lodging
Unlimited and has over ten years of hospitality sales experience. At the Lessee,
Ms. Bowen is responsible for sales and marketing of the Company's existing
properties.
Rosemary Stoll (age 39) is currently the Director of Human Resources of the
Lessee Company and has served in such position since November 1995. During the
13 years prior to joining the Lessee, Ms. Stoll served as Director of Human
Resources for Holiday Inns, Registry, and Sheraton Hotels. Ms. Stoll holds a
Bachelor of Arts degree in Education from Rutgers University in New Brunswick,
New Jersey.
Heidi Torr (age 40) is Asset Manager for the Lessee and has served in such
position since 1995. Prior to joining the Lessee, Ms. Torr served as Real Estate
Specialist with the Federal Deposit Insurance Company in Irvine, California and
as Assistant Project Manager for Rielly Homes Development, a real estate
development company in Irvine, California. Ms. Torr has 16 years of experience
in the real estate industry.
Robert G. Combie (age 40) is currently a Lead Manager for the Lessee and
joined the Lessee in January 1996. During the past ten years he has been a
Project Manager for The Hotel Group; General Manager, Hampton Inn Seattle
Airport and Operations Manager for Beachwood Resort, Blaine, Washington. Mr.
Combie is a Certified Hotel Administrator, is Hampton Inn Manager certified and
holds a degree from the University of Massachusetts in Hotel, Travel and
Tourism. Mr. Combie has 22 years experience in the hospitality industry.
Susan R. Landgraf (age 45) is currently a Lead Manager for the Lessee. Ms.
Landgraf joined a predecessor of the Lessee in 1993. In the ten years prior to
joining the Lessee, Ms. Landgraf served as Director of Marketing and General
Manager at Holiday Inns in Wisconsin, Oklahoma and Texas. Ms. Landgraf is a
Certified Hotel Administrator and holds a degree in Business Communication from
the University of Wisconsin and studied technical writing at the University of
New Orleans. Ms. Landgraf has 17 years experience in the hospitality industry.
Karen Trujillo (age 38) is currently a Lead Manager for the Lessee. Ms.
Trujillo joined a predecessor of the Lessee in 1983. Ms. Trujillo is certified
in the Hampton Inn Management Development Program, Hampton Inn Mentor Training
Program, and Hampton Inn Revenue Maximization. Ms. Trujillo has 23 years
experience in the hospitality industry.
1996 STOCK APPRECIATION RIGHTS PLAN
The Lessee intends to implement a special stock appreciation rights plan
(the "SAR Plan") for employees and consultants in the service of the Lessee and
the non-employee members of the Lessee's Board of Directors. Under the SAR Plan,
stock appreciation rights ("SARs") tied to the value of the Company's publicly
traded shares of Common Stock may be granted with respect to 162,500 shares of
Common Stock. However, the granted SARs will not provide the holders with any
shareholder or other equity interest in the Company or the Lessee. Each granted
SAR may have a base price less than, equal to, or greater than, the fair market
value per share of Common Stock on the grant date and will become exercisable in
a series of installments over the holder's period of service with the Lessee.
Upon exercise, the holder will receive a cash payment from the Lessee equal to
the number of shares of Common Stock underlying the exercised SAR multiplied by
the excess of (i) the fair market value per share of Common Stock on the
exercise date over
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(ii) the base price per share in effect for the exercised right. Outstanding
SARs will have a maximum term of ten years, subject to earlier termination in
connection with the holder's termination of service with the Lessee. SARs will
be subject to full and immediate vesting and cash out upon certain changes in
ownership of either the Company or the Lessee.
The Lessee intends to grant 162,400 SARs with a base price of $9.50 per SAR
to 98 of the Lessee's employees, including each of the corporate officers and
key employees at the corporate office of the Lessee (Chief Financial Officer,
Vice President -- Marketing, Vice President -- Acquisitions, Director of Sales,
and Asset Manager) and each of the management personnel at the property level
(Lead Hotel General Managers, Hotel General Managers, Sales Directors and
Department Heads). The Lessee intends to increase the number of SARs covered by
the SAR Plan, to continue to grant SARs to new management personnel at each of
the hotels it acquires and to periodically grant additional SARs to both
corporate and hotel level management personnel in order to create incentives for
performance that increases the value of the Common Stock. Mr. Alter and Mr.
Biederman each intend to contribute to the Lessee in proportion to their stock
ownership (80%/20%) of the amounts necessary to fund any SAR payments to the
extent that the Lessee does not otherwise have sufficient operating cash flow to
make such payments. The Company has granted to Mr. Alter and Mr. Biederman
non-qualified stock options to purchase 130,000 and 32,500 shares respectively
of Common Stock in order to match fund the obligations of Mr. Alter and Mr.
Biederman to make such contributions to the Lessee for the benefit of the
holders of the SARs.
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THE MANAGEMENT COMPANY
GENERAL
The Management Company currently manages the Current Hotels and the
acquired Acquisition Hotel. The Management Company generally is required to
perform management functions necessary to manage the Current Hotels and the
acquired Acquisition Hotel. Such functions include accounting, periodic
reporting, advertising and marketing. As consideration for such services, the
Management Company receives a management fee from the Lessee initially equal to
2% of gross revenues. In addition, the Management Company is reimbursed by the
Lessee for all accounting-related expenses and all out-of-pocket expenses
incurred in connection with the management and administration of the Current
Hotels and the acquired Acquisition Hotel. Neither the Company nor the
Partnership has any contractual or other obligations to the Management Company.
Kenneth J. Biehl serves as the Chief Financial Officer and Secretary of the
Management Company. Carol A. Verret serves as the Vice President -- Marketing of
the Management Company, and David R. Kinkade serves as Vice President of the
Management Company. For a description of the qualifications and experience of
Mr. Biehl, Ms. Verret and Mr. Kinkade, see "The Lessee -- Management."
Affiliates of the Company have developed systems for marketing, ADR
enhancement, expense management, physical facility maintenance, human resources,
accounting and internal auditing. The on-site general manager of each Current
Hotel and the acquired Acquisition Hotel will report to lead managers, who in
turn report to the Vice President -- Marketing and the Director of Sales of the
Lessee. This strategy is designed to place responsibility and authority in the
hands of the on-site general manager with supervision by senior staff of the
Management Company and the Lessee.
Each Current Hotel and the acquired Acquisition Hotel have an on-site
general manager. In addition, the Lessee is obligated pursuant to the Percentage
Leases to employ a sales manager for each Hotel, as reasonably required by the
Company. All sales managers work with their on-site general manager, with
supervision by the Vice President -- Marketing of the Management Company and the
Lessee. Each year, the on-site general manager and sales manager of each Hotel
will develop an annual marketing plan with careful attention given to measurable
results. The Company will monitor the results for each quarter as compared to
the plan. The Management Company uses a management by objective sales program to
coordinate, direct and manage the sales activities of personnel located at the
Hotels.
THE MANAGEMENT AGREEMENT
Pursuant to the terms of the Management Agreement, the Management Company
will provide management and administrative services to the Lessee with respect
to the Current Hotels and the acquired Acquisition Hotel. The Management
Agreement provides for an initial term of one year with an automatic renewal for
additional one-year periods subject to the right of either party to terminate
the Management Agreement upon at least 90 days notice to the other party. As
consideration for such services, the Management Company will receive from the
Lessee a management fee equal to 2% of gross revenues of the Current Hotels and
the acquired Acquisition Hotel. In addition, the Management Company will be
reimbursed by the Lessee for all accounting-related expenses and all
out-of-pocket expenses incurred in connection with the management and
administration of the Current Hotels and the acquired Acquisition Hotel. The
Company anticipates that if additional hotels are acquired and leased to the
Lessee, the Lessee and the Management Company will enter into similar management
agreements with respect to such additional hotels. However, the Lessee is not
obligated to enter into any additional management agreements with the Management
Company with respect to such additional hotels. As required by the Percentage
Leases, the Management Agreement provides, and any such other management
agreements must provide, that the Management Company will repay to the Company
any payments made to it by the Lessee after the Management Company receives
notice that an event of default has occurred and is continuing. This obligation
is personally guaranteed by Mr. Alter. Neither the Partnership nor the Company
is a party to the Management Agreement and, therefore, neither shall have any
obligations or liabilities under the Management Agreement or to the Management
Company.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of June 1, 1996, regarding
the beneficial ownership of Common Stock by (i) each person known to the Company
to be the beneficial owner of more than five percent (5%) of its Common Shares,
(ii) each director of the Company, (iii) each executive officer of the Company
and (iv) by all directors and executive officers of the Company as a group.
Unless otherwise indicated, all shares of Common Stock are owned directly and
the indicated person has sole voting and investment power.
<TABLE>
<CAPTION>
PERCENT OF
CLASS(1)
---------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING
- ------------------------------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Robert A. Alter........................................ 621,271 7.98% 4.94%
115 Calle de Industrias, Suite 201
San Clemente, California 92672
Charles L. Biederman................................... 381,677 4.91 3.03
C. Robert Enever....................................... 162,563 2.09 1.29
Fredric H. Gould....................................... 1,500 * *
H. Raymond Bingham..................................... 1,500 * *
David Lambert.......................................... 5,500 * *
Edward H. Sondker...................................... 3,500 * *
All Directors and Officers as a Group (7 persons)...... 1,177,511 15.13 9.36
Sirach Capital Management, Inc......................... 480,000 6.17 3.82
3323 One Union Square
Seattle, Washington 98101
Wasatch Advisors, Inc.................................. 1,536,574(2) 19.75 12.21
68 South Main Street, Suite 400
Salt Lake City, Utah 84101
</TABLE>
- ---------------
* Less than one percent
(1) The Partnership had 7,780,800 Units outstanding as of June 1, 1996, of which
6,322,000 were owned by the Company, corresponding to the number of shares
of Common Stock outstanding as of that date, and 1,458,800 by other limited
partners. Each of the Units are redeemable pursuant to certain redemption
rights (the "Redemption Rights") on a one-for-one basis for shares of Common
Stock. Redemption Rights are not exercisable by the holder of Units until
August 16, 1996 (except for 210,008 Units issued to one of the Affiliates of
Mr. Alter and Mr. Enever, which are immediately redeemable for Common
Stock). The number and percentages set forth above assumes that all Units
held by the person are redeemed for shares of Common Stock. The total number
of shares of Common Stock outstanding used in calculating the percentage
assumes that all of the Units held by other persons are redeemed for shares
of Common Stock and that 4,800,000 shares of Common Stock are issued in the
Offering and excludes the over-allotment option.
(2) Wasatch Advisors, Inc. is deemed a beneficial owner of the shares only by
virtue of the direct or indirect investment and/or voting discretion it
possesses pursuant to the provisions of investment advisory agreements with
its investment advisory clients.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of capital stock of the Company is
subject to and qualified in its entirety by reference to Maryland law described
herein, and to the Articles of Incorporation and Bylaws of the Company which are
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
GENERAL
The Articles of Incorporation of the Company provide that the Company may
issue up to 60,000,000 shares of capital stock, consisting of 50,000,000 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 the closing of the
Offering, 11,122,000 shares of Common Stock will be issued and outstanding and
no shares of Preferred Stock will be issued and outstanding. Under Maryland law,
stockholders generally are not liable for a corporation's debt or obligations
solely by reason of ownership of stock of the corporation.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of any other shares
or series of shares of capital stock and to the provisions of the Company's
Articles of Incorporation regarding the consequences of actually or
constructively owning shares of Common Stock in violation of the Ownership Limit
(as discussed below), holders of Common Stock will be entitled to receive
dividends on such Common Stock if, as 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 stockholders in the event of its liquidation, dissolution or winding-up
after payment of, or adequate provision for, all known debts and liabilities of
the Company. The Company intends to continue its practice of paying regular
quarterly dividends to its stockholders. See "Price Range of Common Stock and
Distributions."
Subject to the provisions of the Company's Articles of Incorporation
regarding the consequences of actually or constructively owning shares of Common
Stock in violation of the Ownership Limit and to the matters discussed below
under "Certain Provisions of Maryland Law and of the Company's Articles of
Incorporation and Bylaws -- Control Share Acquisitions," each outstanding share
of Common Stock entitles the holder to one vote on all matters submitted to a
vote of stockholders, 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 stock, the holders of such shares of Common Stock will
possess the exclusive voting power. There is no cumulative voting in the
election of directors, which means that the holders of a majority of the
outstanding shares of Common Stock can elect all of the directors then standing
for election and the holders of the remaining shares, if any, will not be able
to elect any directors.
Holders of Common Stock have no conversion, sinking fund, redemption rights
or any preemptive rights to subscribe for any securities of the Company. See
"Description of Capital Stock -- Restrictions on Ownership."
Subject to the provisions of the Articles of Incorporation regarding the
consequences of actually or constructively owning shares of Common Stock in
violation of the Ownership Limit, all shares of Common Stock will have equal
dividend, distribution, liquidation and other rights, and will have no
preference, appraisal or exchange rights.
Pursuant to the MGCL, a Maryland corporation generally cannot dissolve,
amend its articles of incorporation, merge, sell all or substantially all of its
assets, engage in a share exchange or engage in similar transactions outside the
ordinary course of business unless approved by the affirmative vote or written
consent of stockholders holding at least two-thirds of the shares entitled to
vote on the matter unless a lesser percentage (but not less than a majority of
all of the votes entitled to be cast on the matter) is set forth in the
corporation's articles of incorporation. The Articles of Incorporation provides
that a majority of all of the votes entitled to be cast is the required vote of
stockholders in such situations, except that any proposal (i) to permit
cumulative voting in the election of directors, (ii) to alter provisions of the
Articles of Incorporation requiring
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a majority of the directors to be independent directors or provisions of the
Articles of Incorporation relating to the classification of the Board of
Directors into three classes, removal of directors, preemptive rights,
indemnification of corporate agents and limitation of liability of officers and
directors or (iii) that would terminate the Company's status as a REIT for tax
purposes, requires, in each case, the approval of at least two-thirds of all of
the votes entitled to be cast on such matter. In addition, a number of other
provisions of the MGCL could have a significant effect on the Common Stock and
the rights and obligations of holders thereof. See "Certain Provisions of
Maryland Law and of the Company's Articles of Incorporation and Bylaws --
Control Share Acquisitions."
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time, in one or more
classes, as authorized by the Board of Directors. Prior to issuance of shares of
any such class, the Board of Directors is required by the MGCL and the Articles
of Incorporation to set for such class, subject to the provisions of the
Articles of Incorporation regarding Shares-in-Trust, the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends or
other distributions, qualifications and terms or conditions of redemption for
each class as are permitted by Maryland law. The Board of Directors could
authorize the issuance of shares of Preferred Stock with terms and conditions
which could have the effect of delaying, deferring, discouraging or preventing
an attempt by a third party to obtain control of the Company or other
transaction which holders of some, or a majority, of the shares might receive a
premium for their shares of Common Stock over the then prevailing market price
of such shares. As of the date hereof, no shares of Preferred Stock are
outstanding and the Company has no present plans to issue any shares of
Preferred Stock. If and when issued, the Preferred Stock will be subject to the
restrictions on ownership set forth below.
CLASSIFICATION OR RECLASSIFICATION OF COMMON STOCK OR PREFERRED STOCK
The Company's Articles of Incorporation authorizes the Board of Directors
to classify or reclassify any unissued shares of Common Stock or Preferred Stock
by setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, distributions, qualifications
or terms or conditions of redemption.
RESTRICTIONS ON OWNERSHIP
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
shares 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 12 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 would not qualify as rents from real property, which
would result in loss of REIT status for the Company, if the Company were at any
time to own, directly 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
qualify as a REIT, the Articles of Incorporation, subject to certain exceptions
described below, provides that no person may own, or be deemed to own by virtue
of the constructive ownership provisions of the Code, more than 9.8% of the
lesser in value of the total number or value of the outstanding shares of Common
Stock or the outstanding shares of Preferred Stock (the "Ownership Limit"). The
constructive ownership rules of the Code are complex and may cause shares owned
actually or constructively by two or more related individuals and/or entities to
be constructively owned by one individual or entity. As a result, the
acquisition of less than 9.8% of the outstanding shares of Common Stock or 9.8%
of the shares of Preferred Stock (or the acquisition of an interest in an entity
which owns the shares) by an individual or entity could cause that individual or
entity (or another individual or entity) to own constructively in excess of 9.8%
of the outstanding shares of Common
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Stock or 9.8% of the outstanding shares of Preferred Stock, and thus subject
such shares to the Ownership Limit provisions of the Articles of Incorporation.
The Ownership Limit also prohibits any transfer of Common or Preferred Stock
that would (i) result in the Common and Preferred Stock being owned by fewer
than 100 persons (determined without reference to any rules of attribution),
(ii) result in the Company being "closely held" within the meaning of Section
856(h) of the Code, or (iii) cause the Company to own, directly 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.
Except as otherwise provided below, any such acquisition or transfer of the
Company's capital stock (including any constructive acquisition or transfer of
ownership) shall be null and void, and the intended transferee or owner will
acquire no rights to, or economic interests in, the shares.
Subject to certain exceptions described below, any purported transfer of
Common or Preferred Stock that would (i) result in any person owning, directly
or indirectly, Common or Preferred Stock in excess of the Ownership Limit, (ii)
result in the Common 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, directly or constructively, 10.0% 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, will be
designated as "Shares-in-Trust" and transferred automatically to a trust (the
"Share Trust") effective on the day before the purported transfer of such Common
or Preferred Stock. The record holder of the Common or Preferred Stock that are
designated as Shares-in-Trust (the "Prohibited Owner") will be required to
submit such number of Common or Preferred Stock to the Share Trust for
designation in the name of the Share Trustee. The Share Trustee will be
designated by the Company. The beneficiary of the Share Trust (the
"Beneficiary") will be one or more charitable organizations that are named by
the Company.
Shares-in-Trust will remain issued and outstanding Common or Preferred
Stock and will be entitled to the same rights and privileges as all other shares
of the same class or series. The Share Trust 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 Share Trustee
will vote all Shares-in-Trust. The Share 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
Share Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Share Trust the amount of any dividends or distributions received
by the Prohibited Owner (i) that are attributable to any Shares-in-Trust and
(ii) that 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
Share Trustee the lesser of (i) the price per share such Prohibited Owner paid
for the Common 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) and (ii) the price per share received by the Share
Trustee from the sale or other disposition of such Shares-in-Trust. Any amounts
received by the Share 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 ninety days after the later of (i) the date of the
purported transfer which resulted in such Shares-in-Trust and (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 sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction
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reporting system with respect to securities listed or admitted to trading on the
New York Stock Exchange or, if the Common or Preferred Stock are not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the shares of Common or
Preferred Stock are listed or admitted to trading or, if the shares of Common or
Preferred Stock are not listed or admitted to trading on any national securities
exchange, the last quoted price, or if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System or,
if such system is no longer in use, the principal other automated quotations
system that may then be in use or, if the shares of Common or Preferred Stock
are not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in the
Common or Preferred Stock as selected by the Board of Directors. "Trading Day"
shall mean a day on which the principal national securities exchange on which
the shares of Common or Preferred Stock are listed or admitted to trading is
open for the transaction of business or, if the shares of Common 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.
Any person who acquires or attempts to acquire Common or Preferred Stock in
violation of the foregoing restrictions, or any person who owned shares of
Common or Preferred Stock that were transferred to a Share Trust, will be
required (i) to give immediately written notice to the Company of such event and
(ii) to provide to the Company such other information 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 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 and Preferred Stock owned directly or indirectly, and a
description of how such shares are held. In addition, each direct or indirect
stockholder 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
Limit.
The Ownership Limit generally will not apply to the acquisition of shares
of Common 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
Limit under certain circumstances. The foregoing restrictions will continue to
apply until the Board of Directors, with the approval of the holders of at least
two-thirds of the outstanding shares of all votes entitled to vote on such
matter at a regular or special meeting of the stockholders of the Company,
determines to terminate its status as a REIT.
The Ownership Limit will not be automatically removed even if the REIT
provisions of the Code are changed so as to remove any ownership concentration
limitation. Any change of the Ownership Limit would require an amendment to the
Articles of Incorporation. Such amendment requires the affirmative vote of
holders holding at least two-thirds of the outstanding shares entitled to vote
on the matter. In addition to preserving the Company's status as a REIT, the
Ownership Limit may have the effect of delaying, deferring, discouraging or
preventing an acquisition of control of the Company without the approval of the
Board of Directors.
All certificates representing shares of Common or Preferred Stock will bear
a legend referring to the restrictions described above.
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CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Articles of Incorporation and Bylaws of the Company is subject to and qualified
in its entirety by reference to the Articles of Incorporation and Bylaws of the
Company which are filed as exhibits to the Registration Statement of which this
Prospectus is a part.
CLASSIFICATION OF THE 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. The directors may increase the number of directors by a vote of a
least 80% of the members of the Board of Directors, provided that the number of
directors shall never be less than the number required by Maryland law and that
the tenure of office of a director shall not be affected by any decrease in the
number of directors. Any vacancy will be filled, including a vacancy created by
an increase in the number of directors, 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.
Pursuant to the Articles of Incorporation the Board of Directors will be
divided into three classes of directors. The initial terms of the first, second
and third classes will expire in 1997 and 1998, respectively. The term of the
two Class I directors elected at the 1996 annual meeting of stockholders expires
in 1999. As the term of each class expires, directors in that class will be
elected by the stockholders of the Company for a term of three years and until
their successors are duly elected and qualify. Classification of the Board of
Directors is intended to assure the continuity and stability of the Company's
business strategies and policies as determined by the Board of Directors.
Holders of Common Stock will have no right to cumulative voting in the election
of directors. Consequently, at each annual meeting of stockholders, the holders
of a majority of the shares of Common Stock present in person or by proxy at
such meeting will be able to elect all of the successors of the class of
directors whose terms expire at that meeting.
The classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and difficult, which
could delay, defer, discourage or prevent an attempt by a third party to obtain
control of the Company or other transaction, even though such an attempt or
other transaction might be beneficial to the Company and its stockholders. At
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the Board of Directors. Thus, the
classified board provision could increase the likelihood that incumbent
directors will retain their positions. See "Risk Factors -- Limitation on
Acquisition and Change of Control."
REMOVAL OF DIRECTORS
The Articles of Incorporation provide that a director may be removed with
or without cause by 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 provision in the Bylaws authorizing the Board of Directors to fill
vacant directorships, could preclude stockholders from removing incumbent
directors except upon the existence of a substantial affirmative vote and by
filling the vacancies created by such removal with their own nominees upon the
affirmative vote of a majority of the votes entitled to be cast in the election
of directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Articles of Incorporation and Bylaws limit the liability of the
Company's directors and officers for money damages to the Company and its
stockholders to the fullest extent permitted from time to time by Maryland law.
Maryland law presently permits the liability of directors and officers to a
corporation or its stockholders for money damages to be limited, except (i) to
the extent that it is proved that the director or officer actually received an
improper benefit or profit, or (ii) to the extent that a judgment or other final
adjudication is entered in a proceeding based on a finding that the director's
or officer's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action, as adjudicated in the
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proceeding. This provision does not limit the ability of the Company or its
stockholders to obtain other relief, such as an injunction or rescission.
The Articles of Incorporation and Bylaws require the Company to indemnify
its directors and officers to the fullest extent permitted from time to time by
Maryland law. The Company's Articles of Incorporation and Bylaws also permit the
Company to indemnify employees, agents and other persons acting on behalf of or
at the request of the Company. The MGCL permits a corporation to indemnify its
directors, officers and certain other parties against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the Company, unless it is established
that: (i) the act or omission of the indemnified party was material to the
matter giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; (ii) the indemnified party actually
received an improper personal benefit; or (iii) in the case of any criminal
proceeding, the indemnified party had reasonable cause to believe that the act
or omission was unlawful. Indemnification may be made against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by the
director or officer in connection with the proceeding; provided, however, that
if the proceeding is one by or in the right of the Company, indemnification may
not be made with respect to any proceeding in which the director or officer has
been adjudged to be liable to the Company. In addition, a director or officer
may not be indemnified with respect to any proceeding charging improper personal
benefit to the director or officer in which the director or officer was adjudged
to be liable on the basis that the personal benefit was improperly received. The
termination of any proceeding by conviction, or upon a plea of nolo contendere
or its equivalent, or an entry of any order of probation prior to judgment,
creates a rebuttable presumption that the director or officer did not meet the
requisite standard of conduct required for indemnification to be permitted.
Indemnification under the provisions of the MGCL is not deemed exclusive to any
other rights, by indemnification or otherwise, to which an officer or director
may be entitled under the Articles of Incorporation or Bylaws, or under
resolutions of stockholders or directors, contract or otherwise. It is the
position of the Commission that indemnification of directors and officers for
liabilities arising under the Securities Act is against public policy and is
unenforceable pursuant to Section 14 of the Securities Act.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of such corporation's shares or an affiliate of such corporation
who, at any time within the two-year period prior to the date in question, was
the beneficial owner of ten percent or more of the voting power of the
then-outstanding voting shares of such corporation (an "Interested Stockholder")
or an affiliate thereof are prohibited for five years after the most recent date
on which the Interested Stockholder became an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board of
directors of such corporation and approved by the affirmative vote of at least
(a) 80% of the votes entitled to be cast by holders of outstanding voting shares
of such corporation and (b) two-thirds of the votes entitled to be cast by
holders of voting shares of such corporation other than shares held by the
Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other things, the corporation's
stockholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously paid
by the Interested Stockholder for its shares. These provisions of Maryland law
do not apply, however, to business combinations that are approved or exempted by
the board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. The Board of Directors has
exempted from these provisions of the MGCL any business combination with certain
officers and directors of the Company, including Messrs. Alter, Biederman and
Enever, and all present or future Affiliates or associates of, or any other
person acting in concert or as a group with, any of the foregoing persons and
any other business combination which may arise in connection with the Company
formation transactions generally.
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CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquiror, by officers or by directors who are
employees of the corporation. "Control Shares" are voting shares which, if
aggregated with all other such shares previously acquired by the acquiror, or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-third
(ii) one-third or more but less than a majority, or (iii) a majority or more of
all voting power. Control Shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of control shares,
subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition,
and certain limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange, if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the articles of
incorporation or bylaws of the corporation.
The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's Common Stock or Preferred Stock. There can be no assurance that such
provision will not be amended or eliminated at any time in the future.
AMENDMENTS TO THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The Articles of Incorporation may only be amended by the affirmative vote
of the holders of not less than a majority of the votes entitled to be cast on
the matter, except that any proposal (i) to permit cumulative voting in the
election of directors, (ii) to alter provisions of the Articles of Incorporation
requiring a majority of the directors to be independent directors or provisions
of the Articles of Incorporation relative to the classification of the Company's
Board of Directors into three classes, removal of directors, preemptive rights,
indemnification of corporate agents and limitation of liability of officers and
directors, or (iii) that would terminate the Company's status as a REIT for tax
purposes, may not be amended, altered, changed or repealed without the
affirmative vote of at least two-thirds of all of the votes entitled to be cast
on the matter. Subject to the right of the Company's stockholders to adopt,
alter or repeal the Bylaws, the Bylaws may be amended by the Board of Directors,
except for provisions of the Bylaws relating to the sale of a Sunstone Hotel and
transactions involving the Company in which an advisor, director or officer has
an interest, which may be altered or repealed only upon the vote of stockholders
holding at least two-thirds of the outstanding shares of Common Stock entitled
to vote generally in the election of directors.
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DISSOLUTION OF THE COMPANY
Pursuant to the Articles of Incorporation, the dissolution of the Company
must be approved and advised by the Board of Directors and approved by the
affirmative vote of the holders of a majority of all of the votes entitled to be
cast on the matter.
OPERATIONS
The Company is generally prohibited from engaging in certain activities,
including incurring consolidated indebtedness, in the aggregate, in excess of
the Debt Limitation and acquiring or holding property or engaging in any
activity that would cause the Company to fail to qualify as a REIT.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S
ARTICLES OF INCORPORATION AND BYLAWS
The provisions in the Articles of Incorporation regarding the Ownership
Limit and the classification of the Board of Directors, the business combination
provisions of the MGCL, the control shares acquisition provisions of the MGCL,
and the advance notice provisions of the Bylaws could have the effect of
delaying, deferring, discouraging or preventing a transaction or a change of
control of the Company in which holders of some, or a majority, of the capital
stock of the Company might receive a premium for their shares over the then
prevailing market price or which such holders might believe to be otherwise in
their best interest.
OTHER MATTERS
The shares of Common Stock are currently listed for quotation on the Nasdaq
National Market under the symbol "SSHI." The Company has applied for approval to
list its Common Stock on the New York Stock Exchange under the symbol "SSI" and
expects to receive approval from the New York Stock Exchange prior to the
closing of the Offering.
The transfer agent and registrar for the Company's Common Stock is Chase
Mellon Shareholder Services.
SHARES AVAILABLE FOR FUTURE SALE
Upon the closing of the Offering, the Company will have outstanding or
reserved for issuance upon redemption of Units or pursuant to the 1994 Plan or
Directors Plan approximately 13,080,800 shares of Common Stock. In addition to
Units issued to the Company, the Partnership has outstanding an aggregate of
1,458,800 Units. The Common Stock issued in the Offering 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 Company's Articles of Incorporation. See "Description of Capital Stock --
Restrictions on Ownership."
Pursuant to the Partnership Agreement, the Limited Partners will receive
the Redemption Rights, which will enable them to cause the Partnership to redeem
their Units in exchange for shares of Common Stock 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 9.8%
of the shares of Common Stock). The Redemption Rights may be exercised by the
Limited Partners at any time after August 16, 1996 (except with respect to
Messrs. Alter, Biederman and Enever who are subject to lock-up agreements for
120 days after the date of the Offering), in whole or in part, provided that the
Redemption Rights granted to one limited partner are not subject to this
redemption restriction. Any amendment to the Partnership Agreement that would
(i) affect the Redemption Rights, (ii) adversely affect the Limited Partners'
rights to receive cash distributions, (iii) alter the Partnership's allocations
of income or (iv) impose on the Limited Partners any obligations to make
additional contributions to the capital of the Partnership, would require the
consent of Limited Partners holding more than two-thirds of the Units held by
Limited Partners (other than the Company as a Limited Partner).
Shares of Common Stock issued to holders of Units upon exercise of the
Redemption Rights and shares issued pursuant to the 1994 Plan and the Directors
Plan 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
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contained in Rule 144. As described below, the Company has granted certain
holders registration rights with respect to their shares of Common Stock.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of restricted shares from the
Company or any "Affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1.0% of the then outstanding shares of Common Stock or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 also are subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. If three years have elapsed since the date of acquisition of restricted
shares from the Company or from any Affiliate of the Company, and, the acquiror
or subsequent holder thereof is deemed not to have been an Affiliate of the
Company at any time during the three months preceding a sale, such person would
be entitled to sell such shares in the public market under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
The Company has agreed to file, on or before December 31, 1996, a
registration statement with the Commission for the purpose of registering the
sale of shares of up to approximately 1,458,800 shares of Common Stock issuable
to holders of Units upon redemption thereof. The Company will 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 such registration requirements, except that such expenses
shall not include any underwriting discounts or commissions, 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 elect to receive, in lieu of cash, shares of
Common Stock, Units, or other securities convertible into shares of Common
Stock.
For a description of certain restrictions on transfers of Common Stock held
by certain stockholders of the Company, see "Underwriting."
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 Delaware limited partnership
pursuant to the terms of the Partnership Agreement. Pursuant to the Partnership
Agreement, the Company, as the sole general partner of the Partnership, will
have full, exclusive and complete responsibility and discretion in the
management and control of the Partnership, and the Limited Partners will have no
authority in their capacity as Limited Partners to transact business for, or
participate in the management activities or decisions of, the Partnership except
as required by applicable law. However, any amendment to the Partnership
Agreement that would (i) affect the Redemption Rights, (ii) adversely affect the
Limited Partners' rights to receive cash distributions, (iii) alter the
Partnership's allocations of income or loss, or (iv) impose on the Limited
Partners any obligations to make additional contributions to the capital of the
Partnership, would require the consent of Limited Partners (other than the
Company as a Limited Partner) holding more than two-thirds of the Units held by
such partners.
TRANSFERABILITY OF INTERESTS
The Company may not voluntarily withdraw from the Partnership or transfer
or assign its interest in the Partnership unless 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 unless 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,
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without the written consent of the Company, which 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 the net proceeds of the
Offering in exchange for approximately 4,800,000 Units. After such Unit
issuance, the Limited Partners will have a 88.3% interest in the Partnership.
Although the Partnership will receive the net proceeds of the Offering, the
Company will be deemed to have made a capital contribution to the Partnership in
the amount of the gross proceeds of the Offering and the Partnership will be
deemed simultaneously to have paid the underwriter's discount and other expenses
paid or incurred in connection with the Offering. 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.
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. Under the Partnership Agreement, the Company
generally is obligated to contribute the proceeds of a share offering as
additional capital to the Partnership. Upon such contribution, 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. 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 received
the Redemption Rights, which will enable them to cause the Partnership to redeem
their interests in the Partnership in exchange for cash at the election of the
Company. At the election of the Company, the Company may purchase the Units for
either cash or shares of Common Stock. The redemption price will be paid in cash
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 Limit, (ii) result in the
Common 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 capital stock for
purposes of complying with the Securities Act. The Redemption Rights may be
exercised by the Limited Partners at any time after one year following the
closing of the IPO (other than the immediate Redemption Rights of one Limited
Partner), provided that not more than two redemptions may occur during each
calendar year and each Limited Partner may not exercise the Redemption Right for
less than 500 Units or, if such Limited Partner holds less than 500 Units, all
of the Units held by such Limited Partner. The aggregate number of shares of
Common Stock issuable upon exercise of the Redemption Rights, excluding shares
of Common Stock issuable upon redemption of Units issuable upon exercise of
warrants to be issued to Messrs. Alter, Biederman and Enever and MRC, is
1,458,800. 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 the ownership interests of the Limited Partners or
the stockholders of the Company.
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REGISTRATION RIGHTS
For a description of certain registration rights held by the Limited
Partners, see "Shares Available for Future Sale."
OPERATIONS
The Partnership Agreement requires that the Partnership be operated in a
manner that will enable the Company to satisfy the requirements for being
classified as a REIT, to avoid any federal income or excise tax liability
imposed by the Code, and to ensure that the Partnership will not be classified
as a "publicly traded partnership" for purposes of Section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Partnership, the Partnership will pay all administrative costs and
expenses of the Company (the "Company Expenses") and the Company Expenses will
be treated as expenses of the Partnership. The Company Expenses generally will
include (i) all expenses relating to the formation and continuity of existence
of the Company, (ii) all expenses relating to the public offering and
registration of securities of 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, will not include any administrative and operating costs and
expenses incurred by the Company that are attributable to hotel properties owned
by the Company directly. The Company currently does not have any such
properties.
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
will be allocated among the partners in accordance with their respective
interests in the Partnership, subject to compliance with the provisions of Code
Section 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 limited partnership interests in the Partnership
(other than those held by the Company, if any), or (iv) the election by the
General Partner.
TAX MATTERS
Pursuant to the Partnership Agreement, the Company will be 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.
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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 in the Company.
Brobeck, Phleger & Harrison LLP has acted as counsel to the Company and has
reviewed this summary and is of the opinion that it fairly summarizes the
federal income tax considerations that are likely to be material to a holder of
the Common Stock. The discussion contained herein does not address all aspects
of taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
(including insurance companies, tax-exempt organizations, financial institutions
or broker-dealers, 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 opinions of Brobeck, Phleger &
Harrison LLP as to tax consequences expressed herein are based on current
provisions of the Code, existing, temporary, and currently proposed Treasury
Regulations promulgated under the Code, the legislative history of the Code,
existing administrative rulings and practices of the Service, and judicial
decisions. No assurance can be given that future legislative, judicial, or
administrative actions or decisions, which may be retroactive in effect, will
not affect the accuracy of any statements in this Prospectus with respect to the
transactions entered into or contemplated prior to the effective date of such
changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE 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.
SUMMARY OF TAX OPINIONS
Brobeck, Phleger & Harrison LLP will provide the Company with an opinion
letter addressing certain federal tax consequences material to the purchase,
ownership and disposition of the Common Stock. The specific opinions that
Brobeck, Phleger & Harrison LLP will provide are:
1. The description of law and legal conclusions herein under the
heading "Federal Income Tax Considerations," are correct in all material
respects, and the discussion fairly summarizes the federal income tax
considerations that are material to a holder of Common Stock.
2. The Partnership will be treated as a partnership for federal income
tax purposes and not as an association taxable as a corporation.
3. Commencing with the inception of its taxable year ended December
31, 1995, the Company has been organized and operated in conformity with
the requirements for qualification as a REIT under the Code, and the
Company's organization and contemplated method of operation will enable it
to continue to meet the requirements for qualification and taxation as a
REIT under the Code in 1996 and subsequent years.
The opinions to be rendered by Brobeck, Phleger & Harrison LLP are based on
the Code and Treasury Regulations thereunder currently in effect, current
administrative interpretations and positions of the Service, and existing court
decisions. No assurance can be given that future legislation, Treasury
Regulations, administrative interpretations and court decisions will not
significantly change the law or the conclusions reached by counsel. Any such
change could apply retroactively to transactions preceding the date of change.
Accordingly, no assurance can be provided that such opinions (which do not bind
the Service or the courts) will not be challenged by the Service or will be
sustained by a court if so challenged. In addition, counsel is relying on
certain representations of the Company and the Partnership in rendering its
opinions. To the extent any representations upon which counsel is relying in
rendering its opinion are incorrect, counsel's opinion as to the tax
consequences could be altered. Counsel has not rendered any opinions as to the
tax consequences of an
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investment in or the taxation of the Company or the Partnership except as
specifically stated herein. See "Risk Factors -- Tax Risks."
TAXATION OF THE COMPANY
The Company plans to make an election to be taxed as a REIT under Sections
856 through 860 of the Code, effective for its taxable year ended on December
31, 1995. 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. However, no assurance can be given that the Company will operate in a
manner so as to remain qualified as a REIT. See "Risk Factors -- Tax Risks."
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 stockholders. 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.
Brobeck, Phleger & Harrison LLP has acted as counsel to the Company in
connection with the Offering and the Company's election to be taxed as a REIT.
In the opinion of Brobeck, Phleger & Harrison LLP, commencing with the inception
of the Company's taxable year ended December 31, 1995, the Company has been
organized and operated in conformity with the requirements for qualification as
a REIT under the Code, and its organization and contemplated method of operation
will enable it to continue to meet the requirements for qualification and
taxation as a REIT under the Code in 1996 and subsequent years. Investors should
be aware, however, that opinions of counsel are not binding upon the Service or
any court. It must be emphasized that Brobeck, Phleger & Harrison LLP's 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 and income during 1995 and subsequently
and the future conduct of its business. Such factual assumptions and
representations are described below in this discussion of "Federal Income Tax
Considerations" and are set out in the federal income tax opinion that will be
delivered by Brobeck, Phleger & Harrison LLP at the closing of the Offering.
Moreover, such qualification and taxation as a REIT depends 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. Brobeck, Phleger & Harrison LLP 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 1996 and subsequent taxable years 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" and "Risk
Factors -- Tax Risks."
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 stockholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and stockholder levels)
that generally results from 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 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 net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test. Sixth,
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if the Company should fail to distribute during each calendar year at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax on
the excess of such required distribution over the amounts actually distributed.
Seventh, if the Company acquires any asset from a C corporation (i.e., a
corporation generally subject to full corporate-level tax) in a transaction in
which the basis of the asset in the Company's hands is determined by reference
to the basis of the asset (or any other asset) in the hands of the C corporation
and the Company recognizes gain on the disposition of such asset during the
10-year period beginning on the date on which such asset was acquired by the
Company, then to the extent of such asset's "built-in-gain" (i.e., the excess of
the fair market value of such asset at the time of acquisition by the Company
over the adjusted basis in such asset at such time), such gain will be subject
to tax at the highest regular corporate rate applicable (as provided in Treasury
Regulations that have not yet been promulgated). The results described above
with respect to the recognition of "built-in-gain" assume that the Company would
make an election pursuant to IRS Notice 88-19 if it were to make any such
acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for Sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and to maintain REIT status; (viii) that uses a calendar year for
federal income tax purposes and complies with the recordkeeping requirements of
the Code and Treasury Regulations promulgated thereunder; and (ix) that meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months. Conditions (v) and (vi) will not apply
until after the first taxable year for which an election is made by the Company
to be taxed as a REIT. The Company anticipates issuing sufficient Common Stock
with sufficient diversity of ownership pursuant to the Offering to allow it to
satisfy requirements (v) and (vi). In addition, the Company's Articles of
Incorporation will provide for restrictions regarding transfer of the Common
Stock that are intended to assist the Company in continuing to satisfy the share
ownership requirements described in (v) and (vi) above. Such transfer
restrictions are described in "Description of Capital Shares -- Restrictions on
Ownership."
For purposes of determining stock 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
qualified as a trust under Code Section 401(a) is not considered an individual
and beneficiaries of such trust are treated as holding shares of a REIT in
proportion to their actuarial interests in such trust for purposes of the 5/50
Rule.
The Company has not had and does not currently have any subsidiaries, nor
will it have any subsidiaries immediately after closing of the Offering,
although it may have 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
has been held by the REIT at all times during the period such corporation was in
existence. 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.
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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 as in the partnership for purposes of Section 856 of the Code,
including satisfying the gross income and asset tests, described below. Thus,
assuming the Partnership is classified as a partnership rather than as a
corporation for tax purposes, the Company's proportionate share of the assets,
liabilities and items of income of the Partnership will be treated as assets and
gross income of the Company for purposes of applying the requirements described
herein.
Income Tests
In order for the Company to maintain its qualification as a REIT, there are
three 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. Third, not more that 30% of the Company's
gross income (including gross income from prohibited transactions) for each
taxable year may be gain from the sale or other disposition of (i) stock or
securities held for less than one year, (ii) dealer property that is not
foreclosure property, and (iii) certain real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property).
The specific application of these tests to the Company is discussed below.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the Company,
or an owner of 10% or more of the Company, directly or constructively owns 10%
or more of such tenant (a "Related Party Tenant"). Third, if rent attributable
to personal property leased in connection with a lease of real property is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property." Finally, for rents received to qualify as "rents from real property,"
the Company generally must not operate or manage the property or furnish or
render services to the tenants of such property, other than through an
"independent contractor" who is adequately compensated and from whom the Company
derives no revenue. The "independent contractor" requirement, however, does not
apply to the extent the services provided by the Company are "usually or
customarily rendered" in connection with the rental of space for occupancy only
and are not otherwise considered "rendered to the occupant."
Pursuant to the Percentage Leases, the Lessee will lease from the
Partnership the land, buildings, improvements, furnishings and equipment
comprising the Current Hotels for a 10-year period. The Percentage Leases
provide that the Lessee will be obligated to pay to the Partnership (i) the
greater of the Base Rent or the Percentage Rent (collectively, the "Rents") and
(ii) certain other Additional Charges. The Percentage Rent is calculated by
multiplying fixed percentages by the revenues for each of the Current Hotels in
excess of certain levels. Both the Base Rent and the threshold room revenue
amount in each Percentage Rent formula will be adjusted for inflation. The
adjustment will be calculated at the beginning of each calendar year based on
the change in the CPI during the prior calendar year. The Base Rent accrues and
is required to be paid monthly and the Percentage Rent (if any) accrues and is
required to be paid quarterly.
In order for the Base Rent, the Percentage Rent and the Additional Charges
to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In
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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, which is indicative of a lease, or whether the lessee
was required simply to use its best efforts to perform its obligations under the
agreement, which is indicative of a service contract), (iv) the extent to which
the property owner retains the ultimate benefits and burdens of ownership, and
(v) the extent to which the lessee rather than the property owner bears the risk
of increases in operating expenses and damage to the property during the term of
the lease (and has the benefits of a decrease in operating expenses) 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.
Brobeck, Phleger & Harrison LLP is of the opinion that the Percentage
Leases will be treated as true leases for federal income tax purposes. Such
opinion 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 will be documented by lease agreements, (ii) the Lessee will have
the right to exclusive possession and use and quiet enjoyment of the Current
Hotels during the term of the Percentage Leases, (iii) the Lessee will bear the
cost of, and be responsible for, day-to-day maintenance and repair of the
Current Hotels and the acquired Acquisition Hotel, other than the cost of
certain capital expenditures and will dictate how the Current Hotels and the
acquired Acquisition Hotel are operated, maintained and improved, (iv) the
Lessee will bear all of the costs and expenses of operating the Current Hotels
and the acquired Acquisition Hotel (including the cost of any inventory used in
their operation) during the term of the Percentage Leases (other than real and
personal property taxes, insurance (other than workers' compensation insurance)
and the cost of repairing, replacing or refurbishing furniture, fixtures and
equipment, to the extent such costs do not exceed the amounts to be made
available to the Lessee for such costs by the Partnership under each Percentage
Lease), (v) the Lessee will benefit from any savings in the costs of operating
the Current Hotels during the term of the Percentage Leases, (vi) in the event
of damage or destruction to a Current Hotel and the acquired Acquisition Hotel,
the Lessee will be at economic risk because it will be 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 Current Hotel and the acquired Acquisition Hotel for an amount generally
equal to the fair market value of the Property, less any insurance proceeds,
(vii) the Lessee will indemnify 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 Current Hotels and the
acquired Acquisition Hotel or (B) the Lessee's use, management, maintenance or
repair of the Current Hotels and the acquired Acquisition Hotel, and (viii) the
Lessee will be obligated to pay substantial fixed rent for the period of use of
the Current Hotels, and (ix) the Lessee stands to incur substantial losses (or
reap substantial gains) depending on how successfully it operates the Current
Hotels and the acquired Acquisition Hotel.
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. Therefore, the
opinion of Brobeck,
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Phleger & Harrison LLP with respect to the relationship between the Partnership
and the Lessee is based upon all of the facts and circumstances and upon
administrative pronouncements and judicial decisions involving situations that
are considered to be analogous. Opinions of counsel are not binding upon the
Service or any court, and there can be no assurance that the Service will not
assert successfully a contrary position. 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 would not be considered rent or would not otherwise satisfy the various
requirements for qualification as "rents from real property." In that case, the
Company would not be able to satisfy either the 75% or 95% gross income tests
and, as a result, would lose its REIT status.
As stated above, in order for the Rents to constitute "rents from real
property," the Rents attributable to personal property leased in connection with
the lease of the real properties comprising a Current Hotel must not be greater
than 15% of the Rents received under the Percentage Lease. The portion of the
Rents attributable to the personal property in a Current Hotel or acquired
Acquisition Hotel is the amount that bears the same ratio to total Rent for the
taxable year as the average of the adjusted bases of the personal property in
the Current Hotel at the beginning and at the end of the taxable year bears to
the average of the aggregate adjusted bases of both the real and personal
property comprising the Current Hotel or the acquired Acquisition Hotel at the
beginning and at the end of such taxable year (the "Adjusted Basis Ratio"). With
respect to each Current Hotel or acquired Acquisition Hotel, the Company has
determined that the adjusted tax bases of the personal property in such Current
Hotel has, at all times while the Partnership has owned such Current Hotel or
acquired Acquisition Hotel, been less than 15% of the adjusted tax bases of both
the real and personal property comprising such Current Hotel. The Partnership
has represented that in no event will it acquire additional personal property
for any Hotel to the extent that such acquisition would cause the adjusted tax
bases of such personal property to exceed 15% of the total adjusted tax bases of
the real and personal property comprising such Hotel. There can be no firm
assurance, however, that the Company will not fail the 15% adjusted basis ratio
test described above as to one or more of the Percentage Leases, which in turn
potentially could cause it 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 Current Hotels and acquired
Acquisition Hotel 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 on the income or
profits of any person (except by reason of being based on a fixed percentage of
gross revenues, as described above). In the event that any of the foregoing
representations of the Company are inaccurate, the Company could fail or cease
to qualify as a REIT.
A third requirement for qualification of the Rents as "rents from real
property" is that the Company must not own, directly or constructively, 10% or
more of the Lessee. The constructive ownership rules generally provide that, if
10% or more in value of the shares of the Company are owned, directly or
indirectly, by or for any person, the Company is considered as owning the shares
of the Lessee owned, directly or indirectly, by or for such person. The Company
has represented that it has not and will not at any time directly or indirectly
own any stock of the Lessee. However, because Mr. Alter is the sole stockholder
of the Lessee, the Company would be deemed to own all of the stock of the Lessee
if Mr. Alter at any time owns, directly, indirectly or
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constructively, 10% or more of the shares of Common Stock. Mr. Alter owns 12,300
Units which he acquired prior to the Offering and may acquire shares of Common
Stock by exercising his Redemption Rights with respect to such Units and to the
552,271 Units which he will beneficially own upon the Closing) and will
constructively own any shares of Common Stock that he has an option to acquire.
The Partnership Agreement provides that a redeeming Limited Partner will receive
cash, rather than shares of Common Stock, at the election of the Company or if
the acquisition of shares of Common Stock by such partner would result in such
partner or any other person owning, directly or constructively, more than 9.8%
of the Company for purposes of the Related Party Tenant rule. Thus, Mr. Alter
will never be entitled to acquire a 10% interest in the Company, and the Company
should never own, directly 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.
A fourth requirement for qualification of the Rents as "rents from real
property" is that the Company cannot furnish or render noncustomary services to
the Lessee (or tenants of the Current Hotels or acquired Acquisition Hotel), or
manage or operate the Current Hotels or acquired Acquisition Hotel or any leased
properties, other than through an independent contractor who is adequately
compensated and from whom the Company itself does not derive or receive any
income. Provided that the Percentage Leases are respected as true leases, the
Company should satisfy that requirement because neither the Company nor the
Partnership will be performing any services other than customary ones for the
Lessee. The Company has also 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 and will not be managing or operating the
Current Hotels or such other hotels. As described above, 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 nonqualifying services to the
occupants of the Current Hotels or acquired Acquisition Hotel and to manage or
operate the Current Hotels or acquired Acquisition Hotel 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
tests. The Company would lose its REIT status in this event only if the Rents
attributable to personal property (plus any other nonqualifying income) during a
taxable year exceed 5% of the Company's gross income during the year. 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, directly or constructively, 10% or more of the Lessee, or
(iii) the Company furnishes noncustomary services to the tenants of the Current
Hotels or acquired Acquisition Hotel, or manages or operates the Current Hotels
or acquired Acquisition Hotel, other than through a qualifying independent
contractor, none of the Rents would qualify as "rents from real property." In
that case, the Company would lose its REIT status because it would be unable to
satisfy either the 75% or 95% gross income tests.
In addition to the Rents, the Lessee is required to pay to the Partnership
the Additional Charges. To the extent that the Additional Charges represent
either (i) reimbursements of amounts paid by the Partnership to third parties
that the Lessee is obligated to bear 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.
Based on the foregoing discussion and subject to the limitations described
therein, Brobeck, Phleger & Harrison LLP is of the opinion that the Rents and
the Additional Charges will qualify as "rents from real property" for purposes
of the 75% and 95% gross income tests, except to the extent that the Additional
Charges represent interest that is accrued on the late payment of the Rents or
the Additional Charges (which will be qualifying gross income for the 95% test
but not the 75% test). As described above, the opinion of Brobeck, Phleger &
Harrison LLP is based upon an analysis of all the facts and circumstances and
upon
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rulings and judicial decisions involving situations that are considered to be
analogous, as well as representations by the Company and assumptions that are
described above and set out in the federal income tax opinion of Brobeck,
Phleger & Harrison LLP. Opinions of counsel are not binding upon the Service or
a court. Accordingly, there can be no assurance that the Service will not assert
successfully a contrary position and, therefore, prevent the Company from
qualifying as a REIT.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that 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. The Company and the Partnership believe
that no asset owned by the Company or the Partnership will be held for sale to
customers 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 from
time to time. 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 qualified
income under the 75% gross income test), less expenses directly connected with
the production of such income. However, gross income from such foreclosure
property will qualify under the 75% and 95% gross income tests. "Foreclosure
property" is defined as any real property (including interests in real property)
and any personal property incident to such real property (i) that is acquired by
a REIT as the result of such REIT having bid on 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 date that is two years after
the date such REIT acquired such property (or longer if an extension is granted
by the Secretary of the Treasury). The foregoing grace period is terminated and
foreclosure property ceases to be foreclosure property on the first day (i) on
which a lease is entered into with respect to such property that, by its terms,
will give rise to income that does not qualify under the 75% gross income test
or any amount is received or accrued, directly or indirectly, pursuant to a
lease entered into on or after such day that will give rise to income that does
not qualify under the 75% gross income test, (ii) on which any construction
takes place on such property (other than completion of a building, or any other
improvement, where more than 10% of the construction of such building or other
improvement was completed before default became imminent), or (iii) which is
more than 90 days after the day on which such property was acquired by the REIT
and the property is used in a trade or business that is conducted by the REIT
(other than through an independent contractor from whom the REIT itself does not
derive or receive any income). As a result of the rules with respect to
foreclosure property, if 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 qualifying 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 to hedge any
variable rate indebtedness incurred to acquire or carry real estate assets, any
periodic
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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.
Furthermore, any such contract would be considered a "security" for purposes of
applying the 30% 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 will be generally 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 these 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 amount by which it fails the 75% or 95% gross income tests.
No such relief is available for violations of the 30% income test.
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
stock of a qualified REIT subsidiary).
For purposes of the asset requirements, the Company will be deemed to own
its proportionate share of the assets of the Partnership, rather than its
partnership interest in the Partnership, assuming that the Partnership is
treated as a partnership and not as a corporation for tax purposes. The Company
has represented that at all times since the commencement of its short taxable
year ended December 31, 1995, (i) at least 75% of the value of its total assets
were represented by assets qualifying under the 75% asset test, and (ii) it has
not owned any securities that do not satisfy the 75% asset test. The Company has
represented that it has not and will not acquire or dispose, or cause the
Partnership to acquire or dispose, of assets during 1995, 1996 or in later years
in a way that would cause it to violate the asset tests for REIT status. Based
on the foregoing, Brobeck, Phleger & Harrison LLP is of the opinion that the
Company has and will satisfy the asset tests for REIT status.
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 requirements either did not exist immediately after the acquisition of
any particular asset or was not wholly or partly caused by such an acquisition
(i.e., the discrepancy arose from changes in the market values of its 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.
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Distribution Requirements
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders 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 after such declaration. To
the extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular ordinary and capital
gains corporate tax rates. Furthermore, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain income for such year,
and (iii) any undistributed taxable income from prior periods, the Company would
be subject to a 4% nondeductible excise tax on the excess of such required
distribution over the amounts actually distributed. The Company has represented
that, for its taxable year ended December 31, 1995, the Company made
distributions sufficient to satisfy the foregoing distribution requirements.
Furthermore, the Company intends in the future 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 inclusion of that
income in REIT taxable income and (ii) the actual payment of expenses and the
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 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 stockholders 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, in order to qualify as a REIT,
the Company must maintain certain records and request on an annual basis certain
information from its stockholders designed to disclose the actual ownership of
its outstanding shares. The Company has represented that it complied with these
requirements on a timely basis for its taxable year ended December 31, 1995 and
intends to comply with such requirements in the future. Brobeck, Phleger &
Harrison LLP's opinion as to the Company's status as a REIT assumes that the
Company has complied and will at all times comply with such requirements.
Counsel will not, however, monitor such compliance by the Company.
Anti-Abuse Regulations
The United States Treasury Department recently issued regulations that
authorize 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 Regulations"). The Anti-Abuse
Regulations would apply where a partnership is formed or utilized in connection
with a transaction (or series of related
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transactions) with a principal purpose of substantially reducing the present
value of the partners' aggregate federal tax liability in a manner inconsistent
with the intent of the partnership provisions of the Code.
Prior to the issuance of the Anti-Abuse Regulations, officials at the
Service and the Treasury Department stated publicly that the Anti-Abuse
Regulations are not intended to affect a corporation, such as the Company, that
owns an interest in a partnership and is seeking to qualify as a REIT. The
Anti-Abuse Regulations contain 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 partner 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 of the Code and, thus, cannot be recast by the
Service. Based on the foregoing, Brobeck, Phleger & Harrison LLP is of the
opinion that the Anti-Abuse Regulations will not have any adverse impact on the
Company's ability to qualify as a REIT. However, because the Anti-Abuse
Regulations are extremely broad in scope and would be applied based on an
analysis of all of the facts and circumstances, counsel can give no assurance
that the Service will not attempt to apply the Anti-Abuse Regulations to the
Company.
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 stockholders 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 stockholders 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. STOCKHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. stockholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. stockholder" means a holder of shares of Common
Stock 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, or (iii) an estate or trust the income of which is subject
to U.S. federal income taxation regardless of its source. 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 stockholder has held
his shares of Common Stock. However, corporate stockholders may be required to
treat up to 20% of certain capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits will not
be taxable to a stockholder to the extent that they do not exceed the adjusted
basis of the stockholder's 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 stockholder's
Common Stock, 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 stockholder. In addition, any distribution declared by the
Company in October, November, or December of any year and payable to a
stockholder of
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record on a specified date in any such month shall be treated as both paid by
the Company and received by the stockholder on December 31 of such year,
provided that the distribution is actually paid by the Company during January of
the following calendar year.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, stockholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which the stockholder 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 stockholders 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 STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a stockholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the shares of Common Stock have been held
for more than one year and otherwise as short-term capital gain or loss.
However, any loss upon a sale or exchange of shares of Common Stock by a
stockholder 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
stockholder as long-term capital gain. All or a portion of any loss realized
upon a taxable disposition of the shares of Common Stock may be disallowed if
the shares of Common Stock are purchased within 30 days before or after the
disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal income tax rate on ordinary income of
individuals is 39.6%, whereas the highest rate applicable to net capital gains
of individuals is 28%. 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 deduction of
$3,000. Unused capital losses may be carried forward. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate rates. A corporate
taxpayer can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. stockholders 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 stockholder 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 stockholder 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 stockholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any stockholders
who fail to certify their nonforeign status to the Company. See "Federal Income
Tax Considerations -- Taxation of Non-U.S. Stockholders."
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TAXATION OF TAX-EXEMPT STOCKHOLDERS
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.
Thus, amounts distributed by the Company to Exempt Organizations generally
should not constitute UBTI. However, if an Exempt Organization finances its
acquisition of the 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 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 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 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 or (B) a group of pension trusts
individually holding more than 10% of the value of the Company's shares
collectively own more than 50% of the value of the Company's shares.
While an investment in the Company by an Exempt Organization generally is
not expected to result in UBTI except in the circumstances described in the
preceding paragraph, any UBTI that does arise from such an investment will be
combined with all other UBTI of the Exempt Organization for a taxable year. Any
net UBTI will be subject to tax. If the gross income taken into account in
computing UBTI exceeds $1,000, the Exempt Organization is obligated to file a
tax return for such year on IRS Form 990-T. Neither the Company, the Board of
Directors, nor any of their Affiliates expects to undertake the preparation or
filing of IRS Form 990-T for any Exempt Organization in connection with an
investment by such Exempt Organization in the Common Stock.
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. STOCKHOLDERS 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.
Distributions to Non-U.S. Stockholders 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 will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Stock is treated as
effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or
business, the Non-U.S. Stockholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. stockholders 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. Stockholder 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. Stockholder unless (i) a
lower treaty
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rate applies and any required form evidencing eligibility for that reduced rate
is filed with the Company or (ii) the Non-U.S. Stockholder files an IRS Form
4224 with the Company claiming that the distribution is effectively connected
income. Distributions in excess of current and accumulated earnings and profits
of the Company will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's 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. Stockholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Stockholder would
otherwise be subject to tax on any gain from the sale or disposition of his
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
current and accumulated earnings and profits of the Company.
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. Stockholder 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. Stockholder as if such gain were effectively
connected with a U.S. business. Non-U.S. Stockholders thus would be taxed at the
normal capital gain rates applicable to U.S. stockholders (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
stockholder not entitled to treaty relief or exemption. The Company is required
by currently applicable Treasury Regulations 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. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of his 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. It is currently anticipated that the Company
will be a "domestically controlled REIT" and, therefore, the sale of the Common
Stock will not be subject to taxation under FIRPTA. However, because the Common
Stock will be publicly traded, no assurance can be given that the Company will
continue to be a "domestically controlled REIT." Furthermore, gain not subject
to FIRPTA will be taxable to a Non-U.S. Stockholder if (i) investment in the
Common Stock is effectively connected with the Non-U.S. Stockholder's U.S. trade
or business, in which case the Non-U.S. Stockholder will be subject to the same
treatment as U.S. stockholders with respect to such gain, or (ii) the Non-U.S.
Stockholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and certain other conditions
apply, in which case the nonresident alien individual will be subject to a 30%
tax on the individual's capital gains. If the gain on the sale of the shares of
Common Stock were to be subject to taxation under FIRPTA, the Non-U.S.
Stockholder would be subject to the same treatment as U.S. stockholders 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 foreign
corporations). IN ADDITION, NON-U.S. STOCKHOLDERS SHOULD BE AWARE THAT
LEGISLATIVE PROPOSALS HAVE BEEN MADE TO SUBJECT FOREIGN PERSONS TO U.S. TAX IN
CERTAIN CIRCUMSTANCES ON THEIR GAINS FROM THE SALE OF STOCK IN U.S.
CORPORATIONS. THERE CAN BE NO ASSURANCE THAT SUCH A PROPOSAL WILL NOT BE ENACTED
INTO LAW IN A FORM DETRIMENTAL TO FOREIGN HOLDERS OF THE COMMON STOCK.
OTHER TAX CONSEQUENCES
The Company, the Partnership, or the Company's stockholders 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
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reside. The state and local tax treatment of the Company and its stockholders
may not conform to the federal income tax consequences discussed above.
CONSEQUENTLY, PROSPECTIVE STOCKHOLDERS 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
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the 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 the Partnership's income and to deduct its distributive share of the
Partnership's losses only if the Partnership is classified for federal income
tax purposes as a partnership rather than as association taxable as a
corporation. An organization formed as a partnership will be treated as a
partnership, rather than as a corporation, for federal income tax purposes if
(i) it has no more than two of the four corporate characteristics that the
Treasury Regulations use to distinguish a partnership from a corporation for tax
purposes (continuity of life, centralization of management, limited liability,
and free transferability of interests); and (ii) it is not treated as a
corporation by virtue of being classified as a "publicly traded partnership."
The Partnership will not request a ruling from the Service that it will be
classified as a partnership for federal income tax purposes. Instead, at the
Closing, Brobeck, Phleger & Harrison LLP will deliver its opinion that, based on
the provisions of the Partnership Agreement, certain factual assumptions and
certain representations described in the opinion, the Partnership will be
treated for federal income tax purposes as a partnership and not as an
association taxable as a corporation. 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 the Partnership as a partnership for federal
income tax purposes. If such challenge were sustained by a court, the
Partnership would be treated as a corporation for federal income tax purposes,
as described below. In addition, the opinion of Brobeck, Phleger & Harrison LLP
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.
Under Section 7704 of the Code, a partnership is treated as a corporation
for federal income tax purposes if it is a "publicly traded partnership" (except
in situations in which 90% or more of the partnership's gross income is of a
specified type). A partnership is deemed to be publicly traded if its interests
are either (i) traded on an established securities market, or (ii) readily
tradable on a secondary market (or the substantial equivalent thereof). While
the Partnership Units will not be traded on an established securities market,
they could possibly be deemed to be traded on a secondary market or its
equivalent due to the redemption rights enabling the partners to dispose of
their Units.
The Treasury Department recently issued regulations (the "PTP Regulations")
governing the classification of partnerships under Section 7704. These
regulations provide that the classification of partnerships is generally based
on a facts and circumstances analysis. However, the regulations also provide
limited "safe harbors" which preclude publicly traded partnership status.
Pursuant to one of those safe harbors, 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 (the "1933 Act"), 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 for this purpose, a person owning an
interest in a flowthrough 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 (x) substantially all of the value of the person's
interest in the flow-through entity is attributable to the flow-through entity's
interest (direct or indirect) in the partnership and (y) a principal purpose of
the use of the tiered arrangement is to permit the partnership to satisfy the
100-partner limitation. Furthermore, pursuant to
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Notice 88-75 issued by the Internal Revenue Service, through the year 2005, an
existing partnership may qualify for non-publicly traded status if it has less
than 500 partners (looking through to the ultimate owners in the case of
flow-through entities), does not issue any Units registered under the 1933 Act
and does not enter into a substantial new line of business.
The Partnership currently has less than 100 actual partners and less than
500 partners calculated on a "lookthrough" basis. The Partnership has not issued
any Units required to be registered under the 1933 Act. Thus, the Partnership
presently qualifies for the safe harbors provided in Notice 88-75 and the PTP
Regulations. However, there is no assurance that the Partnership will at all
times in the future be able to avoid treatment as a publicly traded partnership.
Even if the Partnership were ever to be classified as a publicly traded
partnership, it would nevertheless be treated as a partnership for federal
income tax purposes (rather than an association taxable as a corporation) if at
least 90% of its gross income in each taxable year (commencing with the year in
which it is treated as a publicly traded partnership) consists of "qualifying
income" within the meaning of Section 7704(c)(2) of the Code (including
interest, dividends, "real property rents" and gains from the disposition of
real property). The Partnership has represented that, if in any taxable year the
Partnership falls outside of an applicable safe harbor from publicly traded
partnership status, it will satisfy the gross income test set forth in Section
7704(c)(2) of the Code in that taxable year and each subsequent taxable year.
Among other things, this will require that Mr. Alter (or any other shareholder
of the Lessee who owns at least 10% of the stock of the Lessee) own less than a
5% interest in the Partnership in the particular taxable year. Mr. Alter
currently owns more than a 5% interest in the Partnership, but anticipates a
reduction to less than 5% by reason of the Offering. The opinion of Brobeck,
Phleger & Harrison LLP as to the classification of the Partnership is based on
an assumption that the Partnership will either (i) continue to fall within a
safe harbor from publicly traded partnership status, or (ii) if the Partnership
is ever treated as a publicly traded partnership, it will satisfy the qualifying
income test of Section 7704(c)(2) of the Code in the taxable year in which such
treatment commences and all years thereafter.
If for any reason the Partnership was taxable as a corporation, rather than
as a partnership, for federal income tax purposes, the Company would not be able
to satisfy the income and asset requirements for REIT status. Thus the Company
would be subject to tax as a regular corporation and would not receive a
deduction for dividends paid to its stockholders. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Income Tests" and
"Requirements for Qualification -- Asset Tests." In addition, any change in the
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. Further, items of income and deduction of the Partnership would
not pass through to its partners, and its partners would be treated as
stockholders for tax purposes. Consequently, the Partnership would be required
to pay income tax at corporate tax rates on its net income, and distributions to
its partners would constitute dividends that would not be deductible in
computing the Partnership's taxable income.
The following discussion assumes that the Partnership will be treated as a
partnership for federal income tax purposes.
Income Taxation of the Partnership and Its Partners
Partners, Not the Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company will be
required to take into account its allocable share of the Partnership's income,
gains, losses, deductions, and credits for any taxable year of the 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 the Partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes 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,
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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. Brobeck, Phleger & Harrison LLP is of the opinion that the
Partnership's allocations of taxable income and loss comply with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department has issued
regulations requiring partnerships to use a "reasonable method" for allocating
items affected by Section 704(c) of the Code and outlining certain reasonable
allocation methods.
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 contributed properties
that results in the Company receiving a disproportionately large share of such
deductions. In addition, gain on sale of a Current Hotel will be specially
allocated to the Limited Partners (other than the Company as a Limited Partner)
to the extent of any "built-in" gain with respect to such Current Hotel for
federal income tax purposes.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally will be 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 (including deemed distributions as a result of reductions in the
Company's allocable 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) would constitute
taxable income to the Company. Such distributions and constructive distributions
normally would 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 would constitute long-term capital gain.
Depreciation Deductions Available to the Partnership. Subsequent to the
IPO, the Partnership purchased certain of the Current Hotels and the acquired
Acquisition Hotel with cash. The Partnership acquired certain other Current
Hotels partially in exchange for interests in the Partnership. To the extent the
Partnership purchased the Current Hotels and the acquired Acquisition Hotel with
cash, the Partnership's initial basis in such Current Hotels and the acquired
Acquisition Hotel for federal income tax purposes generally was equal to the
purchase price paid by the Partnership. The Partnership is depreciating such
depreciable Current Hotels for federal income tax purposes under the ADS system
of depreciation. Under ADS, the Partnership is generally depreciating
furnishings and equipment over a twelve-year recovery period using a
straight-line 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.)
Under ADS, the Partnership is generally depreciating buildings and improvements
over a 40-year recovery period using a straight line method and a mid-month
convention. The Partnership intends to depreciate all
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Hotels acquired in the future using the same depreciation methods. To the extent
that the Partnership acquired the Current Hotels in exchange for limited
partnership interests in the Partnership, the Partnership's initial basis in
such Current Hotels for federal income tax purposes was the same as the
transferor's basis in that Hotel on the date of acquisition. Although the law is
not entirely clear, the Partnership is depreciating such depreciable property
for federal income tax purposes over the same remaining useful lives and under
the same methods used by the transferors.
The Partnership's tax depreciation deductions have been and 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 Sunstone Initial Hotels or other contributed properties that
results in the Company receiving a disproportionately large share of such
deductions).
Sale of the Partnership's Property. Generally, any taxable gain realized
by the Partnership on the sale of property by the 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 taxable gain
recognized by the Partnership on the disposition of the Sunstone Initial Hotels
or any other hotels originally contributed to the Partnership by the Limited
Partners other than the Company will be allocated first to the Limited Partners
(other than the Company as a Limited Partner) 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 such Hotels sold will equal
the excess of the Limited Partners' proportionate share of the book value of
those Hotels over the Limited Partners' tax basis allocable to those Hotels at
the time of the sale. Any remaining taxable gain recognized by the Partnership
on the disposition of the Hotels will be allocated among the partners in
accordance with their respective percentage interests in the Partnership.
The Company's share of any gain realized by the 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 allow the 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
Partnership's trade or business.
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UNDERWRITING
The underwriters named below (the "Underwriters"), represented by
Montgomery Securities, Bear, Stearns & Co. Inc., EVEREN Securities, Inc. and
Raymond James & Associates, Inc. (the "Representatives"), have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement, to
purchase from the Company the number of shares of Common Stock indicated below
opposite their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of the shares, if they purchase any. In the event of a default
by an Underwriter, the Underwriting Agreement provides that, in certain
circumstances, the purchase commitments of the nondefaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO BE
UNDERWRITERS PURCHASED
------------------------------------------------------------------------- ------------
<S> <C>
Montgomery Securities....................................................
Bear, Stearns & Co. Inc. ................................................
EVEREN Securities, Inc. .................................................
Raymond James & Associates, Inc. ........................................
---------
Total.......................................................... 4,800,000
=========
</TABLE>
The Representatives propose initially to offer the Common Stock to the
public at the Price to Public set forth on the cover page of this Prospectus.
The Underwriters may allow to selected dealers a concession of not more than
$0. per share; and the Underwriters may allow, and such dealers may allow, a
concession of not more than $0. per share to certain other dealers. The shares
of Common Stock are offered subject to receipt and acceptance by the
Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part. After the initial public offering, the public
offering price, allowances, concessions and other selling terms may be changed
by the Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 720,000 additional shares to cover over-allotments. To the extent that the
Underwriters exercise this option, the Underwriters will be committed, subject
to certain conditions, to purchase such additional shares in approximately the
same proportion as set forth in the above table. The Underwriters may purchase
such shares only to cover over-allotments made in connection with this Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
The Company and the officers of the Company will agree that, except under
certain circumstances, for a period of 120 days after the date of this
Prospectus, they will not, without the consent of Montgomery Securities, issue,
sell or dispose of any shares of Common Stock or any shares convertible or
exchangeable into any shares of Common Stock. See "Shares Eligible for Future
Sale."
In connection with the Offering, the Underwriters may engage in passive
market-making transactions in the Common Stock on the Nasdaq National Market
immediately prior to the commencement of sales in the Offering, in accordance
with Rule 10b-6A under the Exchange Act. Passive market-making consists of
displaying bids on the Nasdaq National Market limited by the bid prices of
independent market-makers and purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market-maker on each day are
limited to a specified percentage of the passive market-maker's average daily
trading volume in the Common Stock during a specified prior period and must be
discontinued when such limit is reached. Passive market-making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
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The Common Stock is currently listed for quotation on the Nasdaq National
Market. The Company has applied for approval to list the Common Stock on the New
York Stock Exchange under the symbol "SSI."
At the IPO, MYPC, an affiliate of Montgomery Securities, acquired 24,500
Units in the Partnership. Additionally, MYPC received warrants to purchase
33,946 Units which are exercisable at any time between the first and the fifth
anniversary of the closing of the IPO at an exercise price per share equal to
the IPO offering price of $9.50 per share of Common Stock. At any time after one
year following the closing of the IPO, the Units may be redeemed on a
one-for-one basis for shares of Common Stock (or for cash at the election of the
Company).
EXPERTS
The consolidated balance sheets of Sunstone Hotel Investors, Inc. as of
December 31, 1995 and 1994, the combined balance sheet of Sunstone Initial
Hotels as of December 31, 1994 and the related consolidated and combined
statements of operations, equity and cash flows for the periods August 16, 1995,
through December 31, 1995 and January 1, 1995 through August 15, 1995,
respectively and the years ended December 31, 1994 and 1993 including the
accompanying financial statement schedule as of December 31, 1995, the financial
statements of Sunstone Hotel Properties, Inc. as of December 31, 1995 and for
the period August 16, 1995, inception, through December 31, 1995, the financial
statements of Renton Joint Venture as of December 31, 1995 and for the year then
ended and the combined financial statements of Bay City Hospitality, Inc. and
Price Hospitality, Inc. as of October 31, 1995 and for the year then ended,
included in this Registration Statement have been audited by Coopers & Lybrand
L.L.P., independent accountants, as set forth in their reports thereon included
elsewhere herein. Such financial statements are included in reliance upon such
reports given on their authority as experts in accounting and auditing.
The balance sheets for the year ended October 31, 1994 and the period from
February 5, 1993 (inception) through October 31, 1993 of Bay City Hospitality
Inc., a California Corporation as of October 31, 1994 and 1993, and related
financial statements and the audit of the balance sheet of Price Hospitality,
Inc., a Utah Corporation, as of October 31, 1994, and the related financial
statements for the period from the inception of operations, December 28, 1993 to
October 31, 1994, included in this Prospectus have been audited by Griffing &
Company, P.C., independent accountants, as set forth in their reports thereon
included elsewhere herein and in the Registration Statement. Such balance sheets
and related financial statements, are included in reliance upon such reports
given on their authority as experts in accounting and auditing.
REPORTS TO STOCKHOLDERS
The Company intends to furnish its stockholders 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 shares of Common Stock offered hereby will be passed
upon for the Company by Brobeck, Phleger & Harrison LLP. 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 Brobeck, Phleger & Harrison LLP. Certain legal matters related to this
Offering will be passed upon for the Underwriters by O'Melveny & Myers LLP. In
rendering their opinions, Brobeck, Phleger & Harrison LLP and O'Melveny & Myers
LLP will rely upon the opinion of Ballard Spahr Andrews & Ingersoll as to
certain matters of Maryland law.
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ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-11
(of which this Prospectus is a part) under the Securities Act with respect to
the securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the SEC.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules hereto. For further information
regarding the Company and the shares of Common Stock offered hereby, reference
is hereby made to the Registration Statement and such exhibits and schedules.
The Registration Statement and the exhibits and schedules forming a part
thereof filed by the Company with the Commission can be inspected and copies
obtained from the Commission at Room 1204, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
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GLOSSARY OF SIGNIFICANT TERMS
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus.
"ACM" means asbestos containing materials.
"Acquisition Hotels" means the Holiday Inn-Renton, Washington hotel
acquired on June 28, 1996, and the two hotels which the Company intends to
acquire concurrently with the closing of the Offering.
"ADA" means the Americans with Disabilities Act of 1990.
"Additional Charges" means certain amounts payable by the Lessee in
connection with Percentage Leases, including interest accrued on any late
payments or charges.
"Administrator" means the Compensation Committee or its designee.
"ADR" means average daily room rate.
"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, five percent (5%) or
more of the outstanding capital shares, 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). The term "person" means and
includes individuals, corporations, general and limited partnerships, shares
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.
"Alter Employment Agreement" means the employment agreement between the
Company and Robert A. Alter.
"Anti-Abuse Regulations" means certain federal tax regulations issued by
the Service respecting abusive transactions involving partnerships.
"Articles of Incorporation" means the Amended Articles of Incorporation of
the Company, as amended by the Articles of Amendment of the Company, as filed
with the State Department of Assessment and Taxation of Maryland on November 9,
1994, and as further amended by the Articles of Amendment of the Company, as
filed with the State Department of Assessment and Taxation of Maryland on June
19, 1995.
"Award Date" means the first meeting of the Board of Directors following
the annual meeting of the Company's stockholders at which they are elected.
"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 a Share Trust.
"Biederman Employment Agreement" means the employment agreement between the
Company and Charles L. Biederman.
"Board of Directors" means the Board of Directors of the Company.
"Bylaws" means the Bylaws of the Company.
"Cash Available for Distribution" means net income (loss) (computed in
accordance with generally accepted accounting principles) of the Company plus
depreciation and amortization and minority interest minus capital expenditures
and principal payments on indebtedness.
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"Closing Price" shall mean on any date the last sale price, regular way,
or, if no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, as reported in the principal consolidated transaction
reporting system.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Common Stock, par value $.01 per share, of the
Company.
"Company" means Sunstone Hotel Investors, Inc., a Maryland corporation, and
Sunstone Hotel Investors, L.P., unless the context otherwise indicates.
"CPI" means the United States Consumer Price Index, All Urban Consumers,
U.S. City Average, All Items (1982-84 = 100).
"Current Hotels" means the 17 hotels owned by the Company, exclusive of the
Acquisition Hotels.
"Cypress Inn Hotels" means the Company's four hotels located in Washington
and Oregon previously operated as Cypress Inns Hotels.
"Debt Limitation" means the provisions in the Company's Articles of
Incorporation which limits consolidated indebtedness to 50% of the Company's
investment in Hotels, at cost, after giving effect to the Company's use of
proceeds from any indebtedness.
"Directors Plan" means the 1994 Directors Plan adopted by the Board of
Directors.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" means entities, including qualified employee pension
and profit sharing trusts and individual retirement accounts, that are generally
exempt from federal income taxation under Section 501(a) of the Code.
"FFO" means funds from operations, defined as income before minority
interest (computed in accordance with generally accepted accounting principles),
excluding gains (losses) from debt restructuring and sales of property and real
estate related depreciation and amortization (excluding amortization of
financing costs).
"FIRPTA" means Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Founding Director" means those directors who are members of the Board of
Directors at the close of the Offering.
"Franchise Agreement" shall mean the franchise agreement by and between the
franchisor and the Lessee for each Current Hotel and any subsequently acquired
Hotel pursuant to which a franchise agreement is executed. The term "Franchise
Agreement" includes the applicable franchise license under which each Current
Hotel and any subsequently acquired Hotel is operated.
"General Partner" means Sunstone Hotel Investors, Inc., the sole general
partner of the Partnership.
"Hampton" means Promus Hotel Corporation.
"Holiday Inn" means Holiday Inns Franchising, Inc.
"Hospitality Directions" means the report dated January 1996 entitled
"Coopers & Lybrand Hospitality Directions".
"Hotels" means collectively the Current Hotels and the Acquisition Hotels.
"Independent Director" means a director of the Company who is not an
officer or employee of the Company, any Affiliate of an officer or employee or
any Affiliate of (i) any advisor to the Company under an advisory agreement,
(ii) any lessee of any property of the Company, (iii) any subsidiary of the
Company, or (iv) any partnership which is an Affiliate of the Company. Due to
Mr. Enever's extensive personal relationship
120
<PAGE> 129
history with Mr. Alter and as former general partner of certain of the Sunstone
Affiliates, Mr. Enever will not be deemed to be an Independent Director but will
be eligible to participate in the Directors Plan.
"ISOs" means incentive stock options granted under the 1994 Plan.
"Lessee" means Sunstone Hotel Properties, Inc., a Colorado corporation.
"Limited Partners" means the limited partners of the Partnership.
"Line of Credit" means the $45 million line of credit facility (with an
option to increase the total commitment to $50 million) obtained by the Company
from Bank One of Arizona.
"Management Agreement" means the Management Agreement between the Lessee
and the Management Company pursuant to which the Management Company will provide
certain management functions for the Company's hotels.
"Management Company" means Sunstone Hotel Management, Inc., a Colorado
corporation.
"Market Price" shall mean on any date the average of the Closing Price for
the five consecutive trading days ending on such date.
"Marriott" means Marriott International, Inc.
"MGCL" means the Maryland General Corporation Law, as amended from time to
time.
"MRC" means M R C Hotel Partners, Ltd., a Colorado limited partnership and
a Sunstone Affiliate.
"MYPC" means MYPC Partners, an affiliate of Montgomery Securities, one of
the Representatives.
"Nasdaq National Market" means the National Association of Securities
Dealers, Automated Quotation National Market.
"1994 Plan" means the Company's 1994 Stock Incentive Plan.
"Non-U.S. Stockholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign stockholders.
"Offering" means the offering of Common Stock hereby.
"Option Agreement" means that certain Right of First Refusal and Option to
Purchase to be executed by the Company, Mr. Alter and Mr. Biederman granting the
Company certain rights to acquire certain hotels in which Affiliates of Mr.
Alter and Mr. Biederman own an interest.
"Ownership Limit" means the restriction on ownership (or deemed ownership
by virtue of the attribution provisions of the Code) of more than 9.8% of the
outstanding shares of Common Stock or of the outstanding shares of Preferred
Stock.
"Participants" means those employees of the Company who are eligible to
participate in the 1994 Plan.
"Partnership" means Sunstone Hotel Investors, L.P., a limited partnership
organized under the laws of the State of Delaware.
"Partnership Agreement" means the partnership agreement of the Partnership,
as amended and restated.
"Partnership Provisions" means the partnership provisions of the Code.
"Percentage Leases" means collectively the operating leases between the
Lessee and the Partnership pursuant to which the Lessee leases the Current
Hotels from the Partnership and will lease the Acquisition Hotels from the
Partnership and any additional Hotels acquired by the Company after the
Offering, as each may be amended or restated.
"Percentage Rent" means rent based on percentages of revenue payable by the
Lessee pursuant to the Percentage Leases.
"Preferred Stock" means the preferred stock, par value $.01 per share, of
the Company.
121
<PAGE> 130
"Prohibited Owner" means the record holder of shares that become
Shares-in-Trust.
"Proposed Regulations" means a regulation issued by the U.S. Treasury
Department under the partnership provisions of the Code that authorize the
Service, in certain abusive transactions involving partnerships, to disregard
the form of the transaction and recast it for federal income tax purposes as the
Service deems appropriate.
"Redemption Right" means the right of the persons receiving Units in the
Formation Transactions to cause the redemption of Units in exchange for shares
of Common Stock 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 9.8% of the shares of Common Stock).
"Reelected Director" means any eligible director who, during the term of
the Directors Plan, ceases to be a member of the Board but is subsequently
reelected.
"REIT" means real estate investment trust, as defined in Section 856 of the
Code.
"Rent" means the greater of Base Rent and Percentage Rent payable under the
Percentage Leases.
"Representatives" means Montgomery Securities, Bear, Stearns & Co. Inc.,
EVEREN Securities, Inc. and Raymond James & Associates, Inc.
"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.
"SARs" means share appreciation rights.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the United States Internal Revenue Service.
"Share Trust" means a trust established to hold shares of Common Stock or
Preferred Stock that cause a person or entity to violate the Ownership Limit.
"Share Trustee" means the trustee of a Share Trust.
"Shares-in-Trust" means any shares of Common Stock in the REIT designated
as Shares-in-Trust pursuant to the Restrictions on Ownership provisions of the
Company's Articles of Incorporation.
"Smith Travel" means Smith Travel Research, Inc., an unaffiliated hotel
industry research firm.
"SSHI" means the symbol which has been approved for quotation of the shares
of Common Stock on the Nasdaq National Market.
"Steamboat Partnership" means Steamboat Hotel Partners, Ltd., a Colorado
limited partnership, which is a Sunstone Affiliate that owns one of the Sunstone
Initial Hotels.
"Subscription Agreement" means that certain Subscription Agreement by and
among the Company, MRC, MYPC, Mr. Alter, Mr. Biederman and Mr. Enever dated as
of September 23, 1994.
"Sunstone Affiliates" means the Affiliates of Messrs. Alter, Biederman or
Enever, including the predecessors of such entities, that owned or managed the
Sunstone Initial Hotels.
"Sunstone Initial Hotels" means the Holiday Inn-Provo, Utah, the Holiday
Inn-Craig Colorado, the Holiday Inn-Steamboat Springs, Colorado, the Hampton
Inn-Denver, Colorado, the Hampton Inn-Pueblo, Colorado, the Hampton Inn-Mesa,
Arizona and the Courtyard by Marriott-Fresno, California.
"Third Party Pledge Agreement" means the Third Party Pledge Agreement
entered into by and among the Partnership, Mr. Alter and Mr. Biederman, as
amended.
122
<PAGE> 131
"Trading Day" shall mean a day on which the principal national securities
exchange on which the shares of Common or Preferred Stock are listed or admitted
to trading is open for the transaction of business.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"UBTI" means unrelated business taxable income as defined in Section 512 of
the Code.
"UBTI Percentage" means the gross income derived 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.
"Underwriters" means the Underwriters named in this Prospectus.
"Underwriting" means information concerning indemnification of the
Underwriters and other matters.
"Underwriting Agreement" means the Underwriting Agreement between the
Representatives, as Representatives of the several Underwriters, and the
Company.
"Unit Purchase Agreement" means the Agreement Respecting Lessee Unit
Purchase to be entered into by and among the Company, the Partnership, the
Lessee, Mr. Alter and Mr. Biederman.
"Units" means units of partnership interest in the Partnership.
"USFS" means U.S. Franchise Systems, Inc., franchisor of Hawthorn Suites
hotels.
123
<PAGE> 132
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Sunstone Hotel Investors, Inc. -- Pro Forma Consolidated Financial Information
Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 1996................. F-3
Notes to Unaudited Pro Forma Consolidated Balance Sheet............................. F-4
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended
December 31, 1995................................................................ F-6
Unaudited Pro Forma Consolidated Statement of Income for the Three Months Ended
March 31, 1996................................................................... F-7
Unaudited Pro Forma Consolidated Statement of Income for the Three Months Ended
March 31, 1995................................................................... F-8
Notes to Unaudited Pro Forma Consolidated Statements of Income...................... F-9
Sunstone Hotel Properties, Inc. -- Pro Forma Combined Statements of Operations
Unaudited Pro Forma Combined Statement of Operations for the Year Ended
December 31, 1995................................................................ F-11
Unaudited Pro Forma Combined Statement of Operations for the Three Months Ended
March 31, 1996................................................................... F-12
Unaudited Pro Forma Combined Statement of Operations for the Three Months Ended
March 31, 1995................................................................... F-13
Notes to Unaudited Pro Forma Combined Statements of Operations...................... F-14
Sunstone Hotel Investors, Inc. and Sunstone Initial Hotels (the "Predecessor")
Report of Independent Accountants................................................... F-15
Sunstone Hotel Investors, Inc. -- Consolidated Balance Sheets as of March 31, 1996
(unaudited), December 31, 1995 and 1994; Sunstone Initial Hotels (Predecessor) --
Combined Balance Sheet as of December 31, 1994................................... F-16
Sunstone Hotel Investors, Inc. -- Consolidated Statement of Income for the Three
Months
Ended March 31, 1996 (unaudited) and for the Period August 16, 1995 (Inception)
through
December 31, 1995; Sunstone Initial Hotels (Predecessor) -- Combined Statement of
Income for the Three Months Ended March 31, 1995 (unaudited) and for the Period
January 1, 1995 Through August 15, 1995 and for the Years Ended December 31, 1994
and 1993......................................................................... F-17
Sunstone Hotel Investors, Inc. -- Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 1996 (unaudited) and for the Period August 16, 1995
(Inception) Through December 31, 1995; Sunstone Initial Hotels
(Predecessor) -- Combined Statement of Cash Flows for the Three Months Ended
March 31, 1995 (unaudited) and for the Period January 1, 1995 Through August 15,
1995 and for the Years Ended December 31, 1994 and 1993.......................... F-18
Sunstone Hotel Investors, Inc. -- Consolidated Statement of Equity for the Year
Ended December 31, 1995; Sunstone Initial Hotels (Predecessor) -- Combined
Statement of
Deficit for the Period January 1, 1995 to August 15, 1995 and the Years Ended
December 31, 1994 and 1993....................................................... F-19
Notes to Consolidated and Combined Financial Statements............................. F-20
Schedule III -- Real Estate and Accumulated Depreciation as of December 31, 1995.... F-26
Sunstone Hotel Properties, Inc. (the Lessee)
Report of Independent Accountants................................................... F-27
Balance Sheets as of March 31, 1996 (unaudited) and December 31, 1995............... F-28
</TABLE>
F-1
<PAGE> 133
<TABLE>
<S> <C>
Statements of Operations and Deficit for the Three Months Ended March 31, 1996
(unaudited) and for the Period From Inception, August 16, 1995 through December
31, 1995......................................................................... F-29
Statements of Cash Flows for the Three Months Ended March 31, 1996 (unaudited) and
for the Period From Inception, August 16, 1995 Through December 31, 1995......... F-30
Notes to Combined Financial Statements.............................................. F-31
Renton Joint Venture (A Washington General partnership)
Report of Independent Accountants................................................... F-33
Balance Sheets as of March 31, 1996 (unaudited) and December 31, 1995............... F-34
Statements of Operations for the Three Months Ended March 31, 1995 and 1996
(unaudited) and for the Year Ended December 31, 1995............................. F-35
Statement of Partners' Equity for the Year Ended December 31, 1995 and for the Three
Months Ended March 31, 1996 (unaudited).......................................... F-36
Statements of Cash Flows for the Three Months Ended March 31, 1996 (unaudited) and
for the Year Ended December 31, 1995............................................. F-37
Notes to Financial Statements....................................................... F-38
Bay City Hospitality, Inc. and Price Hospitality, Inc.
Report of Independent Accountants................................................... F-41
Combined Balance Sheets as of January 31, 1996 (unaudited) and October 31, 1995..... F-42
Combined Statements of Operations and Equity for the Three Months Ended January 31,
1996 (unaudited) and for the Year Ended October 31, 1995......................... F-43
Combined Statements of Cash Flows for the Three Months Ended January 31, 1996
(unaudited) and for the Year Ended October 31, 1995.............................. F-44
Notes to Combined Financial Statements.............................................. F-45
Bay City Hospitality, Inc.
Report of Independent Accountants................................................... F-48
Balance Sheets as of October 31, 1994 and 1993...................................... F-49
Income Statements for the Year Ended October 31, 1994 and for the Period From
Inception, February 5, 1993, Through October 31, 1993............................ F-50
Statement of Changes in Shareholder's Equity for the Period From Inception, February
5, 1993, Through October 31, 1994................................................ F-51
Statements of Cash Flows for the Year Ended October 31, 1994 and for the Period From
Inception, February 5, 1993, Through October 31, 1993............................ F-52
Notes to Financial Statements....................................................... F-53
Price Hospitality, Inc.
Report of Independent Accountants................................................... F-56
Balance Sheet as of October 31, 1994................................................ F-57
Statement of Income and Changes in Shareholder's Equity for the Period From
Inception of Operations Through October 31, 1994................................. F-58
Statement of Cash Flows for the Period From Inception of Operations Through October
31, 1994......................................................................... F-59
Notes to Financial Statements....................................................... F-60
</TABLE>
F-2
<PAGE> 134
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
The following Unaudited Pro Forma Consolidated Balance sheet is presented
as if the Offering as set forth under the caption "Use of Proceeds" had occurred
on March 31, 1996. Such information should be read in conjunction with the
Financial Statements listed in the index at page F-1 of this Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of the
Offering and related transactions have been made.
The following unaudited Pro Forma Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been
assuming such transactions had been completed as of March 31, 1996, nor does it
purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
PRO FORMA
SUNSTONE SUNSTONE HOTEL
HOTEL PRO FORMA CURRENT ACQUISITION PRO FORMA INVESTORS,
INVESTORS, INC. ADJUSTMENTS HOTELS PROPERTIES ADJUSTMENTS INC.
--------------- ----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
(HISTORICAL) (PRO FORMA)
(A) (B) (C)
ASSETS:
Investment in hotel properties,
net............................. $67,076,000 $6,800,000 $73,876,000 $25,578,000 $ 99,454,000
Mortgage notes receivable......... 2,850,000 2,850,000 2,850,000
Cash.............................. 407,000 407,000 $ 3,940,000(D) 4,347,000
Rent receivable -- Lessee......... 2,227,000 2,227,000 2,227,000
Due from affiliates............... 128,000 128,000 128,000
Prepaid expenses and
other assets, net............... 1,206,000 1,206,000 1,206,000
--------- --------- --------- --------- --------- ---------
$71,044,000 $9,650,000 $80,694,000 $25,578,000 $ 3,940,000 $110,212,000
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Revolving line of credit.......... 22,000,000 5,750,000 27,750,000 25,578,000 (44,328,000)(D) 9,000,000
Mortgage notes payable............ 3,025,000 3,025,000 3,025,000
Accounts payable and other accrued
expenses........................ 1,690,000 1,690,000 1,690,000
Dividends/distributions payable...
--------- --------- --------- --------- --------- ---------
23,690,000 8,775,000 32,465,000 25,578,000 (44,328,000) 13,715,000
--------- --------- --------- --------- --------- ---------
Minority interest................. 8,722,000 875,000 9,597,000 1,654,000(E) 11,251,000
--------- --------- --------- --------- --------- ---------
Stockholders' equity:
Common stock, $.01 par value,
50,000,000 authorized;
6,322,000 shares outstanding;
11,122,000 pro forma............ 63,000 63,000 48,000(D) 111,000
Preferred stock, $.01 par value,
10,000,000 authorized, no shares
issued or outstanding...........
Additional paid-in capital........ 37,432,000 37,432,000 48,220,000(D) 83,998,000
(1,654,000)(E)
Retained earnings................. 1,137,000 1,137,000 1,137,000
--------- --------- --------- --------- --------- ---------
38,632,000 38,632,000 46,614,000 85,246,000
--------- --------- --------- --------- --------- ---------
$71,044,000 $9,650,000 $80,694,000 $25,578,000 $ 3,940,000 $110,212,000
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the pro forma balance sheets.
F-3
<PAGE> 135
SUNSTONE HOTEL INVESTORS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(A) Reflects the Company's historical consolidated balance sheet as of March 31,
1996.
(B) Represents pro forma adjustments to reflect the assets, liabilities and
equity of the acquisition of the Riverside, California property, the sale
of two Cypress Inn properties and the redevelopment and renovation draws on
the Revolving Line of Credit subsequent to March 31, 1996.
(C) Reflects the purchase of the Acquisition Hotels.
(D) Reflects the effects of the Offering and the use of proceeds therefrom as
described in "Use of Proceeds" as if the Offering occurred on March 31,
1996.
(E) Reflects a reallocation between minority interest and shareholders' equity
to reflect the Limited Partners' 11.7% interest in the Partnership after
the Offering.
F-4
<PAGE> 136
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995,
THE THREE MONTHS ENDED MARCH 31, 1996 AND
THE THREE MONTHS ENDED MARCH 31, 1995
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Unaudited Pro Forma Consolidated Statement of Income of
Sunstone Hotel Investors, Inc. for the year ended December 31, 1995, the three
months ended March 31, 1996 and the three months ended March 31, 1995, are
presented as if the closing of the Offering described under the caption "Use of
Proceeds" had occurred as of January 1, 1995. Such information should be read in
conjunction with the Financial Statements listed in the Index at page F-1 of
this Prospectus. In management's opinion, all adjustments necessary to reflect
the effects of the Offering and related transactions have been made.
These Statements are not necessarily indicative of what actual results of
operation of the Company would have been assuming such transactions had been
completed as of the beginning of the periods presented, nor do they purport to
represent the results of operations for future periods.
F-5
<PAGE> 137
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SUNSTONE
CURRENT ACQUISITION PRO FORMA HOTEL
HOTEL HOTELS ADJUSTMENTS INVESTORS, INC.
----------- ------------ ----------- ---------------
(ESTIMATED) (PRO FORMA) (PRO FORMA)
(A) (C)
<S> <C> <C> <C> <C>
REVENUES:
Lease revenue......................... $11,766,000 $ 3,254,000 $ $ 15,020,000
Interest income....................... 47,000 47,000
----------- ----------- ----------- -----------
11,813,000 3,254,000 15,067,000
----------- ----------- ----------- -----------
EXPENSES:
Real estate related depreciation and
amortization........................ 3,282,000 2,048,000 5,330,000
Interest expense and amortization of
financing costs..................... 1,503,000 1,931,000 (2,416,000)(D) 1,018,000
Real estate, personal property taxes
and insurance....................... 1,301,000 432,000 1,733,000
General and administrative............ 375,000 375,000
----------- ----------- ----------- -----------
Total expenses................... 6,461,000 4,411,000 (2,416,000) 8,456,000
----------- ----------- ----------- -----------
Income before minority interest
and extraordinary items........ 5,352,000 $ (1,157,000) $ 2,416,000 $ 6,611,000
=========== ===========
Minority interest(E).................. 1,011,000 771,000
----------- -----------
Net income....................... $ 4,341,000 $ 5,840,000
=========== ===========
</TABLE>
F-6
<PAGE> 138
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
SUNSTONE
HOTEL PRO FORMA CURRENT ACQUISITION PRO FORMA SUNSTONE HOTEL
INVESTORS, INC. ADJUSTMENTS HOTELS HOTELS ADJUSTMENTS INVESTORS, INC.
--------------- ----------- ----------- ----------- ------------ ---------------
(HISTORICAL) (B) (PRO FORMA) (C) (PRO FORMA)
(A)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Lease revenue............. $ 3,190,000 $ 227,000 $3,417,000 $ 643,000 $ $ 4,060,000
Interest income........... 19,000 19,000 19,000
--------------- ----------- ----------- ----------- ----------- ---------------
3,209,000 227,000 3,436,000 643,000 4,079,000
--------------- ----------- ----------- ----------- ----------- ---------------
EXPENSES:
Real estate related
depreciation and
amortization............ 849,000 27,000 876,000 512,000 1,388,000
Interest expense and
amortization of
financing costs......... 324,000 143,000 467,000 483,000 (709,000)(D) 241,000
Real estate, personal
property taxes and
insurance............... 253,000 21,000 274,000 116,000 390,000
General and
administrative.......... 153,000 153,000 153,000
--------------- ----------- ----------- ----------- ----------- ---------------
Total expenses........ 1,579,000 191,000 1,770,000 1,111,000 (709,000) 2,172,000
--------------- ----------- ----------- ----------- ----------- ---------------
Income before minority
interest............ 1,630,000 $ 36,000 1,666,000 $ (468,000) $ 709,000 1,907,000
=========== ========== ===========
-----------
Minority interest (E)..... 293,000 293,000 222,000
--------------- ----------- ---------------
Net income............ $ 1,337,000 $1,373,000 $ 1,685,000
============ ============ ==============
</TABLE>
F-7
<PAGE> 139
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
SUNSTONE SUNSTONE HOTEL
HOTEL PRO FORMA CURRENT ACQUISITION PRO FORMA INVESTORS,
INVESTORS, INC. ADJUSTMENTS HOTELS HOTELS ADJUSTMENTS INC.
--------------- ----------- ----------- ----------- ----------- --------------
(PRO FORMA) (B) (PRO FORMA) (PRO FORMA)
(A)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Lease revenue............ $ 2,593,000 $ 695,000 $3,288,000 $ 580,000(C) $ $3,868,000
Interest income..........
--------------- ----------- ----------- ----------- ----------- --------------
2,593,000 695,000 3,288,000 580,000 3,868,000
--------------- ----------- ----------- ----------- ----------- --------------
EXPENSES:
Real estate related
depreciation and
amortization........... 505,000 260,000 765,000 512,000(C) 1,277,000
Interest expense and
amortization of
financing costs........ 364,000 364,000 483,000(C) (606,000)(D) 241,000
Real estate, personal
property taxes and
insurance.............. 127,000 109,000 236,000 115,000(C) 351,000
General and
administrative......... 104,000 104,000 104,000
--------------- ----------- ----------- ----------- ----------- --------------
Total expenses....... 736,000 733,000 1,469,000 1,110,000 (606,000) 1,973,000
--------------- ----------- ----------- ----------- ----------- --------------
Income before
minority
interest........... 1,857,000 $ (38,000) $1,819,000 $ (530,000) $ 606,000 1,895,000
=========== ========== ===========
-----------
Minority interest(E)..... 324,000 324,000 221,000
--------------- ----------- --------------
Net income........... $ 1,533,000 $1,495,000 $1,674,000
============ ============ ==============
</TABLE>
F-8
<PAGE> 140
SUNSTONE HOTEL INVESTORS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995, THE THREE MONTHS ENDED MARCH 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1995
(A) The Company began operations on August 16, 1995. Estimated revenues and
expenses for the Current Hotels for the year ended December 31, 1995,
include the actual results of operations for the period August 16, 1995 to
December 31, 1995 for the Hotels owned by the Company during that period
plus estimated results of operations for all the Current Hotels to reflect
results from operations as if the Lessee had leased all the Current Hotels
from the Company beginning January 1, 1995. For the three months ended
March 31, 1996 and the three months ended March 31, 1995, amounts represent
the Company's historical consolidated income statement for that period.
(B) Represents pro forma adjustments to reflect the results of operations for
the effect of the acquisition of the Riverside, California and Cypress Inn
properties and the subsequent sale of two Cypress Inn hotels each occurring
subsequent to March 31, 1996.
(C) Reflects the results of operations from the purchase of the Acquisition
Hotels.
(D) Represents an adjustment to reflect the elimination of historical and pro
forma interest expense related to the debt repaid from the proceeds of the
Offering and the addition of interest expense at LIBOR plus 1.90% on the
amount to be outstanding immediately after the Offering.
(E) Calculated at 11.7% of income before minority interest.
F-9
<PAGE> 141
SUNSTONE HOTEL PROPERTIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995, THE THREE MONTHS ENDED MARCH 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1995
The following Unaudited Pro Forma Combined Statements of Operations are
presented as if the application of the net proceeds of the Offering as set forth
under the caption "Use of Proceeds" had occurred as of the beginning of the
period presented. Such information should be read in conjunction with the
Financial Statements listed in the Index at page F-1 of this Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of the
Offering and related transactions have been made.
The following unaudited Pro Forma Combined Statements of Operations are not
necessarily indicative of what actual results of operations of the Lessee and
Initial Hotels would have been assuming such transactions had been completed as
of the beginning of the periods presented nor do they purport to represent the
results of operations for future periods.
F-10
<PAGE> 142
SUNSTONE HOTEL PROPERTIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ACQUISITION SUNSTONE
HOTELS PRO FORMA HOTEL
----------- ADJUSTMENTS PROPERTIES, INC.
CURRENT ----------- -----------------
HOTEL (C) (PRO FORMA)
-----------
(ESTIMATED)
(A)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Room............................. $27,914,000 $ 7,673,000 $ $35,587,000
Food and beverage................ 1,933,000 2,112,000 4,045,000
Other............................ 1,288,000 340,000 1,628,000
----------- ----------- ----------- -----------
31,135,000 10,125,000 41,260,000
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Room............................. 7,816,000 1,949,000 9,765,000
Food and beverage................ 1,955,000 1,642,000 3,597,000
Other............................ 658,000 181,000 839,000
----------- ----------- ----------- -----------
10,429,000 3,772,000 14,201,000
----------- ----------- ----------- -----------
Departmental profit............ 20,706,000 6,353,000 27,059,000
----------- ----------- ----------- -----------
General and administrative....... 2,889,000 1,052,000 3,941,000
Sales and marketing.............. 1,901,000 853,000 2,754,000
Repairs and maintenance.......... 1,282,000 541,000 1,823,000
Utilities and other operating
costs.......................... 1,666,000 610,000 2,276,000
Management fees.................. 790,000 360,000 (325,000)(D) 825,000
Franchise fees................... 793,000 793,000
Real estate, personal property
taxes and insurance............ 846,000 432,000 (1,278,000)(E)
----------- ----------- ----------- -----------
Gross operating profit......... 10,539,000 2,505,000 1,603,000 14,647,000
----------- ----------- ----------- -----------
Real estate related depreciation
and amortization............... 540,000 (540,000)(F)
Interest expense and amortization
of financing costs............. 1,377,000 (1,377,000)(G)
Rent expense..................... 3,013,000 12,007,000(H) 15,020,000
----------- ----------- ----------- -----------
Net income..................... $ 7,526,000 $ 588,000 $(8,487,000) $ (373,000)
=========== =========== =========== ===========
</TABLE>
F-11
<PAGE> 143
SUNSTONE HOTEL PROPERTIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
SUNSTONE HOTEL PRO FORMA CURRENT ACQUISITION PRO FORMA SUNSTONE HOTEL
PROPERTIES, INC. ADJUSTMENTS HOTELS HOTELS ADJUSTMENTS PROPERTIES, INC.
---------------- ---------- ----------- ---------- ----------- ----------------
(HISTORICAL) (PRO FORMA) (PRO FORMA)
(A)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Room............................. $6,786,000 $421,000 $7,207,000 $1,746,000 $ $ 8,953,000
Food and beverage................ 232,000 32,000 264,000 436,000 700,000
Other............................ 318,000 53,000 371,000 77,000 448,000
---------- -------- ---------- ---------- ---------- ----------
7,336,000 506,000 7,842,000 2,259,000 10,101,000
---------- -------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Room............................. 1,697,000 113,000 1,810,000 462,000 2,272,000
Food and beverage................ 242,000 26,000 268,000 374,000 642,000
Other............................ 193,000 34,000 227,000 49,000 276,000
---------- -------- ---------- ---------- ---------- ----------
2,132,000 173,000 2,305,000 885,000 3,190,000
---------- -------- ---------- ---------- ---------- ----------
Departmental profit............ 5,204,000 333,000 5,537,000 1,374,000 6,911,000
---------- -------- ---------- ---------- ---------- ----------
General and administrative....... 461,000 109,000 570,000 296,000 866,000
Sales and marketing.............. 638,000 46,000 684,000 195,000 879,000
Repairs and maintenance.......... 316,000 (10,000) 306,000 139,000 445,000
Utilities and other operating
costs.......................... 294,000 (29,000) 265,000 148,000 413,000
Management fees.................. 132,000 33,000 165,000 80,000 (43,000)(D) 202,000
Franchise fees................... 192,000 46,000 238,000 238,000
Real estate, personal property
taxes and insurance............ 21,000 21,000 116,000 (137,000)(E)
---------- -------- ---------- ---------- ---------- ----------
Gross operating profit......... 3,171,000 117,000 3,288,000 400,000 180,000 3,868,000
---------- -------- ---------- ---------- ---------- ----------
Real estate related depreciation
and amortization............... 136,000 (136,000)(F)
Interest expense and amortization
of financing costs............. 294,000 (294,000)(G)
Rent expense..................... 3,190,000 3,190,000 870,000(H) 4,060,000
---------- -------- ---------- ---------- ---------- ----------
Net income..................... $ (19,000) $117,000 $ 98,000 $ (30,000) $(260,000) $ (192,000)
========== ======== ========== ========== ========== ==========
</TABLE>
F-12
<PAGE> 144
SUNSTONE HOTEL PROPERTIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
SUNSTONE
CURRENT ACQUIRED PRO FORMA HOTEL
HOTELS HOTELS ADJUSTMENTS PROPERTIES, INC.
---------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
(ESTIMATED) (HISTORICAL) (PRO FORMA)
(A)
OPERATING REVENUES:
Room................................... $7,248,000 $1,468,000 $ $ 8,716,000
Food and beverage...................... 496,000 479,000 975,000
Other.................................. 341,000 75,000 416,000
---------- ---------- ----------- ----------
8,085,000 2,022,000 10,107,000
---------- ---------- ----------- ----------
OPERATING EXPENSES:
Room................................... 1,759,000 447,000 2,206,000
Food and beverage...................... 512,000 401,000 913,000
Other.................................. 212,000 45,000 257,000
---------- ---------- ----------- ----------
2,483,000 893,000 3,376,000
---------- ---------- ----------- ----------
Departmental profit.................. 5,602,000 1,129,000 6,731,000
---------- ---------- ----------- ----------
General and administrative............. 743,000 281,000 1,024,000
Sales and marketing.................... 451,000 199,000 650,000
Repairs and maintenance................ 268,000 118,000 386,000
Utilities and other operating costs.... 379,000 146,000 525,000
Management fees........................ 234,000 72,000 (104,000)(B) 202,000
Franchise fees......................... 174,000 174,000
Real estate, personal property taxes
and insurance........................ 205,000 115,000 (320,000)(C)
---------- ---------- ----------- ----------
Gross operating profit............... 3,148,000 198,000 424,000 3,770,000
---------- ---------- ----------- ----------
Real estate related depreciation and
amortization......................... 73,000 (73,000)(D)
Interest expense and amortization of
financing costs...................... 257,000 (257,000)(E)
Rent expense........................... 3,868,000(F) 3,868,000
---------- ---------- ----------- ----------
Net income........................... $3,148,000 $ (132,000) $(3,114,000) $ (98,000)
========== ========== =========== ==========
</TABLE>
F-13
<PAGE> 145
SUNSTONE HOTEL PROPERTIES, INC.,
THE LESSEE
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995,
THE THREE MONTHS ENDED MARCH 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1995
(A) The Lessee began operations on August 16, 1995. Estimated revenues and
expenses for the Current Hotels include the actual results of
operations for the period August 16, 1995 to December 31, 1995 for the
Hotels owned by the Company during that period plus estimated results
of operations for all the Current Hotels to reflect results from
operations as if the Lessee had leased all the Current Hotels from the
Company beginning January 1, 1995. For the three months ended March 31,
1996 and the three months ended March 31, 1995, amounts represent the
Lessee's historical combined statement of operations for that period.
(B) Represents pro forma adjustments to reflect the results of operations
for the effect of the Company's acquisition of the Riverside,
California and Cypress Inn properties and the subsequent sale of two
Cypress Inn hotels, each occurring subsequent to March 31, 1996.
(C) Reflects the results of operations from the Acquisition Hotels.
(D) Represents an adjustment to reflect management fees of 2% of total
revenues.
(E) Reflects the real estate and personal property taxes, and property
insurance which would be incurred by the Company.
(F) Represents the elimination of depreciation expense which would be a pro
forma expense incurred by the Company.
(G) Represents the elimination of interest expense which would be a pro
forma cost incurred by the Company.
(H) Represents rent expense calculated on a pro forma basis by applying the
rent provisions of the Percentage Leases to the historical revenues of
the Hotels.
F-14
<PAGE> 146
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Sunstone Hotel Investors, Inc.
We have audited the accompanying consolidated balance sheets of Sunstone
Hotel Investors, Inc. (the "Company") as of December 31, 1995 and 1994, the
combined balance sheet of Sunstone Initial Hotels (the "Predecessor") as of
December 31, 1994, and the related consolidated and combined statements of
operations, equity and cash flows for the periods August 16, 1995, through
December 31, 1995 and January 1, 1995 through August 15, 1995, respectively and
the years ended December 31, 1994 and 1993. Our audit also included the
accompanying financial statement schedule as of December 31, 1995. 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 audits 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 consolidated and combined financial statements referred
to above present fairly, in all material respects, the consolidated and combined
financial position of Sunstone Hotel Investors, Inc. and Sunstone Initial Hotels
as of December 31, 1995 and 1994, and the consolidated and combined results of
their operations and cash flows for the periods August 16, 1995, through
December 31, 1995 and January 1, 1995 through August 15, 1995, respectively and
the years ended December 31, 1994 and 1993, in conformity with generally
accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND, L.L.P.
Newport Beach, California
March 28, 1996
F-15
<PAGE> 147
SUNSTONE HOTEL INVESTORS, INC. -- CONSOLIDATED BALANCE SHEETS
SUNSTONE INITIAL HOTELS (PREDECESSOR) -- COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
SUNSTONE HOTEL INVESTORS, INC.
-------------------------------------- SUNSTONE
INITIAL HOTELS
DECEMBER 31, YEAR ENDED
MARCH 31, ----------------------- DECEMBER 31,
1996 1995 1994 1994
----------- ----------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS:
Investment in hotel properties, net........ $67,076,000 $49,926,000 $ 5,000 $ 17,539,000
Cash....................................... 407,000 5,222,000 6,000 718,000
Restricted cash............................ 104,000
Rent receivable -- Lessee.................. 2,227,000 646,000
Due from affiliates........................ 128,000 21,000
Trade Receivables.......................... 254,000
Prepaid expenses and other assets, net..... 1,206,000 1,421,000 615,000 324,000
----------- ----------- -------- -----------
$71,044,000 $57,236,000 $626,000 $ 18,939,000
=========== =========== ======== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Long-term debt............................. $ $ $ $ 23,698,000
Revolving line of credit................... 22,000,000 8,400,000
Accounts payable and other accrued
expenses................................. 1,690,000 1,346,000 136,000 2,215,000
Dividends/distributions payable............ 1,764,000
Due to affiliates.......................... 1,300,000
----------- ----------- -------- -----------
23,690,000 11,510,000 136,000 27,213,000
----------- ----------- -------- -----------
Minority interest.......................... 8,722,000 8,231,000
-----------
Stockholders' equity:
Common stock, $.01 par value, 50,000,000
authorized; 6,322,000 and 32,000 issued
and outstanding as of December 31, 1995
and 1994, respectively................... 63,000 63,000
Preferred stock, $.01 par value, 10,000,000
authorized, no shares issued or
outstanding Additional paid-in capital... 37,432,000 37,432,000 490,000
Retained earnings.......................... 1,137,000
Predecessor deficit........................ (8,274,000)
----------- ----------- -------- -----------
38,632,000 37,495,000 490,000 (8,274,000)
----------- ----------- -------- -----------
$71,044,000 $57,236,000 $626,000 $ 18,939,000
=========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 148
SUNSTONE HOTEL INVESTORS, INC. -- CONSOLIDATED STATEMENT OF INCOME
SUNSTONE INITIAL HOTELS (PREDECESSOR) -- COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SUNSTONE INITIAL HOTELS
SUNSTONE HOTEL INVESTORS, INC. ------------------------------
-------------------------------- FOR THE
FOR THE PERIOD PERIOD SUNSTONE INITIAL HOTELS
FOR THE THREE AUGUST 16, 1995 FOR THE THREE JANUARY 1, YEARS ENDED DECEMBER 31,
MONTHS ENDED TO DECEMBER 31, MONTHS ENDED TO AUGUST 15, -------------------------
MARCH 31, 1996 1995 MARCH 31, 1995 1995 1994 1993
-------------- --------------- -------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Lease revenue................... $3,190,000 $ 3,013,000
Hotel operating revenue......... $3,458,000 $ 9,675,000 $13,863,000 $11,937,000
Interest income................. 19,000 47,000
Other revenue................... 497,000
---------- ---------- ---------- ---------- ----------- -----------
3,209,000 3,060,000 3,955,000 9,675,000 13,863,000 11,937,000
---------- ---------- ---------- ---------- ----------- -----------
EXPENSES:
Real estate related depreciation
and amortization............. 849,000 968,000 273,000 696,000 1,248,000 1,298,000
Interest expense and
amortization of financing
costs........................ 324,000 47,000 585,000 1,270,000 2,360,000 2,261,000
Real estate, personal property
taxes and insurance.......... 253,000 312,000 87,000 356,000 689,000 619,000
Property operating costs........ 698,000 3,550,000 5,801,000 4,770,000
General and administrative...... 153,000 109,000 282,000 721,000 1,063,000 940,000
Management fees................. 167,000 409,000 620,000 463,000
Franchise costs................. 128,000 323,000 624,000 412,000
Advertising and promotion....... 269,000 676,000 1,056,000 926,000
Other........................... 4,000 3,000
---------- ---------- ---------- ---------- ----------- -----------
Total expenses............... 1,579,000 1,436,000 2,489,000 8,001,000 13,465,000 11,692,000
---------- ---------- ---------- ---------- ----------- -----------
Income before minority
interest and extraordinary
items...................... 1,630,000 1,624,000 1,466,000 1,674,000 398,000 245,000
Minority interest................. 293,000 284,000 818,000
---------- ---------- ---------- ---------- ----------- -----------
Income before extraordinary
item....................... 1,340,000 648,000
Extraordinary item due to early
extinguishment of debt (net of
$34,000 of minority interest)... 159,000
---------- ---------- ---------- ---------- ----------- -----------
NET INCOME.............. $1,337,000 $ 1,181,000 $ 648,000 $ 1,674,000 $ 398,000 $ 245,000
========== ========== ========== ========== =========== ===========
Earnings per share:
Income before extraordinary
item......................... $ 0.21 $ 0.21
Extraordinary item (net of
$34,000 of minority
interest).................... (0.02)
---------- ----------
NET INCOME PER SHARE.............. $ 0.21 $ 0.19
========== ==========
Weighted average number of
shares.......................... 6,322,000 6,322,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 149
SUNSTONE HOTEL INVESTORS, INC. -- CONSOLIDATED STATEMENT OF CASH FLOWS
SUNSTONE INITIAL HOTELS (PREDECESSOR) -- COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SUNSTONE HOTEL INVESTORS, INC. SUNSTONE INITIAL HOTELS
-------------------------------- -------------------------------
FOR THE THREE FOR THE PERIOD FOR THE THREE FOR THE PERIOD SUNSTONE INITIAL HOTELS
MONTHS ENDED AUGUST 16, 1995 MONTHS ENDED JANUARY 1, YEARS ENDED DECEMBER 31,
MARCH 31, TO DECEMBER 31, MARCH 31, TO AUGUST 15, -------------------------
1996 1995 1995 1995 1994 1993
------------- --------------- ------------- -------------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.................... $ 1,337,000 $ 1,181,000 $ 818,000 $ 1,674,000 $ 398,000 $ 245,000
Extraordinary item due to
early extinguishment of
debt........................ 159,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Minority interest........... 293,000 284,000
Depreciation................ 849,000 968,000 273,000 696,000 1,248,000 1,298,000
Amortization of financing
costs..................... 56,000 35,000
Loss on disposal of
assets.................... 108,000
Increase due to affiliates
for management fees....... 70,000 70,000 73,000 69,000
Management fees waived by
partner................... 15,000 15,000 160,000 46,000
Interest expense added to
principal balance for
revenue participation
clause.................... 51,000
Changes in assets and
liabilities:
Receivables, net.......... (134,000) 255,000 33,000 12,000
Rent receivable-Lessee.... (1,581,000 ) (646,000)
Due from affiliates....... (108,000 ) (21,000)
Inventories............... 158,000 18,000 3,000 (2,000)
Prepaids and other assets,
net..................... (879,000) (22,000) 61,000 94,000 (94,000)
Accounts payable and
accrued expenses........ 344,000 1,210,000 (383,000) (1,115,000) 262,000 (26,000)
Accrued interest payable
and deferred............ (17,000) (480,000) 167,000 33,000
------- ------- ------- ------- ------- -------
Net cash provided by
operating
activities............ 1,348,000 2,291,000 620,000 1,194,000 2,597,000 1,581,000
------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition, improvements
and additions
to hotel properties....... (17,999,000 ) (32,831,000) (176,000) (463,000) (1,081,000) (395,000)
Payment of franchise
transfer fees............. (68,000)
Decrease (increase) in
restricted cash........... ............ 49,000 104,000 263,000 (301,000)
------- ------- ------- ------- ------- -------
Net cash used in
investing
activities............ (17,999,000 ) (32,899,000) (127,000) (359,000) (818,000) (696,000)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from offering.... 52,982,000
Payments to noncontinuing
equity investors of
Predecessor................. (832,000)
Financing costs............... (425,000) (87,000)
Borrowings on revolving line
of credit................... 13,600,000 8,400,000
Principal payments on
long-term debt.............. (23,420,000) (463,000) (846,000) (1,055,000) (873,000)
Proceeds from issuance of
long-term debt.............. 200,000 72,000
Advances from affiliates...... 9,000 40,000 89,000
Payments on advances from
affiliates.................. (125,000) (418,000) (460,000) (327,000)
Partners' capital
contributions............... 436,000
Dividends paid................ (1,454,000 ) (727,000)
Partnership distributions
paid........................ (310,000 ) (154,000) (42,000) (42,000) (50,000) (8,000)
------- ------- ------- ------- ------- -------
Net cash provided by (used
in) financing
activities................ 11,836,000 35,824,000 (621,000) (1,306,000) (1,325,000) (698,000)
------- ------- ------- ------- ------- -------
Net change in cash...... (4,815,000 ) 5,216,000 (128,000) (471,000) 454,000 187,000
Cash, beginning of period..... 5,222,000 6,000 718,000 718,000 264,000 77,000
------- ------- ------- ------- ------- -------
Cash, end of period........... $ 407,000 $ 5,222,000 $ 590,000 $ 247,000 $ 718,000 $ 264,000
======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 150
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENT OF EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
TOTAL STOCK CAPITAL (DEFICIT)
----------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at December 31, 1994........ $ 490,000 $ $ 490,000 $
Reorganization and issuance of
stock........................... 53,306,000 63,000 53,243,000
Predecessor deficit................ (6,627,000) (6,627,000)
Issuance of stock to directors..... 71,000 71,000
Dividends/distributions declared... (2,695,000) (1,514,000) (1,181,000)
Net income......................... 1,181,000 1,181,000
Minority interest.................. (8,231,000) (8,231,000)
----------- ------- ----------- -----------
Balances at December 31, 1995........ $37,495,000 $63,000 $37,432,000 $
=========== ======= =========== ===========
</TABLE>
SUNSTONE INITIAL HOTELS (PREDECESSOR)
COMBINED STATEMENT OF DEFICIT
<TABLE>
<CAPTION>
PARTNERS
DEFICIT
-----------
<S> <C>
Balance at December 31, 1992........................................ $(9,500,000)
Net income........................................................ 245,000
Capital contributions............................................. 482,000
Distributions..................................................... (8,000)
----------
Balance at December 31, 1993........................................ (8,781,000)
Net income........................................................ 398,000
Capital contributions............................................. 159,000
Distributions..................................................... (50,000)
----------
Balance at December 31, 1994........................................ (8,274,000)
Net income........................................................ 1,674,000
Capital contributions............................................. 15,000
Distributions..................................................... (42,000)
----------
Balance at August 15, 1995.......................................... $(6,627,000)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 151
SUNSTONE HOTEL INVESTORS, INC. AND SUNSTONE INITIAL HOTELS -- PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND INITIAL PUBLIC OFFERING
Sunstone Hotel Investors, Inc. (the "Company"), a Maryland corporation, was
formed on September 21, 1994, as a real estate investment trust ("REIT"). The
Company completed an initial public offering (the "Offering") of 5,910,000
shares of its common stock on August 16, 1995. An additional 404,500 shares of
common stock were issued by the Company on September 3, 1995 upon a partial
exercise of the underwriters' over-allotment option. The offering price of all
shares sold in the Offering was $9.50 per share, resulting in gross proceeds of
approximately $60.0 million and net proceeds (less the underwriters' discount
and offering expenses) of approximately $53.0 million.
The Company contributed all of the net proceeds of the Offering to Sunstone
Hotel Investors, L.P. (the "Partnership") in exchange for an approximately 82.5%
aggregate equity interest in the Partnership. The Company conducts all its
business through and is the sole general partner of the Partnership (hereafter
referred to as the "Company").
In connection with the Offering, the Company acquired seven hotels (the
"Sunstone Initial Hotels") from seven entities controlled by officers and a
director of the Company and acquired the three additional hotels (the
"Acquisition Hotels" and together, the "Initial Hotels") from unrelated third
parties in exchange for (i) 1,288,500 units ("Units") in the Partnership
(representing the remaining 17.5% of equity interest in the Partnership) which
are exchangeable for a like number of shares of the common stock of the Company
and (ii) the payment of mortgage indebtedness for the Sunstone Initial Hotels of
approximately $23.5 million and other obligations relating to the Sunstone
Initial Hotels and (iii) payment of approximately $25.8 million to purchase the
Acquisition Hotels. The Initial Hotels together with the Hampton Inn in Oakland,
California (the "Hotels") acquired by the Company in December 1995 comprise all
of the investments of the Company at December 31, 1995.
The Company owns the Hotels and leases them to Sunstone Hotel Properties,
Inc. (the "Lessee") under operating leases (the "Percentage Leases") providing
for the payment of base and percentage rent. The Lessee is owned by Robert A.
Alter, Chairman and President of the Company (80%), and Charles L. Biederman,
Director and Executive Vice President of the Company (20%). The Lessee has
entered into a management agreement pursuant to which all of the Hotels are
managed by Sunstone Hotel Management, Inc. (the "Management Company"), of which
Mr. Alter is the sole shareholder.
Basis Of Presentation
For accounting purposes, the Company exercises unilateral control over the
Partnership; hence, the financial statements of the Company and the Partnership
are consolidated. All significant intercompany transactions and balances have
been eliminated.
The accompanying unaudited interim financial statements reflect, in the
opinion of the Company's management, all adjustments necessary for a fair
presentation of the interim financial statements. All such adjustments are of a
normal and recurring nature.
The Predecessor
The predecessor to the Company was Sunstone Initial Hotels (the
"Predecessor"), consisting of the seven entities referred to above. Due to a
common ownership and management of the Predecessor, the historical combined
financial statements have been accounted for as a group of entities under common
control. All significant intercompany transactions and balances have been
eliminated in the combined presentations. The financial statements of the
Predecessor do not include the Acquisition Hotels or the Oakland, California
property and are, therefore, not comparable to the financial statements of the
Company.
F-20
<PAGE> 152
SUNSTONE HOTEL INVESTORS, INC. AND SUNSTONE HOTELS -- PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment In Hotel Properties
The Sunstone Initial Hotels are recorded at the historical cost of the
Predecessor including accumulated depreciation and do not reflect the Company's
cost to acquire the Sunstone Initial Hotels. All other Hotels are recorded at
cost. Hotel assets are stated at the lower of cost or the amounts described
below and are depreciated using the straight-line method over estimated useful
lives of five to thirty-five years for buildings and improvements and three to
ten years for furniture, fixtures and equipment.
The Company estimates the fair values of each of their hotels on a
quarterly basis. Fair value is estimated as the expected undiscounted future
cash flows of the asset (generally over a five-year period), which is compared
to the net book values of the asset. If the expected undiscounted future cash
flows are less than the net book value of the asset, the excess of the net book
value over the estimated fair value is charged to current earnings. No such
charges to earnings have occurred to date. Fair value is determined based upon
discounted cash flows of the hotel assets at rates deemed reasonable for the
type of property and prevailing market conditions and appraisals. A gain or loss
is recorded to the extent the amounts ultimately received differ from the
adjusted book values of the hotel assets.
Cash And Cash Equivalents
Cash and cash equivalents are defined as cash on hand and in banks plus all
short-term investments with an original maturity of three months or less.
Other Assets
Other assets consist primarily of unearned compensation, deposits,
franchise fees and deferred loan fees. Amortization of deferred loan costs is
computed using the straight-line method over the life of the loan based upon the
terms of the loan agreements.
Concentrations Of Credit Risk
At December 31, 1995, the Company had significant amounts in banks that
were in excess of federally-insured amounts.
Revenue Recognition
The Company recognizes lease revenue on an accrual basis over the terms of
the respective leases.
Income Taxes
The Company expects to qualify as a real estate investment trust (REIT)
under the Internal Revenue Code of 1986, as amended (the "Code"). A REIT will
generally not be subject to federal income taxation to the extent that it
distributes at least 95% of its taxable income to its stockholders and complies
with other requirements. The Company is subject to state income and franchise
taxes in certain states in which it operates.
Net Income Per Share and Partnership Units
Net income per share is based on the weighted average number of common and
common equivalent shares outstanding during the year. Outstanding options are
included as common equivalent shares using the treasury stock method when the
effect is dilutive. The weighted average number of shares used in determining
net income per share was 6,322,000 for the period August 16, 1995 through
December 31, 1995. At
F-21
<PAGE> 153
SUNSTONE HOTEL INVESTORS, INC. AND SUNSTONE HOTELS -- PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995, a total of 7,709,859 partnership units were issued and
outstanding. The weighted average number of units for the same period was
7,662,121.
Fair Value Of Financial Instruments
For disclosure purposes, fair market value is determined by using available
market information and appropriate valuation methodologies. Cash and cash
equivalents and accrued liabilities are carried at amounts which reasonably
approximate fair value.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121 "Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed Of." This statement shall
be effective for financial statements for fiscal years beginning after December
15, 1995. Management has elected early adoption of this statement.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" which shall be effective for financial statements for fiscal years
beginning after December 15, 1995. Management intends to adopt the disclosure
method and, accordingly, there will be no impact on the Company's financial
position or results of operations.
3. INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties as of December 31, 1995 and December 31,
1994 ("Predecessor") consists of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Land...................................................... $11,597,000 $ 5,078,000
Building and improvements................................. 40,415,000 17,071,000
Furniture and equipment................................... 8,239,000 6,332,000
Construction in process................................... 2,280,000
------------ ------------
62,531,000 28,481,000
Less, Accumulated depreciation.......................... (12,605,000) (10,942,000)
------------ ------------
Net investment in hotel properties...................... $49,926,000 $17,539,000
============ ============
</TABLE>
4. REVOLVING LINE OF CREDIT
In October 1995, the Company obtained a three-year commitment for a $30
million credit facility bearing interest at a floating rate of 2.75% over LIBOR
(8.5% at December 31, 1995) that may be used for acquisitions, capital
improvements and working capital and general corporate purposes. The Company is
required to pay a .25% fee on the unused portion. As of December 31, 1995, the
Company had $21.6 million of unused credit.
F-22
<PAGE> 154
SUNSTONE HOTEL INVESTORS, INC. AND SUNSTONE HOTELS -- PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The line of credit is collateralized by the hotel properties currently
owned and by future acquisitions, including lease revenues generated from such
properties. In addition, the line of credit is guaranteed by certain Directors
of the Company.
The line of credit requires the Company to maintain a specified debt to net
worth ratio, a coverage ratio of EBITDA to debt service and a debt service
coverage ratio. In addition, the Company is restricted in the amount of
dividends it may distribute and must maintain a specified liquidity. Further,
the Company is required to maintain national franchises at each of its
properties and maintain its REIT status. At December 31, 1995, the Company was
in compliance with its covenants.
5. LONG-TERM DEBT (PREDECESSOR)
Long-term debt of the Predecessor at December 31, 1994 consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
PROPERTY PLEDGED AS COLLATERAL 1994 INTEREST RATE
---------------------------------------------------------- ------------ -------------
<S> <C> <C>
Hampton Inn -- Pueblo..................................... $ 3,691,087 8.5%
Hampton Inn -- Denver..................................... 5,652,045 10.0
Hampton Inn -- Mesa....................................... 4,389,193 8.5
Holiday Inn -- Steamboat.................................. 2,089,351 8.5
Holiday Inn -- Craig...................................... 356,187 9.0
Holiday Inn -- Provo...................................... 1,986,692 8.5
Courtyard by Marriott -- Fresno........................... 4,810,597 11.0
Land -- Craig............................................. 170,000 8.0
Various................................................... 552,889 4.0 - 10.0
-----------
$ 23,698,041
===========
</TABLE>
All long-term debt of the Predecessor was paid off with proceeds of the
Offering.
6. COMMITMENTS
Pursuant to the Leases, the Company is required to make available to the
Lessee for the repair, replacement and refurbishment of furniture, fixtures and
equipment in the Initial Hotels, when and as deemed necessary by the Lessee, an
amount equal to 4.0% of room revenue per quarter on a cumulative basis. To the
extent the reserve is not fully utilized by the Lessee in any year, the Company
may use the reserve to fund certain capital expenditures.
7. PREFERRED STOCK
The Company has the authority to issue 10,000,000 shares of preferred
stock, par value $0.01 per share, undesignated as to class, series or terms. No
shares of preferred stock have been issued or are outstanding as of December 31,
1995.
F-23
<PAGE> 155
SUNSTONE HOTEL INVESTORS, INC. AND SUNSTONE HOTELS -- PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASE RENTAL AGREEMENTS:
Future minimum rentals to be received by the Company from the Lessee under
the Leases at December 31, 1995 due for the next five years ended December 31
and in total thereafter are as follows:
<TABLE>
<S> <C>
1996............................................ $ 4,837,250
1997............................................ 4,837,250
1998............................................ 4,837,250
1999............................................ 4,837,250
2000............................................ 4,837,250
Thereafter...................................... 22,500,824
-----------
$46,687,074
===========
</TABLE>
The term of each lease is ten years. The rent due under each Lease is the
greater of Base Rent (subject to annual adjustments beginning January 1, 1996
based on increases in the United States Consumer Price Index ("CPI")) or
percentage rent. Percentage rent is calculated as 20% to 37% of room revenues,
up to a certain baseline revenue, then 60% to 65% of room revenues in excess of
the baseline revenues. Generally, percentage rent includes 5% of food and
beverage revenue and 100% of other net revenues. Rental income pursuant to the
leases for the period August 16, 1995 through December 31, 1995 was
approximately $3,013,000, of which approximately $1,328,000 was in excess of
base rents. All rents have been assigned as collateral under the line of credit.
9. STOCK OPTION PLANS
Under the Stock Incentive Plan adopted by the Board of Directors in 1994,
executive officers and other key employees of the Company may be granted share
options, restricted share awards or performance share awards. Restricted share
awards are subject to restrictions determined by the Company's Compensation
Committee. The Compensation Committee, comprised of independent Directors,
determines compensation for the Company's executive officer, and administers
awards under the Stock Incentive Plan. No restricted shares have been issued as
of December 31, 1995.
During the period August 16, 1995 through December 31, 1995 the Company
granted options to purchase 240,000 shares at an exercise price of $9.50 per
share. Such options, which are granted at a minimum of fair market value on the
date of grant, vest over 5 years. As of December 31, 1995, no options have been
exercised.
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Summarized quarterly financial data for the period August 16, 1995 through
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED QUARTER ENDED
SEPTEMBER 30 DECEMBER 31
------------ -------------
<S> <C> <C>
Lease revenues............................................ $1,145,000 $ 1,868,000
Net income before extraordinary item...................... 629,000 711,000
Net income per share before extraordinary item............ $0.10 $0.11
Net income................................................ 470,000 711,000
Net income per share...................................... $0.08 $0.11
</TABLE>
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the line of credit approximates fair value at
December 31, 1995 as the related interest rates are variable and in line with
market rates.
F-24
<PAGE> 156
SUNSTONE HOTEL INVESTORS, INC. AND SUNSTONE HOTELS -- PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS
The Company leases hotel properties to the Lessee. The revenue recognized
on these leases is classified as rental income in the statement of income. The
amount due from the Lessee under these lease agreements at December 31, 1995 is
approximately $645,000.
The Management Company provides certain accounting and management services
for the Company. The cost of these services amounted to $11,000 for the period
August 16, 1995 through December 31, 1995 and is included in general and
administrative services in the statement of operations.
At December 31, 1995 the Company has a due from affiliate of $21,000 which
represents interest expense incurred by the Company that is to be reimbursed by
affiliates. The interest is reimbursable pursuant to an understanding whereby
the Company has agreed to maintain debt in an amount of approximately $8.4
million in order to avoid triggering a taxable event to certain affiliates. Such
affiliates, in return have agreed to cover the negative interest spread under
this arrangement.
13. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES
The Company. During the period August 16, 1995 through December 31, 1995,
noncash transactions were as follows: (i) approximately $18.1 million of
historical basis in hotel property was contributed to the Partnership and
approximately $23.5 million in debt was assumed by the Partnership in exchange
for Partnership units, (ii) approximately $1.8 million of dividends and
distributions were declared but not paid, and (iii) approximately 50,000 Units
of the Partnership were issued in conjunction with the purchase of the Oakland
Hampton Inn.
The Predecessor. Interest paid in cash by Sunstone Initial Hotels, the
predecessor in the years ended December 31, 1994 and 1993 was $2,193,000 and
$2,228,000 respectively. Sunstone Initial Hotels also acquired land and building
and improvements of $647,000 and $2,000,000 through issuance of notes payable in
the years ended December 31, 1994 and 1993, respectively.
14. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information set forth below is presented as if: (i)
the Offering and related formation transactions had been consummated as of
January 1, 1995, and (ii) the acquisition of the Hampton Inn in Oakland,
California had occurred as of January 1, 1995.
The pro forma financial information is not necessarily indicative of what
actual results of operations of the Company would have been assuming the
Offering and related formation transactions and the acquisition of the Oakland
Hampton Inn had been consummated as of January 1, 1995, nor does it purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
(UNAUDITED)
<S> <C>
Lease revenues............................... $ 9,421,000
Net income................................... $ 4,930,000
Net income per share......................... $ 0.78
</TABLE>
15. SUBSEQUENT EVENTS
In February 1996, the Company purchased six Cypress Inn properties located
in Oregon and Washington for an aggregate amount of approximately $15 million in
cash, of which approximately $12 million was funded through a draw on the line
of credit.
F-25
<PAGE> 157
SUNSTONE HOTEL INVESTORS, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
COST CAPITALIZED GROSS AMOUNTS AT
SUBSEQUENT TO WHICH CARRIED AT
INITIAL COST ACQUISITION CLOSE OF PERIOD
------------------------- ---------------------- -------------------------
BUILDINGS BUILDINGS BUILDINGS
AND AND AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ------------------------- ----------- ----------- ------------ -------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hampton Inn -- Pueblo.... $ 607,183 $ 1,745,054 $ $ 406,290 $ 607,183 $ 2,151,344 $ 2,758,527
Hampton Inn -- Denver.... 1,250,462 2,597,505 674,935 1,250,462 3,272,440 4,522,902
Holiday Inn -- Steamboat
Springs................ 400,000 2,959,000 277,826 400,000 3,236,826 3,636,826
Holiday Inn -- Craig..... 70,000 915,024 202,187 665,347 272,187 1,580,371 1,852,558
Hampton Inn -- Mesa...... 900,000 2,117,321 194,573 900,000 2,311,894 3,211,894
Courtyard by Marriott --
Fresno................. 800,000 2,936,460 767,764 800,000 3,704,224 4,504,224
Holiday Inn -- Provo..... 850,000 1,116,708 63,488 850,000 1,180,196 2,030,196
Best Western -- Santa
Fe..................... 2,296,000 8,610,000 2,296,000 8,610,000 10,906,000
Hampton Inn -- Arcadia... 1,660,500 6,226,875 4,166 1,660,500 6,231,041 7,891,541
Hampton Inn
-- Silverthorne....... 1,337,625 5,016,094 11,564 1,337,625 5,027,658 6,365,283
Hampton Inn -- Oakland... 1,223,045 3,109,435 1,223,045 3,109,435 4,332,480
------ ----------- ----------- -------- ----------- ----------- ----------- -----------
$11,394,815 $37,349,476 $202,187 $3,065,953 $11,597,002 $40,415,429 $52,012,431
====== =========== =========== ======== =========== =========== =========== ===========
<CAPTION>
DEPRECIATION
ACCUMULATED NET DATE OF YEAR OF IS
DESCRIPTION DEPRECIATION BOOK VALUE CONSTRUCTION ACQUISITION CONDUCTED
- ------------------------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Hampton Inn -- Pueblo.... $1,013,344 $ 1,745,183 1985 31.5
Hampton Inn -- Denver.... 1,643,667 2,879,235 1985 31.5
Holiday Inn -- Steamboat
Springs................ 1,948,346 1,688,480 1984 31.5
Holiday Inn -- Craig..... 347,326 1,505,232 1991 31.5
Hampton Inn -- Mesa...... 590,391 2,621,503 1987 31.5
Courtyard by Marriott --
Fresno................. 685,717 3,818,507 1989 31.5
Holiday Inn -- Provo..... 79,251 1,950,945 1993 31.5
Best Western -- Santa
Fe..................... 219,555 10,686,445 1995 25.0
Hampton Inn -- Arcadia... 123,919 7,767,622 1995 29.0
Hampton Inn
-- Silverthorne....... 84,648 6,280,635 1995 33.0
Hampton Inn -- Oakland... 4,332,480 1995 27.0
----------- -----------
$6,736,164 $45,276,267
=========== ===========
</TABLE>
F-26
<PAGE> 158
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Sunstone Hotel Investors, Inc.
We have audited the accompanying balance sheet of Sunstone Hotel
Properties, Inc. (the "Lessee") as of December 31, 1995, and the related
statements of operations, deficit and cash flows for the period August 16, 1995,
inception, through December 31, 1995. These financial statements are the
responsibility of the Lessee's management. 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Sunstone Hotel Properties,
Inc. as of December 31, 1995, and the results of its operations and cash flows
for the period August 16, 1995, inception, through December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Newport Beach, California
March 22, 1996
F-27
<PAGE> 159
SUNSTONE HOTEL PROPERTIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
MARCH 31, 1996 -----------------
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash.......................................................... $2,074,000 $ 800,000
Receivables, net.............................................. 710,000 466,000
Inventories................................................... 69,000 125,000
Prepaid expenses and other assets............................. 790,000 70,000
---------- ----------
$3,643,000 $ 1,461,000
========== ==========
LIABILITIES AND DEFICIT:
Rent payable -- REIT.......................................... $2,227,000 $ 645,000
Accounts payable, trade....................................... 735,000 294,000
Advanced deposits............................................. 61,000 199,000
Sales taxes payable........................................... 222,000 225,000
Accrued payroll............................................... 220,000 242,000
Accrued vacation.............................................. 89,000 82,000
Accrued bonus................................................. 115,000
Due to affiliates............................................. 367,000 104,000
Other accrued expenses........................................ 487,000 301,000
---------- ----------
4,408,000 2,207,000
---------- ----------
SHAREHOLDERS' DEFICIT:
Common Stock, no par value, 1,000 shares authorized 100 shares
issued and outstanding
Shareholders' deficit......................................... (765,000) (746,000)
---------- ----------
$3,643,000 $ 1,461,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 160
SUNSTONE HOTEL PROPERTIES, INC.
STATEMENTS OF OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
FROM INCEPTION,
FOR THE THREE AUGUST 16, 1995,
MONTHS ENDED THROUGH DECEMBER
MARCH 31, 1996 31, 1995
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
OPERATING REVENUES:
Room........................................................ $6,786,000 $ 7,060,000
Food and beverage........................................... 232,000 572,000
Other....................................................... 318,000 293,000
---------- ----------
Total revenue....................................... 7,336,000 7,925,000
---------- ----------
OPERATING EXPENSES:
Room........................................................ 1,697,000 2,487,000
Food and beverage........................................... 242,000 531,000
Other....................................................... 193,000 131,000
General and administrative.................................. 461,000 726,000
Franchise costs............................................. 192,000 285,000
Advertising and promotion................................... 638,000 602,000
Utilities................................................... 294,000 363,000
Repairs and maintenance..................................... 316,000 376,000
Management fees............................................. 132,000 157,000
Rent expense................................................ 3,190,000 3,013,000
---------- ----------
Total expenses...................................... 7,355,000 8,671,000
---------- ----------
Net loss............................................ $ (19,000) $ (746,000)
========== ==========
Deficit, beginning of period.................................. (746,000) --
---------- ----------
Deficit, end of period........................................ $ (765,000) $ (746,000)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 161
SUNSTONE HOTEL PROPERTIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FROM
INCEPTION,
AUGUST 16,
1995,
FOR THE THREE THROUGH
MONTHS ENDED DECEMBER 31,
MARCH 31, 1996 1995
---------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (19,000) $ (746,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Changes in assets and liabilities:
Receivables, net....................................... (244,000) (466,000)
Inventories............................................ 56,000 (125,000)
Prepaid expenses and other assets...................... (320,000) (70,000)
Rent payable -- REIT................................... 1,582,000 645,000
Accounts payable, trade................................ 442,000 294,000
Advanced deposits...................................... (138,000) 199,000
Sales taxes payable.................................... (3,000) 225,000
Accrued payroll........................................ (22,000) 242,000
Accrued vacation....................................... 7,000 82,000
Accrued bonus.......................................... (16,000) 115,000
Due to affiliates...................................... 263,000 104,000
Other accrued expenses................................. 186,000 301,000
-------- -------
Net cash provided by operating activities........... 1,674,000 800,000
-------- -------
Cash flows from investing activities:
Capitalized construction costs.............................. (400,000)
-------- -------
Net cash used in investing activities:.............. (400,000)
-------- -------
Net change in cash.................................. 1,274,000
-------- -------
Cash, beginning of period..................................... 800,000 --
-------- -------
Cash, end of period........................................... $ 2,074,000 $ 800,000
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 162
SUNSTONE HOTEL PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Sunstone Hotel Properties, Inc. (the "Company") was incorporated in
Colorado in August 1995 and commenced operations effective with the completion
of an initial public stock offering (the "Offering") by Sunstone Hotel
Investors, Inc. (the "REIT") on August 16, 1995. The Company leases hotel
properties primarily located in the western United States and leases the
properties from the REIT pursuant to long term leases.
Basis of Presentation
The accompanying unaudited interim financial statements reflect, in the
opinion of the Company's management, all adjustments necessary for a fair
presentation of the interim financial statements. All such adjustments are of a
normal and recurring nature.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash And Cash Equivalents
Cash and cash equivalents are defined as cash on hand and in banks plus all
short-term investments with an original maturity of three months or less.
Inventories
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out basis.
Concentrations Of Credit Risk
At December 31, 1995, the Company had amounts in banks that were in excess
of the federally-insured amounts.
Revenue Recognition
Revenue is recognized as earned. Earned is generally defined as the date
upon which a guest occupies a room and utilizes the hotel's services. Ongoing
credit evaluations are performed and potential credit losses are expensed at the
time the account receivable is estimated to be uncollectible. Historically,
credit losses have not been material to the hotels' results of operations. The
Company has recorded an allowance for doubtful accounts of approximately $7,000
at December 31, 1995.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses are deemed to represent their fair value
at December 31, 1995.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-31
<PAGE> 163
SUNSTONE HOTEL PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. INCOME TAXES
The Company has elected to be treated as an S Corporation under Subchapter
S of the Internal Revenue Code. As an S Corporation, the tax attributes of the
Company will pass through to its stockholders, who will then owe any related
taxes. As a result, the accompanying Statements of Operations and Deficit show
no income tax expense.
4. COMMITMENTS
Franchise costs represent the expense for franchise royalties under the
terms of hotel franchise agreements, generally ranging from 10-20 years. Fees
are computed based upon percentages (generally 4%) of gross room revenue.
5. LEASE RENTAL AGREEMENTS
Future minimum rentals to be paid by the Lessee under the Leases at
December 31, 1995 are due for the next five years ended December 31 and in total
thereafter as follows:
<TABLE>
<S> <C>
1996............................................ $ 4,837,250
1997............................................ 4,837,250
1998............................................ 4,837,250
1999............................................ 4,837,250
2000............................................ 4,837,250
Thereafter...................................... 22,500,824
-----------
$46,687,074
===========
</TABLE>
The term of each lease is ten years. The rent payable under each Lease is
the greater of Base Rent (subject to annual adjustments beginning January 1,
1996 based on increases in the United States Consumer Price Index ("CPI")) or a
percentage rent. Percentage rent is calculated as 20% to 37% of room revenues,
up to a certain baseline revenue, then 60% to 65% of room revenues in excess of
the baseline revenues. In addition, percentage rent includes 5% of food and
beverage revenue and 100% of other net revenues. Rent expense for the period
August 16, 1995 through December 31, 1995 was approximately $3,013,000, of which
approximately $1,328,000 was in excess of base rent. The stockholders of the
Lessee have collateralized the lease payments by pledging units owned in
Sunstone Hotel Investors, L.P.
6. RELATED PARTY TRANSACTIONS
The Company leases hotel properties from the REIT. The amount due from the
Company to the REIT under these lease agreements at December 31, 1995 is
approximately $645,000.
Sunstone Hotel Management, Inc. (the "Management Company"), a company
wholly owned by Robert A. Alter, provided management services to the Company.
The cost of these services is classified as management fees in the statement of
operations.
F-32
<PAGE> 164
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Sunstone Hotel Investors, Inc.:
We have audited the accompanying balance sheet of Renton Joint Venture
(referred to as the "Partnership") as of December 31, 1995, and the related
statements of operations, partners' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Renton Joint Venture as of
December 31, 1995, and the results of its operations and its cash flows the year
then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
June 7, 1996
F-33
<PAGE> 165
RENTON JOINT VENTURE
(A WASHINGTON GENERAL PARTNERSHIP)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Investments in hotel properties, at cost:
Land............................................................ $ 627,145 $ 627,145
Building and improvements....................................... 1,993,213 1,993,213
Furniture and equipment......................................... 1,606,196 1,552,961
Accumulated depreciation........................................ (1,458,529) (1,422,105)
---------- -----------
Net Investment in hotel properties...................... 2,768,025 2,751,214
Cash.............................................................. 285,252 357,353
Receivables....................................................... 445,369 266,684
Inventory......................................................... 26,970 24,858
Prepaids.......................................................... 23,010 30,795
Intangible assets (net of accumulated amortization)............... 24,005 25,811
---------- -----------
Total assets............................................ $ 3,572,631 $3,456,715
========== ===========
LIABILITIES AND PARTNERS' EQUITY:
Accounts payable, trade........................................... $ 158,213 $ 146,264
Accrued expenses.................................................. 211,396 164,193
Notes payable..................................................... 2,227,929 2,215,108
---------- -----------
Total liabilities....................................... 2,597,538 2,525,565
---------- -----------
Commitments and contingencies
Partners' equity.................................................. 975,093 931,150
---------- -----------
Total liabilities and partners' equity.................. $ 3,572,631 $3,456,715
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 166
RENTON JOINT VENTURE
(A WASHINGTON GENERAL PARTNERSHIP)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED FOR THE YEAR
------------------------ ENDED
MARCH 31, MARCH 31, DECEMBER 31,
1995 1996 1995
--------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING REVENUES:
Room revenue.......................................... $ 538,514 $ 708,025 $2,914,025
Food and beverage revenue............................. 344,825 287,354 1,472,683
Other revenue......................................... 31,334 39,081 148,222
---------- -------- ----------
Total revenue................................. 914,673 1,034,460 4,534,930
OPERATING EXPENSES:
Room.................................................. 167,158 174,002 753,735
Food and beverage..................................... 290,081 246,005 1,148,926
Other................................................. 24,355 28,965 96,379
---------- -------- ----------
481,594 448,972 1,999,040
---------- -------- ----------
Departmental profit........................... 433,079 585,488 2,535,890
General and administrative.............................. 107,083 97,894 389,665
Utilities and other operating costs..................... 84,787 90,680 356,467
Property operating costs and maintenance................ 62,516 79,828 303,845
Management fee.......................................... 27,460 30,961 136,048
Advertising and promotion............................... 100,467 100,629 407,260
Personal property taxes and insurance................... 40,570 44,029 167,710
---------- -------- ----------
Gross operating profit........................ 10,196 141,467 774,895
---------- -------- ----------
Interest expense........................................ 61,685 59,294 272,795
Depreciation and amortization........................... 29,883 38,230 136,541
---------- -------- ----------
Net income.................................. $ (81,372) $ 43,943 $ 365,559
========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 167
RENTON JOINT VENTURE
(A WASHINGTON GENERAL PARTNERSHIP)
STATEMENT OF PARTNERS' EQUITY
<TABLE>
<S> <C>
Balance December 31, 1994......................................................... $565,592
Contributions................................................................... 50,000
Distributions................................................................... (50,000)
Net income...................................................................... 365,558
--------
Balance December 31, 1995......................................................... 931,150
Net income (unaudited).......................................................... 43,943
--------
Balance March 31, 1996 (unaudited)................................................ $975,093
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 168
RENTON JOINT VENTURE
(A WASHINGTON GENERAL PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS FOR THE YEAR
ENDED ENDED
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 43,943 $ 365,558
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization................................. 38,230 136,541
Change in assets and liabilities:
Receivables................................................... (178,685) (11,001)
Inventory..................................................... (2,112) 1,112
Prepaid expenses and other assets............................. 7,785 9,313
Accounts payable, trade....................................... 11,949 (35,385)
Accrued expenses.............................................. 47,203 (6,887)
--------- ---------
Net cash provided by (used in) operating activities...... (31,687) 459,251
Cash flows from investing activities:
Acquisition, improvements and additions to hotel properties...... (53,235) (189,626)
--------- ---------
Net cash used in investing activities.................... (53,235) (189,626)
--------- ---------
Cash flows from financing activities:
Principal payments on notes payable.............................. (33,800) (101,876)
Proceeds from notes payable...................................... 46,621
Contributions.................................................... -- 50,000
Distributions.................................................... -- (50,000)
--------- ---------
Net cash (used in) provided by financing activities...... 12,821 (101,876)
--------- ---------
Net change in cash................................................. (72,101) 167,749
Cash, beginning of period.......................................... 357,353 189,604
--------- ---------
Cash, end of period................................................ $ 285,252 $ 357,353
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest......................... $ 59,294 $ 256,119
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 169
RENTON JOINT VENTURE
(A WASHINGTON GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The Renton Joint Venture (the "Partnership") was formed for the purpose of
owning, operating, and holding for investment and ultimate resale the Holiday
Inn-Renton (a 188 room, full service "Hotel" in Renton, Washington).
The accompanying unaudited interim financial statements reflect, in the
opinion of the Partnership's management, all adjustments necessary for a fair
presentation of the interim financial statements. All such adjustments are of a
normal and recurring nature.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purpose of reporting cash flows, all highly liquid debt instruments
with maturities of three months or less on the date of acquisition are
considered to be cash equivalents.
Inventories
Inventories consist of food, beverages and guest supplies and are stated at
cost, which approximates market, with cost determined using the first-in,
first-out method.
Investment in Hotel Properties
The Hotel is stated at cost less reductions due to debt restructuring in
1993. Depreciation is computed using the straight-line method based upon the
following useful lives
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building and improvements............................. 40
Furniture and fixtures................................ 7
Equipment............................................. 5
</TABLE>
The Partnership's management periodically reviews the hotel property to
determine if its carrying costs will be recovered from future operations and,
accordingly, whether a reduction in carrying value should be recorded. No such
reductions have occurred to date.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition, the
asset and related accumulated depreciation are removed from the accounts, and
the gain or loss is included in operations.
Amortizable Assets
Amortizable assets consist primarily of deferred finance costs which are
recorded at cost and amortized over the life of the loan.
Income Taxes
No provision has been made in the accompanying financial statements for
federal or state income taxes as the taxable income or loss of the Partnership
is included in the owners' federal and state income tax returns. The
Partnership's tax returns and the amount of allocable income or loss are subject
to examination by the federal and state taxing authorities. If such examinations
result in changes to income or loss, the tax liability of the partners could be
changed accordingly.
F-38
<PAGE> 170
RENTON JOINT VENTURE
(A WASHINGTON GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Revenue is recognized as earned. Earned is generally defined as the date
upon which a guest occupies a room and/or utilizes the Hotel's services. Ongoing
credit evaluations are performed and potential credit losses are expensed at the
time the accounts receivable is estimated to be uncollectible. Historically,
credit losses have not been material to the Hotel's results of operations and,
accordingly, no allowance for doubtful accounts is recorded.
Impact of New Accounting Standards
In March, 1995, the Financial Accounting Standards issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed Of." This statement shall
be effective for financial statements for fiscal years beginning after December
15, 1995. Management believes that adoption of this standard will not have a
material effect on its financial position or results of operations.
Accounting 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,
including disclosure of contingent assets and liabilities at the date of the
financial statements. Ultimate actual results may, in some instances, differ
from previously estimated amounts.
3. NOTES PAYABLE:
<TABLE>
<S> <C>
Mortgage note payable with interest rate of 11.5%,
collateralized by the property of the Partnership, due in
monthly installments with original maturity on November 1,
2000.......................................................... $1,912,695
Notes payable to GIAC, due in monthly installments with original
maturity on October 1, 1999................................... 302,413
----------
$2,215,108
==========
</TABLE>
Scheduled principal payments of notes payable are as follows for fiscal
years ending December 31:
<TABLE>
<S> <C>
1996............................................................ $ 119,413
1997............................................................ 128,933
1998............................................................ 149,639
1999............................................................ 136,199
2000............................................................ 72,956
Thereafter...................................................... 1,607,968
----------
$2,215,108
==========
</TABLE>
F-39
<PAGE> 171
RENTON JOINT VENTURE
(A WASHINGTON GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. OPERATING LEASES
The Partnership leases certain equipment under noncancelable operating
leases with terms ranging from 12 months to 10 years. The following are the
future minimum rental payments under noncancelable operating leases for each of
the remaining years ending December 31:
<TABLE>
<S> <C>
1996............................................................ $ 76,144
1997............................................................ 56,710
1998............................................................ 34,140
1999............................................................ 13,876
2000 and thereafter............................................. 4,625
----------
$ 185,495
==========
</TABLE>
Rental expense for the year ended December 31, 1995, including additional
percentage rents, was $81,636.
5. RELATED PARTIES
In 1995, the Partnership paid management fees of $136,048 to 405 Renton
Inc., a partner, and accounting fees of $24,000 to Westminster Hotel.
6. SUBSEQUENT EVENT
The Partners of the Partnership intend to sell the Hotel to Sunstone Hotel
Investors, Inc. for approximately $8.1 million.
F-40
<PAGE> 172
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Sunstone Hotel Investors, Inc.
We have audited the accompanying combined balance sheet of Bay City
Hospitality, Inc. and Price Hospitality, Inc. (referred to as the "Companies")
as of October 31, 1995, and the related combined statements of operations,
equity, and cash flows for the year then ended. These combined financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
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 financial position of Bay City
Hospitality, Inc. and Price Hospitality, Inc. as of October 31, 1995, and the
results of their operations and their cash flows the year then ended, in
conformity with generally accepted accounting principles.
COOPERS AND LYBRAND L.L.P.
Newport Beach, California
July 2, 1996
F-41
<PAGE> 173
BAY CITY HOSPITALITY, INC. AND PRICE HOSPITALITY, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
1995
JANUARY 31, -----------
1996
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Investments in hotel properties, at cost:
Land............................................................ $ 1,971,535 $ 1,971,535
Building and improvements....................................... 5,299,579 5,298,890
Furniture and equipment......................................... 1,712,536 1,547,279
Accumulated depreciation........................................ (1,058,066) (960,294)
----------- -----------
Net investment in hotel properties...................... 7,925,584 7,857,410
Cash.............................................................. 1,413,332 1,963,001
Receivables....................................................... 133,540 140,720
Inventory......................................................... 10,565 9,235
Other assets...................................................... 300,508 128,580
Receivable from shareholder....................................... 33,880
----------- -----------
Total assets............................................ $ 9,817,409 $10,098,946
=========== ===========
LIABILITIES AND EQUITY:
Accounts payable, trade........................................... 243,137 260,354
Accrued interest.................................................. 401,375 378,084
Accrued expenses.................................................. 110,353 199,100
Notes payable..................................................... 8,707,264 8,593,262
Loans from shareholder............................................ 271,120
----------- -----------
Total liabilities....................................... 9,462,129 9,701,920
----------- -----------
Commitments and contingencies
Equity............................................................ 355,280 397,026
----------- -----------
Total liabilities and equity............................ $ 9,817,409 $10,098,946
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-42
<PAGE> 174
BAY CITY HOSPITALITY, INC. AND PRICE HOSPITALITY, INC.
COMBINED STATEMENTS OF OPERATIONS AND EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
OCTOBER 31, 1995
FOR THE THREE ----------------
MONTHS ENDED
JANUARY 31, 1996
----------------
(UNAUDITED)
<S> <C> <C>
OPERATING REVENUES:
Room revenue.................................................. $1,037,663 $4,758,540
Other revenue................................................. 185,881 831,257
---------- ----------
Total revenue....................................... 1,223,544 5,589,797
---------- ----------
OPERATING EXPENSES:
Room.......................................................... 288,046 1,195,532
Food and beverage............................................. 128,378 493,449
Other......................................................... 19,938 84,839
---------- ----------
436,362 1,773,820
---------- ----------
Departmental profit................................. 787,182 3,815,977
---------- ----------
General and administrative.................................... 200,453 662,066
Advertising and promotion..................................... 59,458 445,967
Utilities..................................................... 57,014 253,526
Repairs and maintenance....................................... 59,022 236,898
Real estate, personal property taxes, and insurance........... 71,780 264,292
Management fees............................................... 48,880 223,591
---------- ----------
496,607 2,086,340
---------- ----------
Gross operating profit...................................... 290,575 1,729,637
---------- ----------
Interest expense.............................................. 234,551 1,103,944
Depreciation and amortization................................. 97,772 403,453
---------- ----------
Net (loss) income................................... $ (41,748) $ 222,240
========== ==========
Equity at beginning of period................................. 397,028 174,788
Equity at end of period....................................... $ 355,280 $ 397,028
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-43
<PAGE> 175
BAY CITY HOSPITALITY, INC. AND PRICE HOSPITALITY, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
OCTOBER 31,
1995
FOR THE THREE ---------------
MONTHS ENDED
JANUARY 31,
1996
---------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income............................................ $ (41,748) $ 222,240
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 97,772 403,453
Changes in assets and liabilities:
Escrow funds............................................ 123,054
Receivables............................................. 7,180 29,415
Inventory............................................... (1,330)
Other assets............................................ (171,928) 6,616
Accounts payable, trade................................. (17,217) 54,556
Accrued interest........................................ 23,291 1,875
Accrued expenses........................................ (88,747) 76,398
---------- ----------
Net cash provided by operating activities............ (192,727) 917,607
---------- ----------
Cash flows from investing activities:
Acquisition, improvements and additions to hotel
properties................................................ (165,944) (329,730)
---------- ----------
Net cash used in investing activities................ (165,944) (329,730)
---------- ----------
Cash flows from financing activities:
Net borrowings (payments) on notes payable................... 114,002 (17,519)
Principal payments on loans from shareholders................ (305,000) (29,880)
---------- ----------
Net cash used in financing activities................ (190,998) (47,399)
---------- ----------
Net change in cash................................... (549,669) 540,478
---------- ----------
Cash, beginning of period...................................... 1,963,001 1,422,523
Cash, end of period............................................ 1,413,332 $ 1,963,001
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest..................... $ 211,260 $ 1,027,546
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-44
<PAGE> 176
BAY CITY HOSPITALITY, INC. AND PRICE HOSPITALITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Bay City Hospitality, Inc. and Price Hospitality, Inc., (the "Companies")
are corporations that own a 165-room hotel located in South San Francisco,
California and a 148-room hotel in Price, Utah, respectively (the "Hotels"). The
Hotels are operated pursuant to franchise agreements with Choice Hotels
International, Inc. and Days Inns of America, Inc., respectively, and are
managed by Westmont Hospitality, Inc.
Basis Of Presentation
The accompanying financial statements have been presented on a combined
basis because the Companies are ultimately owned by the same parent company.
The accompanying unaudited interim financial statements reflect, in the
opinion of the Companies' management, all adjustments necessary for a fair
presentation of the interim financial statements. All such adjustments are of a
normal and recurring nature.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment In Hotel Properties
The Hotels are stated at cost. Depreciation is computed using the
straight-line method based upon the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building and improvements............................. 40
Furniture and fixtures................................ 7
Equipment............................................. 5
</TABLE>
The Companies' management periodically reviews each hotel property to
determine if its carrying costs will be recovered from future operations and,
accordingly, whether a reduction in carrying value should be recorded. No such
reductions have occurred to date.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition, the
asset and related accumulated depreciation are removed from the accounts, and
the gain or loss is included in operations.
Cash
The Companies consider all temporary cash investments purchased with
maturity dates of three months or less on the date of acquisition to be cash
equivalents.
Inventory
Inventory consists of food and beverages that are stated at cost, which
approximates market, with cost determined using the first-in, first-out method.
Income Taxes
No provision has been made in the accompanying financial statements for
federal or state income taxes as the taxable income or loss of the Company is
included in the owners' federal and state income tax returns.
F-45
<PAGE> 177
BAY CITY HOSPITALITY, INC. AND PRICE HOSPITALITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Revenue is recognized as earned. Earned is generally defined as the date
upon which a guest occupies a room and/or utilizes the Hotels' services. Credit
evaluations are performed at year end and potential credit losses are expensed
at the time the accounts receivable is estimated to be uncollectible.
Historically, credit losses have not been material to the Hotels' results of
operations and, accordingly, no allowance for doubtful accounts is recorded.
Management 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 of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Impact Of New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed Of." This statement shall
be effective for financial statements for fiscal years beginning after December
15, 1995. Management believes that adoption of this standard will not have a
material effect on its financial position or results of operations.
3. NOTES PAYABLE
<TABLE>
<CAPTION>
BAY CITY HOSPITALITY, INC.
---------------------------------------------------------------------
<S> <C>
Mortgage note payable with interest rate of 7% through May 1994, 8%
through June 1995, and 9% thereafter, collateralized by the assets
of the Company and personal guarantees of certain officers of the
Company's parent, due in monthly installments, with original
maturity on May 1, 1997............................................ $3,995,098
Mortgage note payable................................................ 1,592,500
---------
$5,587,598
=========
</TABLE>
<TABLE>
<CAPTION>
PRICE HOSPITALITY, INC.
---------------------------------------------------------------------
<S> <C>
Promissory note payable with interest rate of 8%, collateralized by a
deed of trust on the hotel property, due in monthly installments,
with a maturity date of December 1, 2000........................... $1,875,265
Mortgage note payable................................................ 1,090,000
----------
2,965,265
----------
Other notes payable.................................................. 40,399
----------
$8,593,262
=========
</TABLE>
The Companies entered into loan agreements with CSSF in 1993 in the
original amounts of $1,592,500 and $1,090,000, respectively, that are
collateralized by second liens on the related Hotel property and its
improvements. The entire principal amounts are due in May and December 1998, but
can be extended to May and December 2000, respectively.
The loan agreements define several methods for the accrual and payment of
interest, including (1) accrual throughout the term of the obligation at one
rate (11%); (2) payment of interest at another rate (currently 8% throughout the
remaining term of the loan); (3) computation of additional interest based on the
net cash flow of the Hotels; and (4) computation of interest based on
appreciation of the Hotels' property and
F-46
<PAGE> 178
BAY CITY HOSPITALITY, INC. AND PRICE HOSPITALITY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
improvements during the term of the loan. Additional interest is paid currently,
first reducing the obligation for the accrued but unpaid interest, and then as
an incremental amount of interest. The interest computation based on
appreciation in property values must be positive, meaning CSSF will not share in
depreciation of the property. Additional interest is accrued when incremental
amounts are due, but no amount has been provided for the potential obligation
for shared appreciation because there is no objective basis for doing so.
4. COMMITMENTS
Operating Leases:
The Companies lease certain land and equipment under noncancellable
operating leases with terms ranging from 36 to 60 months. The following are the
future minimum rental payments under noncancellable operating leases for each of
the remaining years ending October 31:
<TABLE>
<S> <C>
1996............................................... $ 5,244
1997............................................... 4,305
1998............................................... 3,229
--------
--
$12,778
==========
</TABLE>
Rental expense for the year ended October 31, 1995, was $9,781.
5. RELATED PARTY TRANSACTIONS:
The Companies have entered into management agreements with Westmont
Hospitality, Inc. which require the Companies to remit to Westmont a monthly
management fee equal to 4% of related hotel room revenue, as defined.
Additionally, the Companies each pay Westmont $1,500 per month in accounting
fees. Westmont is owned by the Companies' parent.
6. CONCENTRATION OF CREDIT RISK
At October 31, 1995, the Companies collectively had approximately
$1,286,000 on deposit with financial institutions that exceeded the FDIC limit.
F-47
<PAGE> 179
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Bay City Hospitality, Inc.
Houston, Texas
We have audited the accompanying balance sheets of Bay City Hospitality,
Inc., a California Corporation, as of October 31, 1994 and 1993, and the related
statements of income, changes in shareholder's equity and of cash flows for the
year and period 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 accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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 Bay City Hospitality, Inc.
as of October 31, 1994 and 1993, and the results of its operations and of its
cash flows for the year and period then ended in conformity with generally
accepted accounting principles.
GRIFFING & COMPANY, P.C.
Houston, Texas
December 4, 1995
F-48
<PAGE> 180
BAY CITY HOSPITALITY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSETS:
Current assets
Cash.............................................................. $ 755,727 $ 868,854
Accounts receivable (Note 2)...................................... 122,791 94,440
---------- ----------
Total current assets...................................... 878,518 963,294
---------- ----------
Property & equipment (Notes 2 & 3)
Land.............................................................. 1,731,368 1,731,368
Buildings......................................................... 3,114,510 3,114,510
Furniture & fixtures.............................................. 898,514 562,153
Equipment......................................................... 39,576 9,728
---------- ----------
5,783,968 5,417,759
Accumulated depreciation.......................................... (462,838) (86,515)
---------- ----------
Net property & equipment.................................. 5,321,130 5,331,244
---------- ----------
Other assets, net of amortization (Note 2)
Deferred loan costs............................................... 41,936 53,918
Franchise license fee............................................. 17,500 22,500
Deposit........................................................... 17,000 17,000
Liquor license.................................................... 10,500 7,500
---------- ----------
Total other assets........................................ 86,936 100,918
---------- ----------
Total assets........................................................ $6,286,584 $6,395,456
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY:
Current liabilities
Accounts payable.................................................. $ 71,575 $ 67,802
Accrued liabilities
Interest....................................................... 183,697 165,726
Taxes other than income........................................ 80,975 84,928
Wages & payroll taxes.......................................... 53,702 40,338
Management & accounting fees (Note 3).......................... 23,145 22,420
Other.......................................................... 8,256 2,709
Current maturities of long-term debt (Note 2)..................... 17,373
Income taxes payable.............................................. 41,119 28,621
---------- ----------
Total current liabilities................................. 479,842 412,544
Long-term debt, net of current maturities (Note 2).................. 5,729,627 5,899,000
---------- ----------
Total liabilities......................................... 6,209,469 6,311,544
---------- ----------
Commitments & contingencies (Note 4)................................
Shareholder's Equity
Common stock, $1.00 par value, 10,000 shares authorized, 1,000
shares issued and outstanding.................................. 1,000 1,000
Retained earnings................................................. 76,115 82,912
---------- ----------
Total shareholders's equity............................... 77,115 83,912
---------- ----------
Total liabilities & shareholder's equity.................. $6,286,584 $6,395,456
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE> 181
BAY CITY HOSPITALITY, INC.
INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION,
FOR THE YEAR FEBRUARY 5,
ENDED 1993, THROUGH
OCTOBER 31, OCTOBER 31,
1994 1993
------------------ -----------------
<S> <C> <C>
REVENUE
Rooms..................................................... $2,933,269 $ 1,628,235
Food...................................................... 8,023 5,383
Telephone................................................. 76,367 30,939
Other..................................................... 8,157 4,227
------------------ -----------------
Total revenue.......................................... 3,025,816 1,668,784
------------------ -----------------
DEPARTMENTAL EXPENSE
Rooms..................................................... 803,150 401,703
Food...................................................... 84 143
Telephone................................................. 30,821 14,696
------------------ -----------------
Total departmental expenses............................ 834,055 416,542
------------------ -----------------
Interest income............................................. 8,766 3,158
------------------ -----------------
UNDISTRIBUTED EXPENSES
Administrative & general (Note 3)......................... 370,468 199,284
Marketing................................................. 304,801 180,240
Repairs and maintenance................................... 125,207 66,377
Management fee (Note 3)................................... 121,383 66,863
Energy costs.............................................. 108,553 62,819
------------------ -----------------
Total undistributed expense............................ 1,030,412 575,583
------------------ -----------------
Income before fixed charges................................. 1,170,115 679,817
------------------ -----------------
FIXED CHARGES
Interest.................................................. 569,816 364,889
Depreciation and amortization............................. 381,323 89,015
Property taxes............................................ 158,878 79,075
Insurance................................................. 53,663 34,176
Rent...................................................... 734 1,129
------------------ -----------------
Total fixed charges.................................... 1,164,414 568,284
------------------ -----------------
Income before income taxes.................................. 5,701 111,533
Income taxes................................................ 12,498 28,621
------------------ -----------------
Net (loss) income........................................... $ (6,797) $ 82,912
============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE> 182
BAY CITY HOSPITALITY, INC.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1994
AND THE PERIOD FROM INCEPTION, FEBRUARY 5, 1993, THROUGH OCTOBER 31, 1993
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
------ -------- -------
<S> <C> <C> <C>
Stock issued................................................... $1,000 $ 1,000
Net income..................................................... $ 82,912 82,912
------ ------- -------
Balance, October 31, 1993...................................... 1,000 82,912 83,912
Net loss....................................................... (6,797) (6,797)
------ ------- -------
Balance, October 31, 1994...................................... $1,000 $ 76,115 $77,115
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-51
<PAGE> 183
BAY CITY HOSPITALITY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION,
FEBRUARY 5,
1993,
FOR THE YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
1994 1993
------------------ ----------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income.......................................... $ (6,797) $ 82,912
--------- --------
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation & amortization, including amortized
interest.............................................. 393,305 95,006
Increase (decrease) in cash from changes in working
capital:
Accounts receivable..................................... (28,350) (81,063)
Prepaid expenses........................................ 27,554
Accounts payable........................................ 3,773 67,802
Accrued liabilities..................................... 33,654 310,003
Income taxes payable.................................... 12,498 28,621
--------- --------
Total adjustments.................................. 414,880 447,923
--------- --------
Cash provided by operating activities.............. 408,083 530,835
--------- --------
Cash flows from investing activities:
Additions to property & equipment.......................... (366,210) (63,030)
Additions to other assets.................................. (3,000) (24,500)
Cash used by investing activities (369,210) (87,530)
--------- --------
Cash flows from financing activities:
Repayments of shareholder advances......................... (152,000)
Proceeds from long-term debt............................... 425,549
--------- --------
Cash provided by financing activities.............. (152,000) 425,549
--------- --------
Change in cash and cash equivalents.......................... (113,127) 868,854
Cash and cash equivalents, beginning......................... 868,854
--------- --------
Cash and cash equivalents, ending.................. $ 755,727 $ 868,854
========= ========
Supplemental disclosures of cash flow information:
Interest paid during the year.............................. $ 401,119 $ 193,000
Supplemental schedule of noncash investing and financing
activities:
Net assets acquired at the inception of operations using
long-term debt, net of cash retained.................... $5,480,000
Stock issuance financed using shareholder advance.......... $ 1,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-52
<PAGE> 184
BAY CITY HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bay City Hospitality, Inc. (the "Company"), is a corporation that owns a
165-room hotel located in South San Francisco, California (the "Hotel"). The
Hotel is operated pursuant to a franchise agreement with Choice Hotels
International, Inc. and managed by Westmont Hospitality Group, Inc.
("Westmont"). The Company is a wholly-owned subsidiary of Sedko Group, Inc.
("Sedko").
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 of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Significant accounting policies of the Company are set out below.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all
temporary cash investments purchased with a maturity of three months or less to
be cash equivalents.
Inventory
Inventory consists of food and beverages that are stated at cost, which is
not materially different from market.
Property and Equipment
Property and equipment are stated at cost in the accompanying financial
statements. Depreciation is computed using the double-declining balance method
over estimated useful lives of 5 years for furniture, fixtures, and equipment,
and over 31 1/2 and 39 years for the underlying real estate.
Renewals, additions, and betterments which extend the life of the property
are capitalized while repairs and maintenance are charged to operations as
incurred. Disposals are removed at cost less accumulated depreciation with any
resulting gain or loss reflected in income.
Franchise Fees
"Franchise License Fees" included in the accompanying financial statements
as an asset represent the initial cost to the Company, net of accumulated
amortization, to enter the Choice hotel system. The fee is amortized to
operations over the 20 year term of the license agreement. Accumulated
amortization at October 31, 1994 and 1993 is $7,500 and $2,500, respectively.
In addition to the initial license fee, the Company pays Choice each month
continuing franchise fees, assessments for marketing & reservations, and other
fees. Monthly fees aggregating $199,000 in 1994 and $121,000 in 1993 are
included in operations in the caption "Administrative & General" and
"Marketing." Deferred Loan Costs
Deferred loan costs are amounts incurred to obtain the financing described
in Note 2. The costs are amortized to operations, included in "Interest
Expense," using the straight line method over the life of the loan. Accumulated
amortization at October 31, 1994 and 1993 are $17,973 and $5,991, respectively.
Federal Income Taxes
The Company's federal income tax return filing requirements are to be met
by its inclusion in the consolidated federal income tax return of Sedko. The
federal tax amounts presented in the accompanying
F-53
<PAGE> 185
BAY CITY HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
financial statements as "Income Taxes" are the amounts the Company would have to
pay if it filed a separate tax return. The accounting policy used by the Company
and its parent require, among other things, that deferred taxes be recognized
for the tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial report amounts. The tax and financial
reporting bases of the Company are the same; deferred taxes are not recognized
in the accompanying financial statements.
2. LONG-TERM DEBT
Long-term debt at October 31, 1994 and 1993 consists of the obligations set
out below to LW-SP2, L.P. (Lennar), Comfort Suites-San Francisco, Ltd (CSSF),
and to Sedko that were incurred to acquire the real property and improvements of
an existing hotel site, and to fund the construction and renovation of those
improvements.
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Lennar (See A below)........................................ $4,012,500 $4,012,500
CSSF (See B below).......................................... 1,592,500 1,592,500
Shareholder Advance (See C below)........................... 142,000 294,000
---------- ----------
Total long-term debt........................................ 5,747,000 5,899,000
Less: current maturities.................................... 17,373
---------- ----------
Long-term debt, net of current maturities................... $5,729,627 $5,899,000
========== ==========
</TABLE>
Repayment of principal is scheduled as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING OCTOBER 31,
-------------------------------------------------------------------------
<S> <C>
1995..................................................................... $ 17,373
1996..................................................................... 45,697
1997..................................................................... 3,949,430
1998.....................................................................
1999.....................................................................
Thereafter............................................................... 1,734,500
----------
Total.......................................................... $5,747,000
==========
</TABLE>
- ---------------
(A) The Company entered into a Promissory Note agreement in 1993 in the original
amount of $4,012,500 that is collateralized by a first lien on all property
and equipment, as well as the liquor license, franchise agreement,
receivables, and the personal guarantees of certain officers of Sedko. The
obligation is payable interest only for the first two years, blended
payments for the next two years using a 25 year amortization period, and a
final payment of $3,949,430 due May 1, 1997. The obligation bears interest
of 7% through May 1994, 8% until June 1995, and 9% thereafter.
(B) The Company entered into a Loan Agreement with CSSF in 1993 in the original
amount of $1,592,500 that is collateralized by a second lien on the Hotel
property and its improvements. The entire principal amount is due May 6,
1998, but that date can be extended to May 6, 2000.
The Loan Agreement defines several methods for the accrual and payment of
interest, including (1) accrual throughout the term of the obligation at one
rate (11%); (2) payment of interest at another rate (currently 7% through
May 6, 1995 and 8% throughout the remaining term of the loan); (3)
computation of additional interest based on the net cash flow of the Hotel;
and (4) computation of interest based on appreciation of the Hotel property
and improvements during the term of the loan. The difference between the
accrued interest and paid interest described above is added to the principal
of the loan at each loan year and is due at the maturity of the loan unless
paid earlier. Additional interest is paid
F-54
<PAGE> 186
BAY CITY HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
currently, first reducing the obligation for the accrued but unpaid interest
described above, and then as an incremental amount of interest. The interest
computation based on appreciation in property values must be positive,
meaning CSSF will not share in depreciation of the property. Additional
interest is accrued when incremental amounts are due, but no amount has been
provided for the potential obligation for shared appreciation because there
is no objective basis for doing so.
The interest accruals and payments described above are limited to the
maximum rate of interest allowed by the State of New York, which is
currently 25%. The effective interest rates paid on this obligation in
fiscal 1994 and 1993 were 16 and 14%, respectively.
(C) Amounts due to Sedko are considered long-term as no payments are scheduled.
No interest is imputed or charged on these related party advances.
The loan agreements for the Lennar and CSSF notes described above include
certain restrictive Covenants and Events of Default which, if violated, would
cause repayment of the obligations to accelerate. Management believes the
Company is in compliance with all such Covenants and Events of Default.
3. MANAGEMENT OF HOTEL
The Company entered into an agreement with Westmont in 1993 granting
Westmont the sole and exclusive right to supervise and direct the management and
operations of the Hotel. Sedko is the parent company of both the Company and
Westmont.
The initial term of the Management Agreement is ten years, with two
five-year renewal terms available at the option of Westmont. In exchange for its
management services, Westmont is paid a Management Fee equal to 4% of gross
revenues of the Hotels as defined in the Management Agreement, plus $1,500 per
month for providing accounting services to the Company. The Company's fees to
Westmont aggregating $139,000 and $75,000 in fiscal 1994 and 1993, respectively,
are included in the captions "Administrative & General" and "Management Fee."
Amounts payable to Westmont were about $14,000 and $13,000, respectively at
October 31, 1994 and 1993.
The Management Agreement includes certain restrictive Covenants and Events
of Default which provide Westmont certain remedies in the event they are
violated. Westmont was granted a lien and a secured interest in the Hotel real
property as security for amounts due or to become due under the Management
Agreement, including a Termination Fee, as defined in this Agreement. Management
believes the Company is in compliance with all such Covenants and Events of
Default.
4. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
include cash on deposit with two financial institutions which exceed federally
insured deposit limits by about $410,500 at October 31, 1994.
The Company's customers include overnight guests as well as companies and
individuals who have arranged for guest rooms or seminar or banquet facilities.
Most customers secure their rooms with credit cards. When credit is extended to
customers, the Company performs periodic credit evaluations of its customers and
provides an allowance for doubtful accounts when necessary. Management believes
that no allowance was necessary at October 31, 1994 or 1993.
F-55
<PAGE> 187
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Price Hospitality, Inc.
Houston, Texas
We have audited the accompanying balance sheet of Price Hospitality, Inc.,
a Utah Corporation, as of October 31, 1994, and the related statements of
income, changes in shareholder's equity, and cash flows for the period from
inception of operations, December 29, 1993 to October 31, 1994. 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 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Price Hospitality, Inc. as
of October 31, 1994, and the results of its operations and of cash flows for the
period then ended in conformity with generally accepted accounting principles.
GRIFFING & COMPANY, P.C.
Houston, Texas
July 2, 1996
F-56
<PAGE> 188
PRICE HOSPITALITY, INC.
BALANCE SHEET
OCTOBER 31, 1994
<TABLE>
<S> <C> <C>
ASSETS:
CURRENT ASSETS
Cash.............................................................. $ 789,855
Accounts receivable............................................... 47,343
Inventory......................................................... 12,760
----------
Total current assets...................................... 849,958
PROPERTY AND EQUIPMENT (Note 1)
Land.............................................................. 240,167
Buildings......................................................... 2,036,797
Furniture and fixtures............................................ 411,115
Equipment......................................................... 16,017
----------
2,704,096
Accumulated depreciation............................................ (90,841)
----------
Net property and equipment................................ 2,613,255
----------
OTHER ASSETS, NET OF AMORTIZATION
Franchise fee..................................................... 18,889
Loan escrow....................................................... 43,110
Liquor license.................................................... 10,458
----------
Total other assets........................................ 72,457
----------
Total assets.............................................. $3,535,670
=========
LIABILITIES AND SHAREHOLDER'S EQUITY:
CURRENT LIABILITIES
Accounts payable.................................................. $ 36,098
Accrued liabilities
Taxes other than income........................................ 42,609
Interest....................................................... 81,319
Wages and payroll taxes........................................ 40,565
Management and accounting (Note 5)............................. 8,021
Auditing....................................................... 9,000
Current maturities of long-term debt (Note 2)....................... 44,085
Income taxes payable................................................ 35,074
----------
Total current liabilities................................. 296,771
LONG-TERM DEBT, NET OF CURRENT MATURITIES...........................
Note payable (Note 2)............................................. 3,120,696
Deferred income taxes payable (Note 4)............................ 12,081
----------
Total long term liabilities............................... 3,132,777
----------
Total liabilities......................................... $3,429,548
----------
Commitments and contingencies (Note 7)..............................
Shareholder's equity
Common Stock, $1.00 par value, 10,000 shares authorized, 1,000
shares issued and outstanding.................................. 1,000
Retained earnings................................................. 105,122
----------
Total shareholder's equity................................ 106,122
----------
Total liabilities and shareholder's equity.......................... $3,535,670
=========
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE> 189
PRICE HOSPITALITY, INC.
STATEMENT OF INCOME AND CHANGES IN SHAREHOLDER'S EQUITY
FOR THE PERIOD FROM INCEPTION OF OPERATIONS
THROUGH OCTOBER 31, 1994
<TABLE>
<S> <C>
REVENUES
Rooms.......................................................................... $1,317,546
Food & beverage................................................................ 497,101
Telephone...................................................................... 50,022
Other.......................................................................... 3,629
----------
Total revenues.............................................................. $1,868,298
----------
DEPARTMENTAL EXPENSES
Rooms.......................................................................... 298,748
Food & beverage................................................................ 358,502
Telephone...................................................................... 27,607
----------
Total departmental expenses................................................. 684,857
Interest income.................................................................. 7,444
UNDISTRIBUTED EXPENSES
Administrative & general (Note 5).............................................. 221,702
Management fee (Note 5)........................................................ 75,030
Marketing...................................................................... 115,843
Repairs & maintenance.......................................................... 84,329
Energy costs................................................................... 98,515
----------
Total undistributed expenses................................................ 595,419
----------
Income before fixed charges...................................................... 595,466
----------
FIXED CHARGES
Property taxes................................................................. 35,771
Insurance...................................................................... 26,728
Interest....................................................................... 280,820
Depreciation & amortization (Note 2)........................................... 99,870
----------
Total fixed charges......................................................... 443,189
----------
Income before income taxes....................................................... 152,277
Federal income taxes........................................................... 41,089
State income taxes............................................................. 6,066
----------
Net income....................................................................... $ 105,122
==========
Common Stock issued.............................................................. $ 1,000
Net Income....................................................................... 105,122
----------
Balance, October 31, 1994........................................................ $ 106,122
==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE> 190
PRICE HOSPITALITY, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION OF OPERATIONS
THROUGH OCTOBER 31, 1994
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 105,122
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 99,870
Increase (decrease) in cash from changes in working
Accounts receivable............................................................ (48,764)
Inventory...................................................................... (3,178)
Accounts payable............................................................... 36,098
Accrued liabilities............................................................ 180,887
Income taxes payable........................................................... 47,155
----------
Total adjustments.............................................................. 312,068
----------
Cash provided by operating activities.......................................... $ 417,190
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............................................ (34,490)
Payment of franchise fees...................................................... (20,000)
Payment of loan cost........................................................... (1,511)
----------
Cash used by investing activities.............................................. $ (56,001)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................................................... 457,885
Principal payments on long-term debt........................................... (34,219)
Advances from shareholder...................................................... 5,000
----------
Cash provided by financing activities.......................................... $ 428,666
----------
Change in cash and cash equivalents.............................................. 789,855
Cash and cash equivalents, beginning............................................. 0
----------
Cash and cash equivalents, ending................................................ $ 789,855
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during the year.................................................... $ 199,483
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Net assets acquired at the inception of operations using long-term debt, net of
cash........................................................................... $2,737,115
Stock issuance financed using shareholder advance................................ $ 1,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE> 191
PRICE HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF ORGANIZATION
Price Hospitality, Inc. (the "Company"), is a Corporation which was formed
under the laws of Utah on September 27, 1993. On December 29, 1993 (date of
inception of operations) the Company purchased the Days Inn hotel located in
Price, Utah (the "Hotel"). The Hotel is operated pursuant to a franchise
agreement with Days Inn of America, Inc. The Company is a wholly-owned
subsidiary of Sedko Investment Services Corp. ("Sedko")
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 of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Significant accounting policies of the Company are set out below.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all
temporary cash investments purchased with a maturity of three months or less to
be cash equivalents.
Inventory
Inventory consists of food and beverages stated at cost, which is not
materially different from market.
Property and Equipment
Property and equipment are stated at cost in the accompanying financial
statements. Depreciation is computed using the straight line method over
estimated useful lives of 7 years for furniture, fixtures, and equipment, and 40
years for the underlying real estate.
Renewals, additions, and/or betterments which extend the life of the
property are capitalized while repairs and maintenance are charged to operations
as incurred. Disposals are removed at cost less accumulated depreciation with
any resulting gain or loss reflected in income.
Franchise Fees
"Franchise License Fees" included in the accompanying financial statements
as an asset represents the initial cost to the Company, net of accumulated
amortization, to enter the Days Inn hotel system. The fee is amortized to
operations over the 15 year term of the license agreement. Accumulated
amortization at October 31, 1994 is about $1,100.
In addition to the initial license fee, the Company pays Days Inn each
month continuing franchise fees, assessments for reservations, and other fees.
Monthly fees aggregating approximately $97,500 in 1994 are included in
operations in the caption "Administrative & General" and "Marketing."
Federal Income Taxes
The Company's federal income tax return filing requirements are met by its
inclusion in the consolidated federal income tax return of Sedko. The amounts
presented in the accompanying financial statements as "Federal Income Taxes" are
the amounts the Company would have to pay if it filed a separate tax return. The
accounting policy used by the Company and its parent require, among other
things, that deferred taxes be recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial report amounts (Note 4).
F-60
<PAGE> 192
PRICE HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. LONG-TERM DEBT
Long-term debt at October 31, 1994 consists of the obligations set out
below to Solus Arkansas Portfolio ("Solus"), Castle Limited ("Castle"), and to
Sedko Investment Services Corp. ("Sedko") that were incurred to acquire the real
property and improvements of an existing hotel site, and to fund the
construction and renovation of those improvements.
<TABLE>
<S> <C>
Solus (See A below).............................................. $1,915,781
Castle (See B below)............................................. 1,090,000
Shareholder advance (See C below)................................ 159,000
----------
Total long-term debt............................................. 3,164,781
Less: current maturities......................................... 44,085
----------
Long-term debt, net of current maturities........................ $3,120,696
=========
</TABLE>
Repayment of principal is scheduled as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
OCTOBER 31, TOTAL
------------------ ----------
<S> <C>
1995........................................................ $ 44,085
1996........................................................ 47,313
1997........................................................ 51,671
1998........................................................ 1,145,959
1999........................................................ 60,604
Thereafter..................................................... 1,815,149
----------
Total................................................ $3,164,781
=========
</TABLE>
(A) The Company entered into a promissory note agreement in 1993 in the
original amount of $1,950,000 that is collateralized by a first lien on
all property and equipment, as well as the liquor license, franchise
agreement, receivables, and the personal guarantees of certain officers
of Sedko. The obligation is payable interest only for the initial
payment, blended payments starting February 1, 1994 of $16,311 using a
20 year amortization, and a final payment of $1,578,840 due December
31, 2000. The obligation bears an interest rate of 8% for the term of
the loan.
(B) The Company entered into a loan agreement with Castle in 1993 in the
original amount of $1,090,000 that is collateralized by a second lien
on the Hotel property and its improvements. The entire principal is due
December 28, 1998, but that date can be extended to December 28, 2000.
The loan agreement defines several methods for the accrual and payment
of interest, including (1) accrual throughout the term of the
obligation at one rate (11%); (2) payment of interest at another rate
(currently 7% through December 28, 1995 and 8% through the remaining
term of the loan); (3) computation of additional interest based on the
net cash flow of the Hotel; and (4) computation of interest based on
appreciation of the Hotel property and improvements during the term of
the loan. The difference between the accrued interest and paid interest
described above is added to the principal of the loan at each loan year
and is due at the maturity of the loan unless paid earlier. Additional
interest is paid currently, first reducing the obligation for the
accrued but unpaid interest described above, and then as an incremental
amount of interest. The interest computation based on appreciation in
property values must be positive, meaning Castle will not share in the
depreciation of the property. Additional interest is accrued when
incremental amounts are due, but no amount has been provided for the
potential obligation for shared appreciation because there is no
objective basis for doing so.
F-61
<PAGE> 193
PRICE HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(C) Amounts due to Sedko are considered long-term as no payments are
scheduled. No interest is imputed or charged on these related party
advances.
The loan agreements for the Solus and Castle notes described above include
certain restrictive Covenants and Events of Default which, if violated, would
cause repayment of the obligation to accelerate. Management believes the Company
is in compliance with all such Covenants and Events of Default.
3. LEASE OBLIGATIONS
The Company leases certain assets under noncancelable leases presented in
the accompanying financial statements as operating leases. All leases require
minimum monthly payments that include applicable taxes.
Rental Expense related for the operating leases were about $5,000 in the
accompanying financial statements for October 31, 1994. Following is a schedule
of future minimum lease payments for the operating leases.
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
------------
<S> <C>
1995............................................ $ 5,390
1996............................................ 5,299
1997............................................ 4,305
1998............................................ 3,229
-------
Total........................................... $18,223
=======
</TABLE>
4. INCOME TAXES
Effective October 31, 1994, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (FAS 109). Under the
provisions of FAS 109, an entity recognizes deferred tax assets and liabilities
for future tax consequences of events that have been previously recognized in
the Company's financial statements or tax returns. The measurement of deferred
tax assets and liabilities is based on provisions of the enacted tax law: the
effects of future changes in tax laws or rates are not anticipated.
As of October 31, 1994, the federal and state income tax liabilities
consists of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ------ -------
<S> <C> <C> <C>
Current Income Taxes Payable........................... $30,557 $4,517 $35,074
Deferred Tax Liability................................. 10,532 1,549 12,081
------- ------ -------
Total Income Tax Liability............................. $41,089 $6,066 $47,155
======= ====== =======
</TABLE>
As of October 31, 1994, the provisions for federal and state income tax
expense is as follows:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ------ -------
<S> <C> <C> <C>
Current................................................ $30,557 $4,517 $35,074
Deferred............................................... 10,532 1,549 12,081
------- ------ -------
Total Income Taxes..................................... $41,089 $6,066 $47,155
======= ====== =======
</TABLE>
The tax liability exists because the Company uses the straight line method
of depreciation over estimated lives of seven years for furniture, fixtures and
equipment, and 40 years for the underlying real estate for book purposes. For
tax purposes, the Company uses the Modified Accelerated Cost Recovery System
(MACRS) over the estimated useful lives which range from 5 to 39 years.
Therefore, depreciation is deducted over shorter lives for tax purposes then
permitted by generally accepted accounting principles.
F-62
<PAGE> 194
PRICE HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. MANAGEMENT OF HOTEL
The Company entered into an agreement with Westmont Hospitality Group, Inc.
in 1993 granting Westmont the sole and exclusive right to supervise and direct
the management and operation of the Hotel. Sedko is the parent company of both
the Company and Westmont.
The initial term of the Management Agreement is ten years with two
five-year renewal terms available at the option of Westmont. In exchange for its
management services, Westmont is paid a Management Fee equal to 4% of the gross
revenues of the Hotel, as defined in the Management Agreement, plus $1,500 per
month for providing accounting services to the Company. The Company's fees to
Westmont were about $90,000 in the fiscal year ended 1994. Amounts payable to
Westmont were about $8,000 at October 31, 1994.
The Management Agreement includes certain restrictive Covenants and Events
of Default which provide Westmont certain remedies in the event they are
violated. Westmont was granted a lien and a secured interest in the Hotel real
property as security for amounts due or to become due under the Management
Agreement, including a Termination Fee, as defined in this agreement. Management
believes the Company is in compliance with all such Covenants and Events of
Default.
6. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
include cash on deposit with three financial institutions amounting to
approximately $530,000 at October 31, 1994 which were insured up to only
$300,000 by the U.S. Federal Deposit Insurance Corporation.
The Company's customers include overnight guests as well as companies and
individuals who have arranged for guest rooms or seminar or banquet facilities.
Most customers secure their rooms with credit cards. When credit is extended to
customers, the Company performs periodic credit evaluations of its customers and
provides an allowance for doubtful accounts when necessary. Management believes
that no allowance was necessary at October 31, 1994.
7. SUBSEQUENT EVENT
The Company has executed a letter of intent with Sunstone Hotel Properties,
Inc. for the sale of the Hotel.
F-63
<PAGE> 195
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or any 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 Underwriters. 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. 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 the 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............................... 26
Use of Proceeds........................... 27
Price Range of Common Stock and
Distributions........................... 28
Capitalization............................ 29
Selected Financial Information............ 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 34
Business and Properties................... 40
Policies and Objectives with Respect to
Certain Activities...................... 65
Management................................ 69
Certain Transactions...................... 79
The Lessee................................ 82
The Management Company.................... 85
Principal Stockholders.................... 86
Description of Capital Stock.............. 87
Certain Provisions of Maryland Law and of
the Company's Articles of Incorporation
and Bylaws.............................. 91
Shares Available for Future Sale.......... 94
Partnership Agreement..................... 95
Federal Income Tax Considerations......... 98
Underwriting.............................. 116
Experts................................... 117
Reports to Stockholders................... 117
Legal Matters............................. 117
Additional Information.................... 118
Glossary.................................. 120
Index to Financial Statements............. F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
4,800,000 SHARES
[LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
BEAR, STEARNS & CO., INC.
EVEREN SECURITIES, INC.
RAYMOND JAMES &
ASSOCIATES, INC.
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 196
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, payable by the
Company in connection with the sale of Common Stock being registered. All
amounts are estimates except the SEC registration fee, the NASD filing fee and
the NASDAQ NMS listing (entry) fees.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC Registration fee...................................................... $
NASD filing fee...........................................................
NASDAQ NMS listing (entry) fees...........................................
Printing and engraving....................................................
Legal fees and expenses of the Company....................................
Accounting fees and expenses..............................................
Blue sky fees and expenses................................................
Transfer Agent and Registrar fees.........................................
Miscellaneous.............................................................
--------
Total........................................................... $ 800,000
========
</TABLE>
ITEM 31. 1. SALES TO SPECIAL PARTIES.
See Item 32 below.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
On September 23, 1994, (i) 12,300 Units were issued by the Partnership to
Robert A. Alter in exchange for $123,000 in cash and warrants to purchase 12,470
Units will be granted to Mr. Alter, upon consummation of the Offering (ii) 9,000
Units were issued by the Partnership to Charles L. Biederman in exchange for
$90,000 in cash and warrants to purchase 17,042 Units will be granted to Mr.
Biederman upon consummation of the Offering and (iii) 3,200 shares of Common
Stock of the Company were issued to C. Robert Enever in exchange for $32,000 in
cash and warrants to purchase 4,434 Units will be granted to Mr. Enever upon
consummation of the Offering pursuant to the terms of the Subscription
Agreement. These issuances of Units and Common Stock were effected in reliance
upon an exemption from registration under Section 4(2) of the Securities Act as
a transaction not involving a public offering. The issuance of the warrants will
be effected in reliance upon an exemption from registration under Section 4(2)
of the Securities Act as a transaction not involving a public offering. On
September 23, 1994, 24,500 Units were issued by the Partnership to M R C Hotel
Partners, Ltd., a Sunstone Affiliate, in exchange for $245,000 in cash. This
issuance was effected in reliance upon the exemption from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering. Warrants to purchase 33,946 Units will be issued by the Partnership to
MYPC an affiliate of Montgomery Securities, one of the Representatives, upon
consummation of the Offering pursuant to the terms of an engagement agreement.
This issuance will be effected in reliance upon the exemption from registration
under Section 4(2) of the Securities Act as a transaction not involving a public
offering. As part of the Formation Transactions (i) an aggregate of 1,288,500
Units, valued at approximately $13,529,250 based on the estimated Offering Price
of $10.50 per share of Common Stock, including approximately 539,971 Units,
valued at approximately $5,669,696 based on the estimated Offering Price, which
will be beneficially owned by Mr. Alter, approximately 356,677 Units, valued at
approximately $3,745,109 based on the estimated Offering Price, which will be
beneficially owned by Affiliates of Mr. Biederman, approximately 156,363 Units,
valued at approximately $1,641,812 based on the estimated Offering Price, which
will be beneficially owned by Mr. Enever, and approximately 235,489 Units,
valued at approximately $2,472,635 based on the estimated Offering Price, which
will be beneficially owned by third parties unaffiliated with Messrs. Alter,
Biederman or
II-1
<PAGE> 197
Enever, will be issued to the owners of the Sunstone Initial Hotels in return
for the transfer of the Sunstone Initial Hotels to the Partnership. These
issuances will be effected in reliance upon an exemption from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering. On December 13, 1995, the Partnership issued 50,539 Units to Inns
Properties, L.P. in exchange for the contribution of the 152 room Hampton Inn in
Oakland, California. As of April 1, 1996, the Partnership issued 80,000 to an
Affiliate of Mr. Alter and Mr. Biederman in exchange for the contribution of the
163 room Courtyard by Marriott Hotel in Riverside, California. Each of these
issuances of Units were effected in reliance upon an exemption from registration
under Section 4(2) of the Securities Act as a transaction not involving a public
offering.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the Maryland General Corporation Law (the "MGCL") empowers
the Company to indemnify, subject to the standards set forth therein, any person
who is a party in any action in connection with any action, suit or proceeding
brought or threatened by reason of the fact that the person was a director,
officer, employee or agent of such company, or is or was serving as such with
respect to another entity at the request of such company. The MGCL also provides
that the Company may purchase insurance on behalf of any such director, officer,
employee or agent.
The Company's Articles of Incorporation provide for indemnification of the
officers and directors of the Company substantially identical in scope to that
permitted under Section 2-418 of the MGCL. The Bylaws of the Company also
provide that the expenses of officers and directors incurred in defending any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, must be paid by the Company as they are incurred and in advance
of the final disposition of the action, suit or proceeding, upon receipt of an
undertaking by or on behalf of the director or officer to repay all amounts so
advanced if it is ultimately determined by a court of competent jurisdiction
that the officer or director is not entitled to be indemnified by the Company,
Prior to the completion of the Offering, the Company anticipates entering
into indemnification agreements with certain of its directors and officers that
require the Company to indemnify such directors and officers to the fullest
extent permitted by applicable provisions of the MGCL, provided that any
settlement of a third party action against a director or officer is approved by
the Company, and subject to limitations for actions initiated by the director or
officer, penalties paid by insurance, and violations of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and similar laws.
Pursuant to the Underwriting Agreement, a copy of which is filed as Exhibit
1.1 to this Registration Statement, the Registrant has agreed to indemnify the
Underwriters against certain liabilities which may be incurred in connection
with the Offering made by this Prospectus forming a part of this Registration
Statement, including liabilities under the Securities Act, and the Underwriters
have agreed to indemnify the Company and its officers and directors against
certain similar liabilities.
The Company's Charter limits the liability of the Company's directors and
officers for money damages to the Company and its shareholders to the fullest
extent permitted from time to time by Maryland law. Maryland law presently
permits the liability of directors and officers to a corporation or its
shareholders for money damages to be limited, except (i) to the extent that it
is proved that the director or officer actually received an improper benefit or
profit or (ii) if a judgment or other final adjudication is entered in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. This provision
does not limit the ability of the Company or its shareholders to obtain other
relief, such as an injunction or rescission.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
II-2
<PAGE> 198
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
INDEX TO FINANCIAL STATEMENTS INCLUDED IN PROSPECTUS
<TABLE>
<CAPTION>
PROSPECTUS
PAGE
----------
<S> <C>
Sunstone Hotel Investors, Inc. -- Pro Forma Consolidated Financial Information
Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 1996............. F-3
Notes to Unaudited Pro Forma Consolidated Balance Sheet......................... F-4
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended
December 31, 1995............................................................ F-6
Unaudited Pro Forma Consolidated Statement of Income for the Three Months Ended
March 31, 1996............................................................... F-7
Unaudited Pro Forma Consolidated Statement of Income for the Three Months Ended
March 31, 1995............................................................... F-8
Notes to Unaudited Pro Forma Consolidated Statements of Income.................. F-9
Sunstone Hotel Properties, Inc. -- Pro Forma Combined Statements of Operations
Unaudited Pro Forma Combined Statement of Operations for the Year Ended
December 31, 1995............................................................ F-11
Unaudited Pro Forma Combined Statement of Operations for the Three Months Ended
March 31, 1996............................................................... F-12
Unaudited Pro Forma Combined Statement of Operations for the Three Months Ended
March 31, 1995............................................................... F-13
Notes to Unaudited Pro Forma Combined Statements of Operations.................. F-14
Sunstone Hotel Investors, Inc. and Sunstone Initial Hotels (the "Predecessor")
Report of Independent Accountants............................................... F-15
Sunstone Hotel Investors, Inc. -- Consolidated Balance Sheets as of March 31,
1996 (unaudited), December 31, 1995 and 1994; Sunstone Initial Hotels
(Predecessor) -- Combined Balance Sheet as of December 31, 1994.............. F-16
Sunstone Hotel Investors, Inc. -- Consolidated Statement of Income for the Three
Months
Ended March 31, 1996 (unaudited) and for the Period August 16, 1995
(Inception) through
December 31, 1995; Sunstone Initial Hotels (Predecessor) -- Combined
Statement of
Income for the Three Months Ended March 31, 1995 (unaudited) and for the
Period January 1, 1995 Through August 15, 1995 and for the Years Ended
December 31, 1994 and 1993................................................... F-17
Sunstone Hotel Investors, Inc. -- Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 1996 (unaudited) and for the Period August 16,
1995 (Inception) Through December 31, 1995; Sunstone Initial Hotels
(Predecessor) -- Combined Statement of Cash Flows for the Three Months Ended
March 31, 1995 (unaudited) and for the Period January 1, 1995 Through August
15, 1995 and for the Years Ended December 31, 1994 and 1993.................. F-18
Sunstone Hotel Investors, Inc. -- Consolidated Statement of Equity for the Year
Ended December 31, 1995; Sunstone Initial Hotels (Predecessor) -- Combined
Statement of
Deficit for the Period January 1, 1995 to August 15, 1995 and the Years Ended
December 31, 1994 and 1993................................................... F-19
Notes to Consolidated and Combined Financial Statements......................... F-20
Schedule III -- Real Estate and Accumulated Depreciation as of December 31,
1995......................................................................... F-26
Sunstone Hotel Properties, Inc. (the Lessee)
Report of Independent Accountants............................................... F-27
Balance Sheets as of March 31, 1996 (unaudited) and December 31, 1995........... F-28
</TABLE>
II-3
<PAGE> 199
<TABLE>
<CAPTION>
PROSPECTUS
PAGE
----------
<S> <C>
Statements of Operations and Deficit for the Three Months Ended March 31, 1996
(unaudited) and for the Period From Inception, August 16, 1995 through
December 31, 1995............................................................ F-29
Statements of Cash Flows for the Three Months Ended March 31, 1996 (unaudited)
and for the Period From Inception, August 16, 1995 Through December 31,
1995......................................................................... F-30
Notes to Combined Financial Statements.......................................... F-31
Renton Joint Venture (A Washington General partnership)
Report of Independent Accountants............................................... F-33
Balance Sheets as of March 31, 1996 (unaudited) and December 31, 1995........... F-34
Statements of Operations for the Three Months Ended March 31, 1995 and 1996
(unaudited) and for the Year Ended December 31, 1995......................... F-35
Statement of Partners' Equity for the Year Ended December 31, 1995 and for the
Three Months Ended March 31, 1996 (unaudited)................................ F-36
Statements of Cash Flows for the Three Months Ended March 31, 1996 (unaudited)
and for the Year Ended December 31, 1995..................................... F-37
Notes to Financial Statements................................................... F-38
Bay City Hospitality, Inc. and Price Hospitality, Inc.
Report of Independent Accountants............................................... F-41
Combined Balance Sheets as of January 31, 1996 (unaudited) and October 31,
1995......................................................................... F-42
Combined Statements of Operations and Equity for the Three Months Ended January
31, 1996 (unaudited) and for the Year Ended October 31, 1995................. F-43
Combined Statements of Cash Flows for the Three Months Ended January 31, 1996
(unaudited) and for the Year Ended October 31, 1995.......................... F-44
Notes to Combined Financial Statements.......................................... F-45
Bay City Hospitality, Inc.
Report of Independent Accountants............................................... F-48
Balance Sheets as of October 31, 1994 and 1993.................................. F-49
Income Statements for the Year Ended October 31, 1994 and for the Period From
Inception, February 5, 1993, Through October 31, 1993........................ F-50
Statement of Changes in Shareholder's Equity for the Period From Inception,
February 5, 1993, Through October 31, 1994................................... F-51
Statements of Cash Flows for the Year Ended October 31, 1994 and for the Period
From Inception, February 5, 1993, Through October 31, 1993................... F-52
Notes to Financial Statements................................................... F-53
Price Hospitality, Inc.
Report of Independent Accountants............................................... F-56
Balance Sheet as of October 31, 1994............................................ F-57
Statement of Income and Changes in Shareholder's Equity for the Period From
Inception of Operations Through October 31, 1994............................. F-58
Statement of Cash Flows for the Period From Inception of Operations Through
October 31, 1994............................................................. F-59
Notes to Financial Statements................................................... F-60
</TABLE>
II-4
<PAGE> 200
(b) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended Articles of Incorporation of the Company, as further amended by the
Articles of Amendment of the Company, as filed with the State Department of
Assessments and Taxation of Maryland on November 9, 1994, filed as Exhibit 3.1 to
the Company's Registration Statement No. 33-84346 and incorporated herein by this
reference.
3.2 Bylaws of the Company, as currently in effect, filed as Exhibit 3.2 to the
Company's Registration Statement No. 33-84346 and incorporated herein by this
reference.
3.3 Articles of Amendment of the Company, as filed with the State Department of
Assessments and Taxation of Maryland on June 19, 1995, filed as Exhibit 3.3 to the
Company's Registration Statement No. 33-84346 and incorporated herein by this
reference.
5.1* Opinion of Ballard Spahr Andrews & Ingersoll as to legality of the shares being
registered.
8.1**** Opinion of Brobeck, Phleger and Harrison as to tax matters.
10.1 Form of First Amended and Restated Agreement of Limited Partnership of the
Partnership, filed as Exhibit 10.1 to the Company's Registration Statement No.
33-84346 and incorporated herein by this reference.
10.1.1 First Amendment to First Amended and Restated Agreement of Limited Partnership
dated as of December 12, 1995, filed as Exhibit 10.36 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 (the "1995 10-K") and
incorporated herein by this reference.
10.1.2 Second Amendment to First Amended and Restated Agreement of Limited Partnership
dated as of December 28, 1995, filed as Exhibit 10.1.2 to the Company's 1995 10-K
and incorporated herein by this reference.
10.1.3 Third Amendment to First Amended and Restated Agreement of Limited Partnership
dated as of March 17, 1996, filed as Exhibit 10.1.3 to the Company's amended
Quarterly Report on Form 10-Q/A for the period ending March 31, 1996 (the "First
Quarter 10-Q/A"), and incorporated herein by this reference.
10.1.4*** Fourth Amendment to First Amended and Restated Agreement of Limited Partnership
dated as of July 2, 1996.
10.2 Form of Percentage Lease, filed as Exhibit 10.2 to the Company's Registration
Statement No. 33-84346 and incorporated herein by this reference.
10.2.1 Lease Agreement dated as of August 16, 1995 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for
the Hampton Inn Hotel located in Denver S.E., Colorado, filed as Exhibit 10.2.1 to
the Company's 1995 10-K and incorporated herein by this reference.
10.2.2 Lease Agreement dated as of August 16, 1995 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for
the Hampton Inn Hotel located in Pueblo, Colorado, filed as Exhibit 10.2.2 to the
Company's 1995 10-K and incorporated herein by this reference.
10.2.3 Lease Agreement dated as of August 16, 1995 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for
the Courtyard By Marriott Hotel located in Fresno, California, filed as Exhibit
10.2.3 to the Company's 1995 10-K and incorporated herein by this reference.
10.2.4 Lease Agreement dated as of August 16, 1995 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for
the Courtyard By Hampton Inn located in Mesa, Arizona, filed as Exhibit 10.2.4 to
the Company's 1995 10-K and incorporated herein by this reference.
</TABLE>
II-5
<PAGE> 201
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------------------
<C> <S>
10.2.5 Lease Agreement dated as of August 16, 1995 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for
the Holiday Inn Hotel located in Steamboat Springs, Colorado, filed as Exhibit
10.2.5 to the Company's 1995 10-K and incorporated herein by this reference.
10.2.6 Lease Agreement dated as of August 16, 1995 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for
the Holiday Inn Hotel located in Craig, Colorado, filed as Exhibit 10.2.6 to the
Company's 1995 10-K and incorporated herein by this reference.
10.2.7 Lease Agreement dated as of August 16, 1995 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for
the Holiday Inn Hotel located in Provo, Utah, filed as Exhibit 10.2.7 to the
Company's 1995 10-K and incorporated herein by this reference.
10.2.8 Lease Agreement dated as of August 16, 1995 by and between Sunstone Hotel
Investors, L.P. as lessor, and Sunstone Hotel Properties, Inc., as lessee, for the
Hampton Inn Hotel located in Silverthorne, Colorado, filed as Exhibit 10.2.7 to
the Company's 1995 10-K and incorporated herein by this reference.
10.2.9 Lease Agreement dated as of August 16, 1995 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for
the Doubletree Hotel located in Santa Fe, New Mexico, filed as Exhibit 10.2.9 to
the Company's 1995 10-K and incorporated herein by this reference.
10.2.10 Lease Agreement dated as of August 16, 1995 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for
the Hampton Inn Hotel located in Arcadia, California, filed as Exhibit 10.2.10 to
the Company's 1995 10-K and incorporated herein by this reference.
10.2.11 Lease Agreement dated as of December 13, 1995 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for
the Hampton Inn Hotel located in Oakland, California, filed as Exhibit 10.2.11 to
the Company's 1995 10-K and incorporated herein by this reference.
10.2.12 Lease Agreement dated February 2, 1996 by and between Sunstone Hotel Investors,
L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for the Cypress
Inn hotel located in Clackamas, Oregon, filed as Exhibit 10.2.12 to the Company's
First Quarter 1996 10-Q/A, and incorporated herein by this reference.
10.2.13 Lease Agreement dated February 2, 1996 by and between Sunstone Hotel Investors,
L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for the Cypress
Inn hotel located in Kent, Washington, filed as Exhibit 10.2.13 to the Company's
First Quarter 1996 10-Q/A, and incorporated herein by this reference.
10.2.14 Lease Agreement dated February 2, 1996 by and between Sunstone Hotel Investors,
L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for the Cypress
Inn hotel located in Poulsbo, Washington, filed as Exhibit 10.2.14 to the
Company's First Quarter 1996 10-Q/A, and incorporated herein by this reference.
10.2.15 Lease Agreement dated February 2, 1996 by and between Sunstone Hotel Investors,
L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for the Cypress
Inn hotel located in Portland, Oregon, filed as Exhibit 10.2.15 to the Company's
First Quarter 1996 10-Q/A, and incorporated herein by this reference.
10.2.16** Lease Agreement dated March 28, 1996 by and between Sunstone Hotel Investors,
L.P., as lessor, and Sunstone Hotel Properties, Inc., as lessee, for the Courtyard
By Marriott hotel located in Riverside, California.
</TABLE>
II-6
<PAGE> 202
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------------------
<C> <S>
10.2.17** Lease Agreement dated June 28, 1996 by and between Sunstone Hotel Investors, L.P.,
as lessor, and Sunstone Hotel Properties, Inc., as lessee, for the Holiday Inn
hotel located in Renton, Washington.
10.3 Form of Right of First Refusal and Option to Purchase, filed as Exhibit 10.3 to
the Company's Registration Statement No. 33-84346 and incorporated herein by this
reference.
10.4 Form of Alter Employment Agreement, filed as Exhibit 10.4 to the Company's
Registration Statement No. 33-84346 and incorporated herein by this reference.
10.5 Form of Biederman Employment Agreement, filed as Exhibit 10.5 to the Company's
Registration Statement No. 33-84346 and incorporated herein by this reference.
10.6 Form of Indemnification Agreement to be entered into with officers and directors
of the Company, filed as Exhibit 10.6 to the Company's Registration Statement No.
33-84346 and incorporated herein by this reference.
10.7 1994 Stock Incentive Plan, filed as Exhibit 10.7 to the Company's Registration
Statement No. 33-84346 and incorporated herein by this reference.
10.8 Form of Notice of Grant of Stock Option and Form of Stock Option Agreement (and
Addendum thereto) to be generally used in connection with the Discretionary Option
Grant Program of the 1994 Stock Incentive Plan, filed as Exhibit 10.8 to the
Company's Registration Statement No. 33-84346 and incorporated herein by this
reference.
10.9 Form of Stock Purchase Agreement to be generally used in connection with the
Discretionary Option Grant Program of the 1994 Stock Incentive Plan, filed as
Exhibit 10.9 to the Company's Registration Statement No. 33-84346 and incorporated
herein by this reference.
10.10 1994 Directors Plan, filed as Exhibit 10.10 to the Company's Registration
Statement No. 33-84346 and incorporated herein by this reference.
10.11 Form of Notice of Grant of Automatic Stock Option, Automatic Stock Option
Agreement, Stock Purchase Agreement and Automatic Direct Stock Issuance Agreement
to be generally used in connection with the 1994 Directors Plan, filed as Exhibit
10.11 to the Company's Registration Statement No. 33-84346 and incorporated herein
by this reference.
10.12 Agreement of Purchase and Sale between the Partnership and FBA Hotel Venture dated
as of September 23, 1994, filed as Exhibit 10.12 to the Company's Registration
Statement No. 33-84346 and incorporated herein by this reference.
10.13 Agreement of Purchase and Sale between the Partnership and M R C Hotel Partners,
Ltd. dated as of September 23, 1994, filed as Exhibit 10.13 to the Company's
Registration Statement No. 33-84346 and incorporated herein by this reference.
10.14 Agreement of Purchase and Sale between the Partnership and Arapahoe South Hotel
Partnership dated as of September 23, 1994, filed as Exhibit 10.14 to the
Company's Registration Statement No. 33-84346 and incorporated herein by this
reference.
10.15 Agreement of Purchase and Sale between the Partnership and C and R Hotel Venture
dated as of September 23, 1994, filed as Exhibit 10.15 to the Company's
Registration Statement No. 33-84346 and incorporated herein by this reference.
10.16 Agreement of Purchase and Sale between the Partnership and Craig Hotel Partners
Limited Liability Co. dated as of September 23, 1994, filed as Exhibit 10.16 to
the Company's Registration Statement No. 33-84346 and incorporated herein by this
reference.
10.17 Agreement of Purchase and Sale between the Partnership and Provo Hotel Partners
Limited Liability Co. dated as of September 23, 1994, filed as Exhibit 10.17 to
the Company's Registration Statement No. 33-84346 and incorporated herein by this
reference.
</TABLE>
II-7
<PAGE> 203
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------------------
<C> <S>
10.18 Agreement of Purchase and Sale between the Partnership and Steamboat Hotel
Partners, Ltd. dated as of September 23, 1994, filed as Exhibit 10.18 to the
Company's Registration Statement No. 33-84346 and incorporated herein by this
reference.
10.19 Hotel Sale Agreement between the Management Company and Western Hospitality Group,
LLC dated as of June 14, 1995, filed as Exhibit 10.19 to the Company's
Registration Statement No. 33-84346 and incorporated herein by this reference.
10.20 Real Property Purchase and Sale Agreement and Joint Escrow Instructions between
the Management Company and Hampton Inns, Inc., dated as of June 19, 1995, filed as
Exhibit 10.20 to the Company's Registration Statement No. 33-84346 and
incorporated herein by this reference.
10.21 Hotel Sale Agreement between the Management Company and Sunworld Properties dated
as of June 19, 1995, filed as Exhibit 10.21 to the Company's Registration
Statement No. 33-84346 and incorporated herein by this reference.
10.22 First Amendment to Agreement of Purchase and Sale between the Partnership and FBA
Hotel Venture dated as of June 19, 1995, filed as Exhibit 10.22 to the Company's
Registration Statement No. 33-84346 and incorporated herein by this reference.
10.23 First Amendment to Agreement of Purchase and Sale between the Partnership and M R
C Hotel Partners, Ltd. dated as of June 19, 1995, filed as Exhibit 10.23 to the
Company's Registration Statement No. 33-84346 and incorporated herein by this
reference.
10.24 First Amendment to Agreement of Purchase and Sale between the Partnership and
Arapahoe South Hotel Partnership dated as of June 19, 1995, filed as Exhibit 10.24
to the Company's Registration Statement No. 33-84346 and incorporated herein by
this reference.
10.25 First Amendment to Agreement of Purchase and Sale between the Partnership and C
and R Hotel Venture dated as of June 19, 1995, filed as Exhibit 10.25 to the
Company's Registration Statement No. 33-84346 and incorporated herein by this
reference.
10.26 First Amendment to Agreement of Purchase and Sale between the Partnership and
Craig Hotel Partners Limited Liability Co. dated as of June 19, 1995, filed as
Exhibit 10.26 to the Company's Registration Statement No. 33-84346 and
incorporated herein by this reference.
10.27 First Amendment to Agreement of Purchase and Sale between the Partnership and
Provo Hotel Partners Limited Liability Co. dated as of June 19, 1995, filed as
Exhibit 10.27 to the Company's Registration Statement No. 33-84346 and
incorporated herein by this reference.
10.28 First Amendment to Agreement of Purchase and Sale between the Partnership and
Steamboat Hotel Partners, Ltd. dated as of June 19, 1995, filed as Exhibit 10.28
to the Company's Registration Statement No. 33-84346 and incorporated herein by
this reference.
10.29 Form of Agreement Respecting Lessee Unit Purchase between the Company, the
Partnership, the Lessee, Robert A. Alter and Charles Biederman, filed as Exhibit
10.29 to the Company's Registration Statement No. 33-84346 and incorporated herein
by this reference.
10.30 Form of Third Party Pledge Agreement among the Partnership, Robert A. Alter and
Charles Biederman, filed as Exhibit 10.30 to the Company's Registration Statement
No. 33-84346 and incorporated herein by this reference.
10.30.1 Amendment Number One to Third Party Pledge Agreement effective as of December 13,
1995, filed as Exhibit 10.34 to the Company's 1995 10-K and incorporated herein by
this reference.
10.30.2*** Amendment Number Two to Third Party Pledge Agreement effective as of February 2,
1996.
10.30.3*** Amendment Number Three to Third Party Pledge Agreement effective as of May 30,
1996.
10.30.4*** Amendment Number Four to Third Party Pledge Agreement effective as of June 28,
1996.
</TABLE>
II-8
<PAGE> 204
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------------------
<C> <S>
10.31 First Amendment to Hotel Sale Agreement between the Management Company and
Sunworld Properties, filed as Exhibit 10.31 to the Company's Registration
Statement No. 33-84346 and incorporated herein by this reference.
10.32 First Amendment to Hotel Sale Agreement between the Management Company and Western
Hospitality Group, LLC, filed as Exhibit 10.32 to the Company's Registration
Statement No. 33-84346 and incorporated herein by this reference.
10.33 Commitment Letter for Revolving Line of Credit issued by Bank One, Arizona, NA in
favor of the Company dated as of July 20, 1995, filed as Exhibit 10.33 to the
Company's Registration Statement No. 33-84346 and incorporated herein by this
reference.
10.34 Hampton Inn Oakland Contribution Agreement dated as of December 13, 1995, filed as
Exhibit 10.35 to the Company's 1995 10-K and incorporated herein by this
reference.
10.35 Loan Agreement by and between the Partnership and Bank One, Arizona, N.A. dated as
of October 25, 1995, filed as Exhibit 10.38 to the Company's 1995 10-K and
incorporated herein by this reference.
10.35.1*** Amended and Restated Loan Agreement by and between the Partnership and Bank One,
Arizona, N.A. dated as of June 21, 1996.
10.36 Purchase and Sale Agreement and Joint Escrow Instructions dated December 20, 1995
between the Partnership and HL Project I Limited Liability Company, a Delaware
limited liability company, filed as Exhibit 10.36 to the Company's First Quarter
1996 10-Q/A and incorporated herein by this reference.
10.37*** Purchase and Sale Agreement dated May 28, 1996 between the Partnership and Renton
Joint Venture, a Washington joint venture.
10.38* Capital Contribution Agreement dated March 28, 1996 between the Partnership and
Riverside Hotel Partners, Inc.
23.1*** Consent of Coopers & Lybrand L.L.P.
23.2*** Consent of Griffing & Company, P.C.
23.3 Consent of Brobeck, Phleger & Harrison (Included with opinion filed as Exhibit
8.1).
23.4 Consent of Ballard Spahr Andrews & Ingersoll (Included with opinion filed as
Exhibit 5.1).
24.1*** Power of Attorney. See page II-11.
</TABLE>
- ---------------
* To be filed by amendment.
** Substantially identical to Exhibit 10.2; full text omitted pursuant to
Instruction 2 to Item 601 of Regulation S-K. The material differences
between this Exhibit and Exhibit 10.2 are set forth in the schedule filed
under this Exhibit.
*** Filed herewith.
**** Form of 8.1 opinion filed herewith. Final version to be filed by amendment.
II-9
<PAGE> 205
ITEM 36. UNDERTAKINGS
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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 33 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus as
filed as part of the registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as
amended, shall be deemed to be part of the registration statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each posteffective 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-10
<PAGE> 206
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Clemente, State of
California, on July 3, 1996.
SUNSTONE HOTEL INVESTORS, INC.
By: /s/ ROBERT A. ALTER
------------------------------------
Robert A. Alter
President, Chief Financial Officer,
Secretary and Chairman of the
Board of Directors
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Robert A. Alter his true and lawful attorney-in-fact and agent, with full powers
of substitution, for him and in his name, place and stead, in any an all
capacities, to sign and to file any and all amendments, including post-effective
amendments, to this Registration Statement with the Securities and Exchange
Commission, granting to said attorney-in-fact power and authority to perform any
other act on behalf o the undersigned required to be done in connection
therewith.
Pursuant to the requirements of the Securities Act of 1933 this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------------- --------------
<C> <S> <C>
/s/ ROBERT A. ALTER President, Chief Financial Officer, July 3, 1996
- ------------------------------------- Secretary and Chairman of the Board of
Robert A. Alter Directors (Principal Executive,
Financial and Accounting Officer)
/s/ CHARLES L. BIEDERMAN Executive Vice President and Director July 3, 1996
- -------------------------------------
Charles L. Biederman
/s/ C. ROBERT ENEVER Director July 3, 1996
- -------------------------------------
C. Robert Enever
/s/ DAVID LAMBERT Director July 3, 1996
- -------------------------------------
David Lambert
/s/ H. RAYMOND BINGHAM Director July 3, 1996
- -------------------------------------
H. Raymond Bingham
/s/ FREDRIC H. GOULD Director July 3, 1996
- -------------------------------------
Fredric H. Gould
/s/ EDWARD H. SONDKER Director July 3, 1996
- -------------------------------------
Edward H. Sondker
</TABLE>
II-11
<PAGE> 207
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- ------------------------------------------------------------------------ --------
<C> <S> <C>
1.1* Form of Underwriting Agreement..........................................
3.1 Amended Articles of Incorporation of the Company, as further amended by
the Articles of Amendment of the Company, as filed with the State
Department of Assessments and Taxation of Maryland on November 9, 1994,
filed as Exhibit 3.1 to the Company's Registration Statement No.
33-84346 and incorporated herein by this reference......................
3.2 Bylaws of the Company, as currently in effect, filed as Exhibit 3.2 to
the Company's Registration Statement No. 33-84346 and incorporated
herein by this reference................................................
3.3 Articles of Amendment of the Company, as filed with the State Department
of Assessments and Taxation of Maryland on June 19, 1995, filed as
Exhibit 3.3 to the Company's Registration Statement No. 33-84346 and
incorporated herein by this reference...................................
5.1* Opinion of Ballard Spahr Andrews & Ingersoll as to legality of the
shares being registered.................................................
8.1**** Opinion of Brobeck, Phleger and Harrison as to tax matters..............
10.1 Form of First Amended and Restated Agreement of Limited Partnership of
the Partnership, filed as Exhibit 10.1 to the Company's Registration
Statement No. 33-84346 and incorporated herein by this reference........
10.1.1 First Amendment to First Amended and Restated Agreement of Limited
Partnership dated as of December 12, 1995, filed as Exhibit 10.36 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 10-K") and incorporated herein by this reference........
10.1.2 Second Amendment to First Amended and Restated Agreement of Limited
Partnership dated as of December 28, 1995, filed as Exhibit 10.1.2 to
the Company's 1995 10-K and incorporated herein by this reference.......
10.1.3 Third Amendment to First Amended and Restated Agreement of Limited
Partnership dated as of March 17, 1996, filed as Exhibit 10.1.3 to the
Company's amended Quarterly Report on Form 10-Q/A for the period ending
March 31, 1996 (the "First Quarter 10-Q/A"), and incorporated herein by
this reference..........................................................
10.1.4*** Fourth Amendment to First Amended and Restated Agreement of Limited
Partnership dated as of July 2, 1996....................................
10.2 Form of Percentage Lease, filed as Exhibit 10.2 to the Company's
Registration Statement No. 33-84346 and incorporated herein by this
reference...............................................................
10.2.1 Lease Agreement dated as of August 16, 1995 by and between Sunstone
Hotel Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc.,
as lessee, for the Hampton Inn Hotel located in Denver S.E., Colorado,
filed as Exhibit 10.2.1 to the Company's 1995 10-K and incorporated
herein by this reference................................................
10.2.2 Lease Agreement dated as of August 16, 1995 by and between Sunstone
Hotel Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc.,
as lessee, for the Hampton Inn Hotel located in Pueblo, Colorado, filed
as Exhibit 10.2.2 to the Company's 1995 10-K and incorporated herein by
this reference..........................................................
10.2.3 Lease Agreement dated as of August 16, 1995 by and between Sunstone
Hotel Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc.,
as lessee, for the Courtyard By Marriott Hotel located in Fresno,
California, filed as Exhibit 10.2.3 to the Company's 1995 10-K and
incorporated herein by this reference...................................
10.2.4 Lease Agreement dated as of August 16, 1995 by and between Sunstone
Hotel Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc.,
as lessee, for the Courtyard By Hampton Inn located in Mesa, Arizona,
filed as Exhibit 10.2.4 to the Company's 1995 10-K and incorporated
herein by this reference................................................
10.2.5 Lease Agreement dated as of August 16, 1995 by and between Sunstone
Hotel Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc.,
as lessee, for the Holiday Inn Hotel located in Steamboat Springs,
Colorado, filed as Exhibit 10.2.5 to the Company's 1995 10-K and
incorporated herein by this reference...................................
</TABLE>
<PAGE> 208
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- ------------------------------------------------------------------------ --------
<C> <S> <C>
10.2.6 Lease Agreement dated as of August 16, 1995 by and between Sunstone
Hotel Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc.,
as lessee, for the Holiday Inn Hotel located in Craig, Colorado, filed
as Exhibit 10.2.6 to the Company's 1995 10-K and incorporated herein by
this reference..........................................................
10.2.7 Lease Agreement dated as of August 16, 1995 by and between Sunstone
Hotel Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc.,
as lessee, for the Holiday Inn Hotel located in Provo, Utah, filed as
Exhibit 10.2.7 to the Company's 1995 10-K and incorporated herein by
this reference..........................................................
10.2.8 Lease Agreement dated as of August 16, 1995 by and between Sunstone
Hotel Investors, L.P. as lessor, and Sunstone Hotel Properties, Inc., as
lessee, for the Hampton Inn Hotel located in Silverthorne, Colorado,
filed as Exhibit 10.2.7 to the Company's 1995 10-K and incorporated
herein by this reference................................................
10.2.9 Lease Agreement dated as of August 16, 1995 by and between Sunstone
Hotel Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc.,
as lessee, for the Doubletree Hotel located in Santa Fe, New Mexico,
filed as Exhibit 10.2.9 to the Company's 1995 10-K and incorporated
herein by this reference................................................
10.2.10 Lease Agreement dated as of August 16, 1995 by and between Sunstone
Hotel Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc.,
as lessee, for the Hampton Inn Hotel located in Arcadia, California,
filed as Exhibit 10.2.10 to the Company's 1995 10-K and incorporated
herein by this reference................................................
10.2.11 Lease Agreement dated as of December 13, 1995 by and between Sunstone
Hotel Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc.,
as lessee, for the Hampton Inn Hotel located in Oakland, California,
filed as Exhibit 10.2.11 to the Company's 1995 10-K and incorporated
herein by this reference................................................
10.2.12 Lease Agreement dated February 2, 1996 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as
lessee, for the Cypress Inn hotel located in Clackamas, Oregon, filed as
Exhibit 10.2.12 to the Company's First Quarter 1996 10-Q/A, and
incorporated herein by this reference...................................
10.2.13 Lease Agreement dated February 2, 1996 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as
lessee, for the Cypress Inn hotel located in Kent, Washington, filed as
Exhibit 10.2.13 to the Company's First Quarter 1996 10-Q/A, and
incorporated herein by this reference...................................
10.2.14 Lease Agreement dated February 2, 1996 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as
lessee, for the Cypress Inn hotel located in Poulsbo, Washington, filed
as Exhibit 10.2.14 to the Company's First Quarter 1996 10-Q/A, and
incorporated herein by this reference...................................
10.2.15 Lease Agreement dated February 2, 1996 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as
lessee, for the Cypress Inn hotel located in Portland, Oregon, filed as
Exhibit 10.2.15 to the Company's First Quarter 1996 10-Q/A, and
incorporated herein by this reference...................................
10.2.16** Lease Agreement dated March 28, 1996 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as
lessee, for the Courtyard By Marriott hotel located in Riverside,
California..............................................................
10.2.17** Lease Agreement dated June 28, 1996 by and between Sunstone Hotel
Investors, L.P., as lessor, and Sunstone Hotel Properties, Inc., as
lessee, for the Holiday Inn hotel located in Renton, Washington.........
10.3 Form of Right of First Refusal and Option to Purchase, filed as Exhibit
10.3 to the Company's Registration Statement No. 33-84346 and
incorporated herein by this reference...................................
10.4 Form of Alter Employment Agreement, filed as Exhibit 10.4 to the
Company's Registration Statement No. 33-84346 and incorporated herein by
this reference..........................................................
10.5 Form of Biederman Employment Agreement, filed as Exhibit 10.5 to the
Company's Registration Statement No. 33-84346 and incorporated herein by
this reference..........................................................
</TABLE>
<PAGE> 209
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- ------------------------------------------------------------------------ --------
<C> <S> <C>
10.6 Form of Indemnification Agreement to be entered into with officers and
directors of the Company, filed as Exhibit 10.6 to the Company's
Registration Statement No. 33-84346 and incorporated herein by this
reference...............................................................
10.7 1994 Stock Incentive Plan, filed as Exhibit 10.7 to the Company's
Registration Statement No. 33-84346 and incorporated herein by this
reference...............................................................
10.8 Form of Notice of Grant of Stock Option and Form of Stock Option
Agreement (and Addendum thereto) to be generally used in connection with
the Discretionary Option Grant Program of the 1994 Stock Incentive Plan,
filed as Exhibit 10.8 to the Company's Registration Statement No.
33-84346 and incorporated herein by this reference......................
10.9 Form of Stock Purchase Agreement to be generally used in connection with
the Discretionary Option Grant Program of the 1994 Stock Incentive Plan,
filed as Exhibit 10.9 to the Company's Registration Statement No.
33-84346 and incorporated herein by this reference......................
10.10 1994 Directors Plan, filed as Exhibit 10.10 to the Company's
Registration Statement No. 33-84346 and incorporated herein by this
reference...............................................................
10.11 Form of Notice of Grant of Automatic Stock Option, Automatic Stock
Option Agreement, Stock Purchase Agreement and Automatic Direct Stock
Issuance Agreement to be generally used in connection with the 1994
Directors Plan, filed as Exhibit 10.11 to the Company's Registration
Statement No. 33-84346 and incorporated herein by this reference........
10.12 Agreement of Purchase and Sale between the Partnership and FBA Hotel
Venture dated as of September 23, 1994, filed as Exhibit 10.12 to the
Company's Registration Statement No. 33-84346 and incorporated herein by
this reference..........................................................
10.13 Agreement of Purchase and Sale between the Partnership and M R C Hotel
Partners, Ltd. dated as of September 23, 1994, filed as Exhibit 10.13 to
the Company's Registration Statement No. 33-84346 and incorporated
herein by this reference................................................
10.14 Agreement of Purchase and Sale between the Partnership and Arapahoe
South Hotel Partnership dated as of September 23, 1994, filed as Exhibit
10.14 to the Company's Registration Statement No. 33-84346 and
incorporated herein by this reference...................................
10.15 Agreement of Purchase and Sale between the Partnership and C and R Hotel
Venture dated as of September 23, 1994, filed as Exhibit 10.15 to the
Company's Registration Statement No. 33-84346 and incorporated herein by
this reference..........................................................
10.16 Agreement of Purchase and Sale between the Partnership and Craig Hotel
Partners Limited Liability Co. dated as of September 23, 1994, filed as
Exhibit 10.16 to the Company's Registration Statement No. 33-84346 and
incorporated herein by this reference...................................
10.17 Agreement of Purchase and Sale between the Partnership and Provo Hotel
Partners Limited Liability Co. dated as of September 23, 1994, filed as
Exhibit 10.17 to the Company's Registration Statement No. 33-84346 and
incorporated herein by this reference...................................
10.18 Agreement of Purchase and Sale between the Partnership and Steamboat
Hotel Partners, Ltd. dated as of September 23, 1994, filed as Exhibit
10.18 to the Company's Registration Statement No. 33-84346 and
incorporated herein by this reference...................................
10.19 Hotel Sale Agreement between the Management Company and Western
Hospitality Group, LLC dated as of June 14, 1995, filed as Exhibit 10.19
to the Company's Registration Statement No. 33-84346 and incorporated
herein by this reference................................................
10.20 Real Property Purchase and Sale Agreement and Joint Escrow Instructions
between the Management Company and Hampton Inns, Inc., dated as of June
19, 1995, filed as Exhibit 10.20 to the Company's Registration Statement
No. 33-84346 and incorporated herein by this reference..................
</TABLE>
<PAGE> 210
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- ------------------------------------------------------------------------ --------
<C> <S> <C>
10.21 Hotel Sale Agreement between the Management Company and Sunworld
Properties dated as of June 19, 1995, filed as Exhibit 10.21 to the
Company's Registration Statement No. 33-84346 and incorporated herein by
this reference..........................................................
10.22 First Amendment to Agreement of Purchase and Sale between the
Partnership and FBA Hotel Venture dated as of June 19, 1995, filed as
Exhibit 10.22 to the Company's Registration Statement No. 33-84346 and
incorporated herein by this reference...................................
10.23 First Amendment to Agreement of Purchase and Sale between the
Partnership and M R C Hotel Partners, Ltd. dated as of June 19, 1995,
filed as Exhibit 10.23 to the Company's Registration Statement No.
33-84346 and incorporated herein by this reference......................
10.24 First Amendment to Agreement of Purchase and Sale between the
Partnership and Arapahoe South Hotel Partnership dated as of June 19,
1995, filed as Exhibit 10.24 to the Company's Registration Statement No.
33-84346 and incorporated herein by this reference......................
10.25 First Amendment to Agreement of Purchase and Sale between the
Partnership and C and R Hotel Venture dated as of June 19, 1995, filed
as Exhibit 10.25 to the Company's Registration Statement No. 33-84346
and incorporated herein by this reference...............................
10.26 First Amendment to Agreement of Purchase and Sale between the
Partnership and Craig Hotel Partners Limited Liability Co. dated as of
June 19, 1995, filed as Exhibit 10.26 to the Company's Registration
Statement No. 33-84346 and incorporated herein by this reference........
10.27 First Amendment to Agreement of Purchase and Sale between the
Partnership and Provo Hotel Partners Limited Liability Co. dated as of
June 19, 1995, filed as Exhibit 10.27 to the Company's Registration
Statement No. 33-84346 and incorporated herein by this reference........
10.28 First Amendment to Agreement of Purchase and Sale between the
Partnership and Steamboat Hotel Partners, Ltd. dated as of June 19,
1995, filed as Exhibit 10.28 to the Company's Registration Statement No.
33-84346 and incorporated herein by this reference......................
10.29 Form of Agreement Respecting Lessee Unit Purchase between the Company,
the Partnership, the Lessee, Robert A. Alter and Charles Biederman,
filed as Exhibit 10.29 to the Company's Registration Statement No.
33-84346 and incorporated herein by this reference......................
10.30 Form of Third Party Pledge Agreement among the Partnership, Robert A.
Alter and Charles Biederman, filed as Exhibit 10.30 to the Company's
Registration Statement No. 33-84346 and incorporated herein by this
reference...............................................................
10.30.1 Amendment Number One to Third Party Pledge Agreement effective as of
December 13, 1995, filed as Exhibit 10.34 to the Company's 1995 10-K and
incorporated herein by this reference...................................
10.30.2*** Amendment Number Two to Third Party Pledge Agreement effective as of
February 2, 1996........................................................
10.30.3*** Amendment Number Three to Third Party Pledge Agreement effective as of
May 30, 1996............................................................
10.30.4*** Amendment Number Four to Third Party Pledge Agreement effective as of
June 28, 1996...........................................................
10.31 First Amendment to Hotel Sale Agreement between the Management Company
and Sunworld Properties, filed as Exhibit 10.31 to the Company's
Registration Statement No. 33-84346 and incorporated herein by this
reference...............................................................
10.32 First Amendment to Hotel Sale Agreement between the Management Company
and Western Hospitality Group, LLC, filed as Exhibit 10.32 to the
Company's Registration Statement No. 33-84346 and incorporated herein by
this reference..........................................................
</TABLE>
<PAGE> 211
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- ------------------------------------------------------------------------ --------
<C> <S> <C>
10.33 Commitment Letter for Revolving Line of Credit issued by Bank One,
Arizona, NA in favor of the Company dated as of July 20, 1995, filed as
Exhibit 10.33 to the Company's Registration Statement No. 33-84346 and
incorporated herein by this reference...................................
10.34 Hampton Inn Oakland Contribution Agreement dated as of December 13,
1995, filed as Exhibit 10.35 to the Company's 1995 10-K and incorporated
herein by this reference................................................
10.35 Loan Agreement by and between the Partnership and Bank One, Arizona,
N.A. dated as of October 25, 1995, filed as Exhibit 10.38 to the
Company's 1995 10-K and incorporated herein by this reference...........
10.35.1*** Amended and Restated Loan Agreement by and between the Partnership and
Bank One, Arizona, N.A. dated as of June 21, 1996.......................
10.36 Purchase and Sale Agreement and Joint Escrow Instructions dated December
20, 1995 between the Partnership and HL Project I Limited Liability
Company, a Delaware limited liability company, filed as Exhibit 10.36 to
the Company's First Quarter 1996 10-Q/A and incorporated herein by this
reference...............................................................
10.37*** Purchase and Sale Agreement dated May 28, 1996 between the Partnership
and Renton Joint Venture, a Washington joint venture....................
10.38* Capital Contribution Agreement dated March 28, 1996 between the
Partnership and Riverside Hotel Partners, Inc. .........................
23.1*** Consent of Coopers & Lybrand L.L.P......................................
23.2*** Consent of Griffing & Company, P.C......................................
23.3 Consent of Brobeck, Phleger & Harrison (Included with opinion filed as
Exhibit 8.1)............................................................
23.4 Consent of Ballard Spahr Andrews & Ingersoll (Included with opinion
filed as Exhibit 5.1)...................................................
24.1*** Power of Attorney. See page II-11.......................................
</TABLE>
- ---------------
* To be filed by amendment.
** Substantially identical to Exhibit 10.2; full text omitted pursuant to
Instruction 2 to Item 601 of Regulation S-K. The material differences
between this Exhibit and Exhibit 10.2 are set forth in the schedule filed
under this Exhibit.
*** Filed herewith.
**** Form of 8.1 opinion filed herewith. Final version to be filed by amendment.
<PAGE> 1
Form of Exhibit 8.1
Brobeck, Phleger & Harrison LLP
4675 MacArthur Court, Suite 1000
Newport Beach, California 92660
(714) 752-7535
Sunstone Hotel Investors, Inc.
300 South El Camino Real
Suite 203
San Clemente, CA 92672
RE: SUNSTONE HOTEL INVESTORS, INC./TAX OPINION
Gentlemen:
We have acted as counsel to Sunstone Hotel Investors, Inc., a
Maryland corporation (the "Company"), in connection with the preparation of the
Registration Statement on Form S-11 filed with the Securities and Exchange
Commission (as amended, the "Registration Statement"), with respect to the
offering and sale (the "Offering") of up to 5,520,000 shares of the Company's
common shares (the "Common Shares"), and the Company's contribution of
substantially all of the net proceeds of the Offering to Sunstone Hotel
Investors, L.P., a Delaware limited partnership (the "Partnership"), in exchange
for an additional interest in the Partnership.
The Partnership currently owns several hotels and associated
personal property (the "Current Hotels") leases each of the Current Hotels to
Sunstone Hotel Properties, Inc., a Colorado corporation (the "Lessee"), pursuant
to a percentage lease (the "Leases"). Sunstone Hotel Management, Inc. (the
"Management Company") is managing the Current Hotels and will continue to do so.
Robert A. Alter and Charles L. Biederman are 80% and 20% shareholders,
respectively, of the Lessee and Mr. Alter is the sole shareholder of the
Management Company. Mr. Alter is the Chairman of the Board of Directors and
President of the Company and will continue to serve as such.
Terms not defined in this letter have the meaning ascribed to
them in the Registration Statement.
The Company has requested our opinion as to:
A. Whether, since the inception of its taxable year ended on
December 31, 1995, the Company has been organized and operated in
conformity with the requirements for qualification as a real estate
investment trust (a "REIT") pursuant to Sections 856 through 860 of the
Internal Revenue Code of
<PAGE> 2
Sunstone Hotel Investors, Inc. Page 2
1986 (the "Code"), and whether the Company's organization and
contemplated method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code in
1996 and subsequent years.
B. Whether the description of law and legal conclusions
contained in the Prospectus with respect to the Offering under the
caption "Federal Income Tax Considerations" are correct in all material
respects, and whether the discussion therein fairly summarizes the
federal income tax considerations that are material to a holder of
Common Shares.
C. Whether the Partnership has been and will continue to be
treated for federal income tax purposes as a partnership and not as an
association taxable as a corporation.
In connection with the opinions rendered below, we have
examined the following:
1. The Amended Articles of Incorporation of the Company.
2. The Company's By-Laws.
3. The Registration Statement.
4. The form of First Amended and Restated Limited
Partnership Agreement of the Partnership.
5. The forms of Percentage Leases.
6. The cost segmentation analyses dated ________________,
1995, and ________________, 1996 ("Cost Segmentation
Analyses") prepared by Coopers and Lybrand, L.L.P.
7. 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:
a. Each of the documents referred to above has been duly
authorized, executed, and delivered, is authentic, if an original, or accurate,
if a copy, and has not been amended.
<PAGE> 3
Sunstone Hotel Investors, Inc. Page 3
b. Commencing with its 1995 taxable year and in all subsequent
years, the Company has been operated and will operate in such a manner that will
make the representations set forth below true for all such years.
c. The Company will not make any amendments to its
organizational documents after the date of this opinion that would affect its
qualification as a REIT for any taxable year.
d. No actions will be taken by the Company, the 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.
e. The Cost Segmentation Analyses are accurate in all material
respects.
Furthermore, we have relied upon the correctness of the
following representations of the Company and its authorized representatives on
behalf of itself and the Partnership:
(1) The following requirements have been and will be met by
the Lessee, the Management Company and any other person who leases, manages, or
operates the Current Hotels or other hotel properties in which the Company owns
an interest ("Other Hotel Properties"):
(a) Such person will not own, directly or indirectly
(within the meaning of Section 856(d)(5) of the Code), more than 35% of
the shares of the Company.
(b) If such person is a corporation, not more than 35%
of its stock, measured by voting power or number of shares, or, if such
person is a noncorporate entity, not more than 35% of the interest in
its assets or net profits will be owned, directly or indirectly (within
the meaning of Section 856(d)(5) of the Code), by one or more persons
who own 35% or more of the shares of the Company.
(c) The Company will not derive or receive any income
from such person, other than rents from the Current Hotels or Other
Hotel Properties.
(d) Such person will be adequately compensated for its
services.
(e) If such person is an individual, he or she will not
be an officer or employee of the Company.
<PAGE> 4
Sunstone Hotel Investors, Inc. Page 4
(f) If such person is a corporation, none of its
officers or employees will be officers or employees of the Company.
(g) If an individual serves as both (i) one of such
person's directors and (ii) a director and officer or employee of the
Company, that individual will not receive any compensation for serving
as one of such person's directors.
(h) If an individual serves as both (i) one of such
person's directors and officers (or employees) and (ii) a director of
the Company, that individual will not receive any compensation for
serving as a director of the Company.
(i) If an individual serves as a director, officer or
employee of the Company, such person will not be engaged in the
day-to-day management of the Current Hotels or Other Hotel Properties
and will confine his or her activities as a shareholder or director of
any corporate entity which leases or manages the Current Hotels or
Other Hotel Properties to such activities as are consistent with his or
her status as a shareholder and/or director (as opposed to an officer
or employee) of such entity.
(2) The Company will not furnish or render, or bear the cost
of furnishing or rendering, any services to tenants of the Current Hotels or
Other Hotel Properties, other than the payment of real and personal property
taxes, ground lease rent (where applicable), insurance (other than workers'
compensation insurance), capital improvements, and the cost of repairing,
replacing or refurbishing furniture, fixtures and equipment with respect to such
hotel property (to the extent prescribed in the Percentage Leases). The payments
described in the preceding sentence are usually or customarily borne by lessors
of hotel properties in the geographic areas in which the Current Hotels or Other
Hotel Properties are located.
(3) The following requirements will be met by the Lessee, the
Management Company and any other person who furnishes or renders services
("Noncustomary Services") to the tenants of the Current Hotels or Other Hotel
Properties, other than services that are usually or customarily rendered in
connection with the rental of space for occupancy only and are not otherwise
considered rendered to the occupant:
(a) The Lessee, the Management Company and each such
other person will satisfy the requirements described in paragraph (1)
above.
(b) The cost of the Noncustomary Services will be borne
by the Lessee, the Management Company or such other person.
<PAGE> 5
Sunstone Hotel Investors, Inc. Page 5
(c) Any charge for such Noncustomary Services will be
made, received and retained by the Lessee, the Management Company or
such other person.
(4) The Company is not chartered or supervised as a bank,
savings and loan, or similar association under state or federal law.
(5) The Company will not operate as a small business
investment company under the Small Business Investment Act of 1958.
(6) The Company was not created by or pursuant to an act of a
state legislature for the purpose of promoting, maintaining, and assisting the
economy within the state by making loans that generally would not be made by
banks.
(7) The Company will not engage in the business of issuing
life insurance, annuity contracts, or contracts of health or accident insurance.
(8) Beginning with the Company's 1996 taxable year, beneficial
ownership of the Company will be held by 100 or more persons for at least 335
days of each taxable year. During the entire 1995 taxable year as well as the
1996 taxable year to date, the Company has been managed by one or more directors
and the beneficial ownership of the Company has been represented by transferable
shares.
(9) At no time during the last half of each taxable year
beginning with the Company's 1996 taxable year will more than 50% in value of
the Company's outstanding shares be owned, directly or indirectly (within the
meaning of Section 544 of the Code, as modified by Section 856(h)(i)(B) of the
Code), by or for five or fewer individuals. For this purpose, a qualified stock
bonus, pension, or profit-sharing plan (as described in Section 401(a) of the
Code), a supplemental unemployment compensation benefits plan (as described in
Section 501(c)(17) of the Code), a private foundation (as described in Section
509(a) of the Code), or a portion of a trust permanently set aside or to be used
exclusively for charitable purposes (as described in Section 642(c) of the Code)
generally is considered an individual. However, stock held by a trust described
in Section 401(a) of the Code and exempt from tax under Section 501(a) of the
Code (a "Qualified Trust") generally is treated as held directly by the
Qualified Trust's beneficiaries in proportion to their actuarial interests in
the Qualified Trust.
(10) The Company was organized on September 23, 1994. The
Company has not at any time been a party to a tax-free reorganization with
another corporation and does not hold any asset the disposition of which could
be subject to Section 1374 of the Code.
<PAGE> 6
Sunstone Hotel Investors, Inc. Page 6
(11) The Company will elect to be a REIT for its taxable year
ending December 31, 1995 by computing its taxable income as a REIT on its
federal income tax return for that taxable year (i.e., I.R.S. Form 1120-REIT).
The Company will continue to so compute and report its income in subsequent
years as a REIT and will not terminate or revoke its REIT election.
(12) The Company has not and will not have at the end of any
taxable year, and will not succeed to, any earnings and profits accumulated
during a non-REIT year of the Company or any other corporation.
(13) During 1995 and each subsequent taxable year, at least
95% of the Company's gross income, excluding gross income from the sale of
property held as inventory or held primarily for sale to customers in the
ordinary course of the Company's trade or business ("Prohibited Income"), has
been and will be derived from:
(a) Dividends.
(b) Interest.
(c) "Rents from real property," within the meaning of
Section 856(d) of the Code.
(d) Gain from the sale or other disposition of stock,
securities, and real property (including interests in real property and
interests in mortgages on real property) that is not Prohibited Income.
(e) Abatements and refunds of taxes on real property.
(f) Income and gain derived from real property acquired
directly by foreclosure or deed in lieu thereof ("Foreclosure
Property"), not including property acquired as a result of indebtedness
arising from the sale of property held as inventory or primarily for
sale to customers in the ordinary course of the Company's business.
(g) Amounts (other than amounts based on the income or
profits of any person) received or accrued as consideration for
entering into agreements (i) to make loans secured by mortgages on real
property or on interests in real property or (ii) to purchase or lease
real property (including interests in real property and interests in
mortgages on real property).
(h) Gain from the sale or other disposition of real
estate assets that is not Prohibited Income.
<PAGE> 7
Sunstone Hotel Investors, Inc. Page 7
(i) Payments under bona fide interest rate swap or cap
agreements entered into by the Company to hedge variable rate
indebtedness it incurred to acquire or carry real estate assets
("Qualified Hedging Contracts").
(j) Gain from the sale or other disposition of
Qualified Hedging Contracts.
(14) During 1995 and each subsequent taxable year, at least
75% of the Company's gross income (excluding Prohibited Income) has been and
will be derived from:
(a) "Rents from real property" as defined in Section
856(d) of the Code.
(b) Interest (as defined in Section 856(f) of the Code)
on obligations secured by mortgages on real property or on interests in
real property.
(c) Gain from the sale or other disposition of real
property (including interests in real property and interests in
mortgages on real property) that is not Prohibited Income.
(d) Dividends or other distributions on, and gain
(other than Prohibited Income) from the sale or other disposition of,
transferable shares in other REITs.
(e) Abatements and refunds of taxes on real property.
(f) Income and gain (other than Prohibited Income)
derived from Foreclosure Property.
(g) Amounts (other than amounts based on the income or
profits of any person) received or accrued as consideration for
entering into agreements (i) to make loans secured by mortgages on real
property or on interests in real property or (ii) to purchase or lease
real property (including interests in real property and interests in
mortgages on real property).
(h) Gain from the sale or other disposition of real
estate assets that is not Prohibited Income.
(i) Income that was (i) attributable to stock or a debt
instrument (with a maturity date of at least 5 years), (ii)
attributable to the temporary invest-
<PAGE> 8
Sunstone Hotel Investors, Inc. Page 8
ment of new capital, and (iii) received or accrued during the one-year
period beginning on the date on which the Company received such
capital.
(15) To the extent that the Partnership acquired the personal
property contained in each of the Current Hotels for cash, the initial adjusted
basis of such personal property was equal to the fair market value of such
personal property that is shown on the Cost Segmentation Analyses. To the extent
that the Partnership acquired the personal property contained in a Current Hotel
in exchange for interests in the Partnership, the initial adjusted basis of such
personal property was the same as the transferor's basis in such personal
property on the date of acquisition. With respect to each Current Hotel for 1995
and each subsequent taxable year, the ratio of (i) the average of the adjusted
bases of the personal property contained in the Current Hotel at the beginning
and at the end of such taxable year to (ii) the average of the aggregate
adjusted bases of both the real property and personal property comprising the
Current Hotel at the beginning and at the end of such taxable year (the
"Adjusted Basis Ratio") has not exceeded and will not exceed 15%. The Adjusted
Basis Ratio for any Other Hotel Properties of the Partnership also will not
exceed 15% for any taxable year.
(16) The Leases provide that rent is the greater of a fixed
amount or a percentage amount that is calculated by multiplying specified
percentages by the gross room revenues for each of the Current Hotels in excess
of certain levels (the "Percentage Rent"). The percentages used to compute the
Percentage Rent (i) have not been and will not be renegotiated during the term
of the Leases in a manner that has the effect of basing the Percentage Rent on
income or profits of any person and (ii) conform with normal business practice.
The Company and the Lessee anticipate that the Lessee will have sufficient
future revenue to enable the Lessee to satisfy all of its liabilities (including
payments under the Leases and payments to the Management Company) and generate a
reasonable profit to the Lessee.
(17) The Company has not received and will not receive or
accrue, directly or indirectly, any rent, interest, contingency fees, or other
amounts that were determined in whole or in part with reference to the income or
profits derived by any person (excluding amounts received (i) as rents from the
Leases, (ii) as rents from any other Hotels of the Partnership that are (A)
based solely on a percentage or percentages of receipts or sales and the
percentage or percentages are fixed at the time the leases are entered into, are
not renegotiated during the term of the leases in a manner that has the effect
of basing rent on income or profits, and conform with normal business practices
or (B) attributable to qualified rents from subtenants as provided by Section
856(d)(6) of the Code and (iii) as interest that was (A) based solely on a fixed
percentage or percentages of receipts or sales or (B) attributable to qualified
rents received or accrued by debtors as provided by Section 856(f)(2) of the
Code).
<PAGE> 9
Sunstone Hotel Investors, Inc. Page 9
(18) The Company has not owned and will not own, directly or
indirectly (within the meaning of Section 856(d)(5) of the Code), 10% or more of
the stock, by voting power or number of shares, of the Lessee, any other lessee
of its properties, the Management Company or any other manager of its
properties. The Company will not receive or accrue, directly or indirectly, any
rents from any of the following parties:
(a) A corporation of which the Company owns, directly
or indirectly (within the meaning of Section 856(d)(5) of the Code),
10% or more of the stock, by voting power or number of shares.
(b) A noncorporate entity in which the Company owns,
directly or indirectly (within the meaning of Section 856(d)(5) of the
Code), an interest of 10% or more of the assets or net profits.
(19) During each taxable year, less than 30% of the Company's
gross income has been and will be derived from the sale or other disposition of:
(a) Stock, Qualified Hedging Contracts or other
securities held for less than one year.
(b) Property in a transaction that generates Prohibited
income.
(c) Real property (including interests in real property
interests in mortgages on real property) held for less than four years
other than (i) property compulsorily or involuntarily converted to
another form as a result of its destruction (in whole or in part),
seizure, requisition, or condemnation (or the threat or imminence
thereof) and (ii) Foreclosure Property.
(20) At the close of each quarter of each taxable year
(including the taxable year commencing January 1, 1995), (i) at least 75% of the
value of the Company's total assets have and will be represented by real estate
assets, cash and cash items, and government securities (the "75% Basket") and
(ii) with respect to the Company's securities not included in the 75% Basket,
(A) not more than 5% of the value of Company's total assets have or will consist
of the securities of any one issuer (excluding corporations with respect to
which the Company has held 100% of the stock at all times during the
corporation's existence) and (B) the Company has not and will not hold more than
10% of the outstanding voting securities of any one issuer (excluding
corporations with respect to which the Company has held 100% of the stock at all
times during the corporation's existence). For purposes of this representation,
(i) the term "securities" does not include the Company's interest in the
Partnership (or any other partnership in which the Company owns an interest),
(ii) the Company's proportionate share of the assets of the Partnership (and any
other partnership in which the Company owns an interest) are
<PAGE> 10
Sunstone Hotel Investors, Inc. Page 10
treated as assets of the Company, and (iii) the term "value" means (A) fair
value as determined in good faith by the Board of Directors of the Company or
(B) in the case of securities for which market quotations are readily available,
the market value of such securities.
(21) The Company will maintain sufficient records as to its
investments to be able to show that it complies with the diversification
requirements described in the preceding paragraph.
(22) For each taxable year, the deduction for dividends paid
by the Company (as defined in Section 561 of the Code, but without regard to
capital gain dividends, as defined in Section 857(b)(3)(C) of the Code) has and
will equal or exceed (i) the sum of (A) 95% of the Company's real estate
investment trust taxable income (as defined in Section 857(b)(2) of the Code,
but without regard to the deduction for dividends paid and excluding any net
capital gain) and (B) 95% of the excess of its net income from Foreclosure
Property over the tax imposed on such income by Section 857(b)(4)(A) of the
Code, minus (ii) any excess noncash income (as defined in Section 857(e) of the
Code).
(23) The dividends paid by the Company have been and will be
made pro rata, with no preference to any share as compared with other shares of
the same class.
(24) Within 30 days after the end of the 1995 taxable year and
within 30 days after the end of each subsequent taxable year, the Company has
demanded and will demand written statements from its shareholders that, at any
time during the last six months of the taxable year, owned 5% or more of its
shares (or, if the Company has less than 2,000 and more than 200 shareholders of
record of its shares on any dividend record date, 1% or more of its shares)
setting forth the following information:
(a) The actual owners of the Company's stock (i.e., the
persons who are required to include in gross income in their returns
the dividends received on the stock).
(b) The maximum number of shares of the Company
(including the number and face value of securities convertible into
shares of the Company) that were considered owned, directly or
indirectly (within the meaning of Section 544 of the Code, as modified
by Section 856 (h)(1)(B) of the Code), by each of the actual owners of
any of the Company's shares at any time during the last half of the
Company's taxable year.
<PAGE> 11
Sunstone Hotel Investors, Inc. Page 11
(25) The Company has maintained and will maintain the written
statements described in the preceding paragraph in its principal office, and the
statements will be available for inspection by the Internal Revenue Service (the
"Service").
(26) The Company has and will use the calendar year as its
taxable year.
(27) The Company will operate in such a manner that the
representations described in paragraphs 1 through 26 will continue to be true
throughout its existence.
(28) The Partnership has been duly formed as a limited
partnership under Delaware law and has been and will be operated in accordance
with applicable Delaware law and the Partnership Agreement.
(29) The Partnership Agreement will remain in substantially
the same form as its current form and will not be amended in any material
respect (except upon the substitution of partners in accordance with the terms
of the Partnership Agreement).
(30) The Company is not acting as an agent of the Limited
Partners in connection with the investment by the Limited Partners in, and
operation of, the Partnership.
(31) The investment in the Partnership by the Limited Partners
will not entail a mandatory purchase of any type of security of, or interest in,
the Company.
(32) No Limited Partner (nor any affiliate of any Limited
Partner) has owned or will own, directly or indirectly (as defined in Section
856(d)(5) of the Code), 10% or more of the Company.
(33) A majority of the Company's Board of Directors at all
times will be independent directors.
(34) The Partnership has since its formation satisfied the
private placement "safe harbor" from publicly traded partnership status under
Notice 88-75 issued by the Internal Revenue Service. If the Partnership should
fail to satisfy at least one of the safe harbors set forth in Notice 88-75, or
the Regulations under Section 7704 of the Code, whichever is applicable, in any
taxable year, the Partnership will satisfy the gross income test to avoid
corporate treatment, as set forth in Section 7704(c)(2) of the Code, for such
taxable year and all taxable years thereafter.
(35) The interests in the Partnership have not been and will
not be traded on an established securities market.
<PAGE> 12
Sunstone Hotel Investors, Inc. Page 12
(36) The Partnership has not issued and will not issue any
Units in a transaction required to be registered under the Securities Act of
1933 (the "1933 Act").
After reasonable inquiry, we are not aware of any facts
inconsistent with the representations set forth in paragraphs 1 through 36
above. Furthermore, where such representations involve matters of law, we have
explained to the Company's representatives the relevant and material sections of
the Code, the Regulations thereunder, published rulings of the Service, and
other relevant authority to which such representations relate and are satisfied
that the Company's representatives understand such provisions and are capable of
making such representations.
Based on the documents, assumptions and representations set
forth above, the discussion in the Prospectus under the caption "Federal Income
Tax Considerations" (which is incorporated herein by reference) and the
discussion set forth below, we are of the opinion that:
(a) Since the inception of its taxable year ended on
December 31, 1995, the Company has been organized and operated in
conformity with the requirements for qualification as a REIT pursuant
to Sections 856 through 860 of the Code, and the Company's organization
and contemplated method of operation will enable it to continue to meet
the requirements for qualification and taxation as a REIT under the
Code in 1996 and subsequent years.
(b) The description of law and legal conclusions
contained in the Prospectus under the caption "Federal income Tax
Considerations" are correct in all material respects, and the
discussion therein fairly summarizes the federal income tax
considerations that are material to a holder of Common Shares.
(c) The Partnership will be treated for federal income
tax purposes as a partnership and not as an association taxable as a
corporation.
We will not review the Company's compliance with the
documents, assumptions, and representations set forth above on a continuing
basis. Accordingly, we can provide no assurance that the Company's or
Partnership's operations for any given taxable year will satisfy the
requirements for qualification and taxation as a REIT or partnership,
respectively.
With regard to the opinion set forth in subparagraph (c)
above, Section 7704 of the Code generally provides that a "publicly traded
partnership" will be taxed as a corporation unless at least 90% of its gross
income in each year consists of "qualifying income" within the meaning of
Section 7704(c)(2) of the Code. Section 7704(b) defines a "publicly traded
partnership" as any partnership whose interests are traded on an estab-
<PAGE> 13
Sunstone Hotel Investors, Inc. Page 13
lished securities market or are readily tradable on a secondary market (or the
substantial equivalent thereof). The Treasury Department recently issued
Regulations providing rules governing the meaning of the term "publicly traded
partnership." Prior to the issuance of those Regulations, the Service issued a
notice providing limited safe harbors from the definition of a "publicly traded
partnership." I.R.S. Notice 88-75, 1988-2 C.B.
386.
Pursuant to one of the safe harbors provided in Notice 88-75
(a "private placement" safe harbor), interests in a partnership will not be
treated as readily tradable on a secondary market or the substantial equivalent
thereof if (i) all of the partnership interests are issued in transactions that
are not required to be registered under the 1933 Act and (ii) the partnership
does not have more than 500 partners (as calculated in the manner specified in
Notice 88-75). Since the General Partner has represented that (i) the
Partnership has not and will not offer any Units in a transaction required to be
registered under the 1933 Act, (ii) the Partnership does not currently have more
than 500 Partners, and (iii) the interests in the Partnership are not traded on
an established securities market, we are of the opinion that the Partnership is
not a publicly traded partnership at present.
The Regulations under Section 7704 provide that Notice 88-75
will continue to apply to the Partnership through the year 2005 unless the
Partnership enters into a "substantial new line of business" prior to that date.
Commencing in the year 2006 (or in such earlier taxable year in which the
Partnership enters a substantial new line of business), the Partnership would be
required to have less than 100 partners in order to fall under the private
placement safe harbor. There is no assurance that the Partnership will continue
to satisfy either the 500-partner safe harbor provided in Notice 88-75 or that
the Partnership will satisfy the 100-partner safe harbor provided in the
Regulations. However, the Partnership has represented that, if in any taxable
year the Partnership falls outside of an applicable safe harbor from publicly
traded partnership status, it will satisfy the gross income test set forth in
Section 7704(c)(2) of the Code in that taxable year and each subsequent taxable
year. (Among other things, this will require that Mr. Alter (or any other
substantial shareholder of the Lessee) own less than a 5% interest in the
Partnership in the particular taxable year. Mr. Alter currently owns more than a
5% interest in the Partnership, but anticipates a reduction to less than 5% by
reason of the Offering.)
Our opinion as to the classification of the Partnership is
based on an assumption that the Partnership will either (i) continue to fall
within a safe harbor from publicly traded partnership status, or (ii) if the
Partnership is ever treated as a publicly traded partnership, it will satisfy
the qualifying income test of Section 7704(c)(2) of the Code in the taxable year
in which such treatment commences and all years thereafter. If future events
prove to be inconsistent with our assumptions, our opinion would be
<PAGE> 14
Sunstone Hotel Investors, Inc. Page 14
altered. Because the continuing treatment of the Partnership as a partnership is
based on subsequent events, we can provide no absolute assurance that the
Partnership will not be treated as a corporation at some time in the future.
# # #
The foregoing opinions are based on current provisions of the
Code and the Regulations, published administrative interpretations thereof, and
published court decisions. The 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, or the
Partnership from being classified as a partnership for federal income tax
purposes.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement. We also consent to the references to Brobeck,
Phleger & Harrison LLP under the captions "Federal income Tax Considerations"
and "Legal Matters" in the Prospectus.
The foregoing opinions are limited to the 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
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 addressees and the purchasers of the Common Shares,
and may not be relied upon for any purpose by any other person without our
express written consent.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE> 1
EXHIBIT 10.1.4
<PAGE> 2
FOURTH AMENDMENT TO FIRST AMENDED AND
RESTATED AGREEMENT OF LIMITED
PARTNERSHIP
This Fourth Amendment ("Amendment") to the First Amended and
Restated Agreement of Limited Partnership dated as of August 16, 1995, as
amended, is entered into by and among Sunstone Hotel Investors, Inc., a
Maryland corporation, in its individual capacity (the "Company") and in its
capacity as the General Partner of the Partnership (the "General Partner") and
each of the individuals listed on the signature page attached hereto, as newly
admitted limited partners of the Partnership (the "Substitute Limited
Partners"). All defined terms not otherwise defined herein shall have the
meaning set forth in the Agreement (as defined below).
RECITALS
A. WHEREAS, the General Partner and the current Limited Partners
executed that certain First Amended and Restated Agreement of Limited
Partnership dated as of August 16, 1995, amending and restating that certain
Agreement of Limited Partnership dated as of September 22, 1994 (as amended,
the "Agreement"), and the General Partner caused Sunstone Hotel Investors,
L.P., a Delaware limited partnership (the "Partnership"), to file a Certificate
of Limited Partnership with the Delaware Secretary of State on September 23,
1994, thereby causing the Partnership to be formed for the purposes set forth
in the Agreement.
B. WHEREAS, the Agreement was amended by the First Amendment to First
Amended and Restated Agreement of Limited Partnership dated as of December 12,
1995 (the "First Amendment") to reflect the contribution by Inns Properties of
an additional hotel in exchange for Partnership Units.
C. WHEREAS, the Agreement was amended by the Second Amendment to the
Agreement (the "Second Amendment") to reflect the distribution of Partnership
Units in connection with the dissolution of certain Limited Partners and
thereby admitting additional Substitute Limited Partners.
D. WHEREAS, the Agreement was amended by the Third Amendment to the
Agreement (the "Third Amendment") to reflect the transfer to limited
partnership interest from Peter C. Enever, deceased, to C. Robert Enever and
Audrey W. Enever.
E.
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE> 3
1. Agreement to be Bound. Each of the Substitute Limited
Partners hereby agrees to be bound by each of the terms and conditions of the
Agreement, which are hereby incorporated by reference.
2. Power of Attorney. Each Substitute Limited Partner hereby
irrevocably constitutes and appoints the General Partner, any Liquidator, and
authorized officers and attorneys-in-fact of each, and each of those acting
singly, in each case with full power of substitution, as its true and lawful
agent and attorney-in-fact, with full power and authority in its name and place
instead to perform any of the acts set forth in Section 8.2 of the Agreement.
3. Effect of Amendment. Except as amended hereby, the Agreement
is hereby confirmed in all respects.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the ___ day of March, 1996.
<TABLE>
<S> <C>
GENERAL PARTNER SUBSTITUTE LIMITED PARTNER
SUNSTONE HOTEL INVESTORS, INC., a Maryland ESTATE OF PETER C. ENEVER, DECEASED
corporation and the sole General Partner,
Executing this Amendment without the need for any
consent by any Limited Partner pursuant to the BY:/s/ C. ROBERT ENEVER
------------------------------------------------
terms of Article XI of the Agreement C. ROBERT ENEVER, CO-
PERSONAL REPRESENTATIVE
By: /s/ ROBERT A. ALTER
-----------------------------------------
Robert A. Alter
Its: President BY:/s/ AUDREY W. ENEVER
------------------------------------------------
AUDREY W. ENEVER, CO-
PERSONAL REPRESENTATIVE
</TABLE>
<PAGE> 1
EXHIBIT 10.2.16
Lease Agreement dated March 28, 1996 by and between
Sunstone Hotel Investors, L.P., as lessor, and Sunstone Hotel Properties,
Inc., as lessee, for the Courtyard by Marriott located in Riverside, California.
The following lists the material differences between the Percentage
Lease filed as Exhibit 10.2.1 to the Company's Registration Statement
No. 33-84346 and the Percentage Lease identified by the Exhibit number below
and is being filed pursuant to Instruction 2 to Item 601 of Regulation S-K.
Annual
Percentage Lease Base Percentage Rent
Description Rent Formula
- ---------------- -------- ----------------------
Lease Agreement dated as of 426,000 30% of room revenue up
March 28, 1996 by and between to $1,429,000, plus 60%
Sunstone Hotel Investors, L.P., of room revenue in excess
as lessor, and Sunstone Hotel of $1,429,000, plus 5%
Properties, Inc., as lessee, of food and beverage
for the Courtyard by Marriott revenue, plus 100% of
hotel located in Riverside, sublease and concession
California revenue and other net
revenues
<PAGE> 1
EXHIBIT 10.2.17
Lease Agreement dated June 28, 1996 by and between
Sunstone Hotel Investors, L.P., as lessor, and Sunstone Hotel Properties,
Inc., as lessee, for the Holiday Inn hotel located in Renton, Washington.
The following lists the material differences between the Percentage
Lease filed as Exhibit 10.2.1 to the Company's Registration Statement
No. 33-84346 and the Percentage Lease identified by the Exhibit number below
and is being filed pursuant to Instruction 2 to Item 601 of Regulation S-K.
Annual
Percentage Lease Base Percentage Rent
Description Rent Formula
- ---------------- -------- ----------------------
Lease Agreement dated as of 810,000 30% of room revenue up
June 28, 1996 by and between to $2,700,000, plus 62%
Sunstone Hotel Investors, L.P., of room revenue in excess
as lessor, and Sunstone Hotel of $2,700,000, plus 100%
Properties, Inc., as lessee, of sublease and concession
for the Holiday Inn Hotel revenue and other net
located in Renton, Washington revenue
<PAGE> 1
EXHIBIT 10.30.2
<PAGE> 2
AMENDMENT NUMBER TWO
TO
THIRD PARTY PLEDGE AGREEMENT
THIS AMENDMENT NUMBER TWO TO THIRD PARTY PLEDGE AGREEMENT (the
"Amendment") is made and entered into as of the 2nd day of February 1996, by
and between SUNSTONE HOTEL INVESTORS, L.P., a Delaware limited partnership
("Secured Party"); and ROBERT A. ALTER ("Alter") and CHARLES L. BIEDERMAN
("Biederman; and together with Alter, "Pledgor").
WHEREAS, the undersigned are parties to that certain Third Party
Pledge Agreement entered into as of August 16, 1995, as amended (the
"Agreement"); and
WHEREAS, the undersigned desire to amend the Agreement in the
manner set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants contained herein and in the Agreement, and for other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
1. DEFINED TERMS. For purposes of this Amendment, all
capitalized terms used and not otherwise defined herein, shall have the
meanings assigned to them in the Agreement.
2. UNITS PLEDGED. Exhibit A to the Agreement is hereby amended
and restated in its entirety to read in full as attached hereto as Exhibit A.
3. FORCE AND EFFECT. Except to the extent modified by this
Amendment, all of the terms and provisions of the Agreement shall be unaffected
and shall remain in full force and effect. This Amendment shall be deemed part
of, and construed in accordance with the Agreement.
1
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed this Amendment as
of the date first written above.
PLEDGOR
/s/ ROBERT A. ALTER
------------------------------------
Robert A. Alter
/s/ CHARLES L. BIEDERMAN
------------------------------------
Charles L. Biederman
SECURED PARTY
SUNSTONE HOTEL INVESTORS, L.P.
a Delaware limited partnership
By: Sunstone Hotel Investors, Inc.
a Maryland corporation,
Its General Partner
By: /s/ ROBERT A. ALTER
-------------------------
Robert A. Alter
Its: President
-------------------------
2
<PAGE> 4
EXHIBIT A
Percentage Leases & Pledge of Units
<TABLE>
<CAPTION>
NUMBER OF THIRD
PERCENTAGE FOUR MONTHS UNITS ANNIVERSARY INITIALS
LEASE BASE RENT PLEDGED DATE OF PLEDGOR
----- --------- ------- ---- ----------
<S> <C> <C> <C>
Hampton Inn - $188,750 19,868 August 16, 1998
Denver S.E., CO
Hampton Inn - 150,000 15,790 August 16, 1998
Pueblo, CO
Courtyard by Marriott - 135,000 14,211 August 16, 1998
Fresno, CA
Hampton Inn - 158,667 16,702 August 16, 1998
Mesa, AZ
Holiday Inn - 125,000 13,158 August 16, 1998
Steamboat Springs, CO
Holiday Inn - 142,000 14,947 August 16, 1998
Craig, CO
Holiday Inn - 53,333 5,614 August 16, 1998
Provo, UT
Hampton Inn - 161,000 16,947 August 16, 1998
Silverthorne, CO
Best Western - 220,000 23,158 August 16, 1998
Santa Fe, NM
Hampton Inn - 132,000 13,895 August 16, 1998
Arcadia, CA
Hampton Inn - 139,333 13,933 December 13, 1998
Oakland, CA
Cypress Inn - 189,000 17,182 February 2, 1999
Kent, WA
Cypress Inn - 85,000 7,727 February 2, 1999
Everett, WA
Cypress Inn - 107,917 9,811 February 2, 1999
Poulsbo, WA
</TABLE>
A-1
<PAGE> 5
<TABLE>
<CAPTION>
NUMBER OF THIRD
PERCENTAGE FOUR MONTHS UNITS ANNIVERSARY INITIALS
LEASE BASE RENT PLEDGED DATE OF PLEDGOR
----- --------- ------- ---- ----------
<S> <C> <C> <C> <C>
Cypress Inn - 145,667 13,242 February 2, 1999
Clackamas, WA
Cypress Inn - 121,000 11,000 February 2, 1999
Stark, OR
Cypress Inn - 77,333 7,030 February 2, 1999
Downtown Portland, OR
COMBINED TOTALS: $2,331,000 234,215
=========== ==========
</TABLE>
A-2
<PAGE> 1
EXHIBIT 10.30.3
<PAGE> 2
AMENDMENT NUMBER THREE
TO
THIRD PARTY PLEDGE AGREEMENT
THIS AMENDMENT NUMBER THREE TO THIRD PARTY PLEDGE AGREEMENT
(the "Amendment") is made and entered into as of the 30th day of May 1996, by
and between SUNSTONE HOTEL INVESTORS, L.P., a Delaware limited partnership
("Secured Party"); and ROBERT A. ALTER ("Alter") and CHARLES L. BIEDERMAN
("Biederman; and together with Alter, "Pledgor").
WHEREAS, the undersigned are parties to that certain Third
Party Pledge Agreement entered into as of August 16, 1995, as amended (the
"Agreement"); and
WHEREAS, the undersigned desire to amend the Agreement in
order to reflect the sale of the Cypress Inn Hotels in Portland, Oregon and
Everett, Washington (the "Disposed Hotels") and the termination of the Lease
Agreements for such two hotels.
NOW, THEREFORE, in consideration of the foregoing recitals and
the mutual covenants contained herein and in the Agreement, and for other good
and valuable consideration, the sufficiency of which is hereby acknowledged,
the parties hereto hereby agree as follows:
1. DEFINED TERMS. For purposes of this Amendment, all
capitalized terms used and not otherwise defined herein, shall have the
meanings assigned to them in the Agreement.
2. UNITS PLEDGED. In order to release from the lien of
the pledge in favor of Secured Party in the Units pledged to secure the Lease
Agreements for the Disposed Hotels, Exhibit A to the Agreement is hereby
amended and restated in its entirety to read in full as attached hereto as
Exhibit A.
3. FORCE AND EFFECT. Except to the extent modified by
this Amendment, all of the terms and provisions of the Agreement shall be
unaffected and shall remain in full force and effect. This Amendment shall be
deemed part of, and construed in accordance with the Agreement.
1
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed this
Amendment as of the date first written above.
PLEDGOR
/s/ ROBERT A. ALTER
------------------------------------
Robert A. Alter
/s/ CHARLES L. BIEDERMAN
------------------------------------
Charles L. Biederman
SECURED PARTY
SUNSTONE HOTEL INVESTORS, L.P.
a Delaware limited partnership
By: Sunstone Hotel Investors, Inc.
a Maryland corporation,
Its General Partner
By: /s/ ROBERT A. ALTER
-------------------------
Robert A. Alter
Its: President
2
<PAGE> 4
EXHIBIT A
Percentage Leases & Pledge of Units
<TABLE>
<CAPTION>
NUMBER OF THIRD
PERCENTAGE FOUR MONTHS UNITS ANNIVERSARY INITIALS
LEASE BASE RENT PLEDGED DATE OF PLEDGOR
----- --------- ------- ---- ----------
<S> <C> <C> <C>
Hampton Inn - $188,750 19,868 August 16, 1998
Denver S.E., CO
Hampton Inn - 150,000 15,790 August 16, 1998
Pueblo, CO
Courtyard by Marriott - 135,000 14,211 August 16, 1998
Fresno, CA
Hampton Inn - 158,667 16,702 August 16, 1998
Mesa, AZ
Holiday Inn - 125,000 13,158 August 16, 1998
Steamboat Springs, CO
Holiday Inn - 142,000 14,947 August 16, 1998
Craig, CO
Holiday Inn - 53,333 5,614 August 16, 1998
Provo, UT
Hampton Inn - 161,000 16,947 August 16, 1998
Silverthorne, CO
Best Western - 220,000 23,158 August 16, 1998
Santa Fe, NM
Hampton Inn - 132,000 13,895 August 16, 1998
Arcadia, CA
Hampton Inn - 139,333 13,933 December 13, 1998
Oakland, CA
Cypress Inn - 189,000 17,182 February 2, 1999
Kent, WA
Cypress Inn - 107,917 9,811 February 2, 1999
Poulsbo, WA
Cypress Inn - 145,667 13,242 February 2, 1999
Clackamas, WA
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
NUMBER OF THIRD
PERCENTAGE FOUR MONTHS UNITS ANNIVERSARY INITIALS
LEASE BASE RENT PLEDGED DATE OF PLEDGOR
----- --------- ------- ---- ----------
<S> <C> <C> <C>
Cypress Inn - 121,000 11,000 February 2, 1999
Portland, OR
Courtyard By Marriott - 142,000 14,025 April 1, 1999
Riverside, CA
COMBINED TOTALS: $2,310,667 233,483
=========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 10.30.4
<PAGE> 2
AMENDMENT NUMBER FOUR
TO
THIRD PARTY PLEDGE AGREEMENT
THIS AMENDMENT NUMBER FOUR TO THIRD PARTY PLEDGE AGREEMENT
(the "Amendment") is made and entered into as of the 28th day of June 1996, by
and between SUNSTONE HOTEL INVESTORS, L.P., a Delaware limited partnership
("Secured Party"); and ROBERT A. ALTER ("Alter") and CHARLES L. BIEDERMAN
("Biederman; and together with Alter, "Pledgor").
WHEREAS, the undersigned are parties to that certain Third
Party Pledge Agreement entered into as of August 16, 1995, as amended (the
"Agreement"); and
WHEREAS, the undersigned desire to amend the Agreement in
order to reflect the purchase of the Holiday Inn Hotel in Renton, Washington
(the "Hotel") and the execution of the Lease Agreement for such Hotel.
NOW, THEREFORE, in consideration of the foregoing recitals and
the mutual covenants contained herein and in the Agreement, and for other good
and valuable consideration, the sufficiency of which is hereby acknowledged,
the parties hereto hereby agree as follows:
1. DEFINED TERMS. For purposes of this Amendment, all
capitalized terms used and not otherwise defined herein, shall have the
meanings assigned to them in the Agreement.
2. UNITS PLEDGED. In order to secure the lien of the
pledge in favor of Secured Party in the Units pledged to secure the Lease
Agreement for the Hotel, Exhibit A to the Agreement is hereby amended and
restated in its entirety to read in full as attached hereto as Exhibit A.
3. FORCE AND EFFECT. Except to the extent modified by
this Amendment, all of the terms and provisions of the Agreement shall be
unaffected and shall remain in full force and effect. This Amendment shall be
deemed part of, and construed in accordance with the Agreement.
1
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed this
Amendment as of the date first written above.
PLEDGOR
/s/ ROBERT A. ALTER
-----------------------------------
Robert A. Alter
/s/ CHARLES L. BIEDERMAN
-----------------------------------
Charles L. Biederman
SECURED PARTY
SUNSTONE HOTEL INVESTORS, L.P.
a Delaware limited partnership
By: Sunstone Hotel Investors, Inc.
a Maryland corporation,
Its General Partner
By: /s/ ROBERT A. ALTER
------------------------
Robert A. Alter
Its: President
2
<PAGE> 4
EXHIBIT A
Percentage Leases & Pledge of Units
<TABLE>
<CAPTION>
NUMBER OF THIRD
PERCENTAGE FOUR MONTHS UNITS ANNIVERSARY INITIALS
LEASE BASE RENT PLEDGED DATE OF PLEDGOR
----- --------- ------- ---- ----------
<S> <C> <C> <C>
Hampton Inn - $188,750 19,868 August 16, 1998
Denver S.E., CO
Hampton Inn - 150,000 15,790 August 16, 1998
Pueblo, CO
Courtyard by Marriott - 135,000 14,211 August 16, 1998
Fresno, CA
Hampton Inn - 158,667 16,702 August 16, 1998
Mesa, AZ
Holiday Inn - 125,000 13,158 August 16, 1998
Steamboat Springs, CO
Holiday Inn - 142,000 14,947 August 16, 1998
Craig, CO
Holiday Inn - 53,333 5,614 August 16, 1998
Provo, UT
Hampton Inn - 161,000 16,947 August 16, 1998
Silverthorne, CO
Best Western - 220,000 23,158 August 16, 1998
Santa Fe, NM
Hampton Inn - 132,000 13,895 August 16, 1998
Arcadia, CA
Hampton Inn - 139,333 13,933 December 13, 1998
Oakland, CA
Cypress Inn - 189,000 17,182 February 2, 1999
Kent, WA
Cypress Inn - 107,917 9,811 February 2, 1999
Poulsbo, WA
Cypress Inn - 145,667 13,242 February 2, 1999
Clackamas, WA
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
NUMBER OF THIRD
PERCENTAGE FOUR MONTHS UNITS ANNIVERSARY INITIALS
LEASE BASE RENT PLEDGED DATE OF PLEDGOR
----- --------- ------- ---- ----------
<S> <C> <C> <C>
Cypress Inn - 121,000 11,000 February 2, 1999
Portland, OR
Courtyard By Marriott - 142,000 14,025 April 1, 1999
Riverside, CA
Holiday Inn Select - 270,000 24,828 June 28, 1999
Renton, WA
COMBINED TOTALS: $2,580,667 258,311
========= =======
</TABLE>
<PAGE> 1
EXHIBIT 10.35.1
<PAGE> 2
LOAN AGREEMENT
(Revolving and Mini-Perm)
(Amended and Restated)
BY THIS LOAN AGREEMENT (the "Agreement") made and entered into as of
the 21st day of June, 1996, SUNSTONE HOTEL INVESTORS, L.P., a Delaware limited
partnership, whose address is 115 Calle de Industrias, Suite 201, San Clemente,
California 92672 (hereinafter called "Borrower"), and BANK ONE, ARIZONA, NA, a
national banking association, whose address is Post Office Box 29542, Phoenix,
Arizona 85038, Attention: Western Region Real Estate Finance, Dept. A392
(hereinafter called "Lender"), for and in consideration of the recitals and
mutual promises contained herein, confirm and agree as follows:
SECTION 1. RECITALS
1.1 Lender has previously extended to Borrower credit (the
"Original Loan") in the principal amount of $30,000,000.00 pursuant to that
Loan Agreement, dated October 25, 1995 (the "Original Loan Agreement"), as
evidenced by that Promissory Note, dated October 25, 1995 ("Note"). The unpaid
principal of the Original Loan as of the date hereof is $27,750,000.00.
1.2 The Original Loan is secured by, among other things, those
deeds of trust, assignments of rents, security agreements and fixture filings,
by Borrower, as trustor, for the benefit of Lender, as beneficiary,
(collectively, the "Deeds of Trust") listed on Schedule "A" attached hereto.
1.3 Borrower has requested that Lender increase the Original Loan
and modify the Original Loan Agreement and the other Loan Documents as provided
herein. Lender is willing to do so, subject to the terms and conditions
herein, whereby the Original Loan Agreement is hereby amended and restated.
1.4 For the purposes of this Agreement, unless the context
otherwise requires, the following terms shall have the respective meanings
assigned to them in this Paragraph 1.4 or in the paragraph referred to below:
"Acquisition Costs": See Paragraph 2.4(d).
"Additional Projects" means mid-scale and upper-economy hotel
properties.
"Advance": See Paragraph 2. 1.
"Agreement" means this Loan Agreement, amending and restating the
Original Loan Agreement.
<PAGE> 3
"Alter": See Paragraph 4.1(a)(ii).
"Amortization Schedule" means that schedule of principal payments
determined on the Conversion Date, based on the Floating Rate in effect on the
Conversion Date, showing the amount of principal to be due and payable monthly,
beginning with the first day after the end of the first full month after the
Conversion Date, sufficient to amortize the principal balance of the Loan
outstanding on the Conversion Date over an amortization period of one hundred
eighty (180) months. A schedule reflecting such amortization shall be attached
to the Note on the Conversion Date.
"Applicable Commitment" for purposes of Paragraph 7.14(d) means, until
the completion of a Qualified Offering, the Maximum Commitment and thereafter
the sum of the highest outstanding balance of the Loan in the prior twelve (12)
month period plus the actual current undrawn portion of the Construction Line.
"Appraisal": See Paragraph 5.1(1)(i).
"Biederman": See Paragraph 4.1(a)(iii).
"Borrower" means Sunstone Hotel Investors, L.P., a Delaware limited
partnership.
"Business Day" means a day of the year on which banks are not required
or authorized to close in Phoenix, Arizona and, with respect to a Fixed Rate
Amount, a day on which dealings are carried on in the London interbank market.
"Capital Improvement Advance": See Paragraph 2.4(d).
"Capital Improvement Budget": See Paragraph 2.4(d).
"Closing Date" means the date of the delivery of this Agreement by the
Borrower to the Under.
"Collateral": See Paragraph 4.2.
"Collateral Project": See Paragraph 4.2(b).
"Construction Advance": See Paragraph 2.4(e).
"Construction Advance Conditions" means that the following conditions
precedent shall have been completed and all listed items shall have been
delivered to Lender in form and content satisfactory to Lender with respect to
a proposed Development Project to the satisfaction of the Lender:
-2-
<PAGE> 4
(a) All Initial Projects Closing Requirements, except as
herein amended or supplemented, and to the extent applicable.
(b) Plans and specifications approved by Lender and by
any required governmental entity, which plans and specifications may
be preliminary subject to Lender's receipt of the final plans and
specifications as soon as available.
(c) A project budget itemizing the project costs,
including direct and indirect costs, for the Development Project,
certified to be correct to the best knowledge and belief of Borrower.
(d) Copies of a firm and binding maximum fixed price
contract for construction of the Development Project with a contractor
that has been approved in writing by Lender.
(e) Unless the general contractor is otherwise known and
acceptable to Lender, financial statements for the general contractor,
if any, covering the two-year period immediately preceding the first
Construction Advance and showing a financial condition satisfactory to
Lender.
(f) A current survey of the real property by a licensed
surveyor acceptable to Lender describing the boundaries of the real
property and showing all means of ingress and egress, rights-of-way,
easements (each of which shall be identified by docket and page or
recording number where recorded) and all other customary and relevant
information pursuant to ALTA standards and any title company
requirements. If required by Lender, following completion of the
foundations and footings and prior to any Construction Advance for
footings and foundations, Borrower shall furnish to Lender an update
of this survey showing the location of the footings and foundations
and the proposed improvements which shall be within the boundaries of
the real property and shall not encroach on any easement area or any
building setback requirement. If required by Lender, following
completion of the improvements, Borrower shall furnish to Lender an
ALTA "as built" survey showing the location of the improvements upon
the real property and showing all easements and other matters
affecting the site. All surveys shall be certified to Lender and the
title company issuing the title policy.
(g) An ALTA extended coverage mortgagee's title insurance
policy [ALTA Loan Policy - 1970 (Rev. 10-17-70)] or similar policy
acceptable to Lender, with such endorsements as Lender may require,
issued by Fidelity National Title Insurance Company or by another
title insurance company satisfactory to Borrower and Lender in the
amount of the Loan insuring the lien of the Deed of Trust to be a
first and prior Construction lien upon the real property and
improvements as security for all Advances pursuant to the terms of
this Agreement, subject only to such exceptions as Lender may
expressly approve in writing, and insuring against any lien claims
that could arise out of
-3-
<PAGE> 5
the construction of the improvements on the real property. During the
course of construction of the improvements, Borrower shall provide
Lender with such title insurance endorsements as Lender may require,
including any endorsements Lender may reasonably require to insure
that the improvements shall have been constructed within the
boundaries of the real property and in accordance with all applicable
laws, covenants and restrictions. Upon completion of the
improvements, Borrower shall deliver to Lender such further
endorsements to the title insurance policy as Lender may reasonably
require.
(h) A soils report, including drainage, boring and
compacting data, together with such hydrology and other engineering
reports that Lender may require, all of which shall be acceptable to
Lender, shall be by engineers acceptable to Lender and shall indicate
that the condition of the real property is suitable for construction
of the improvements without extraordinary land preparation. The soils
report shall indicate approval of the proposed foundation design. Any
reasonable recommendations in the approved soils, hydrology and other
engineering reports must be complied with and incorporated into the
plans and specifications.
(i) Evidence that the real property is properly zoned for
the Development Project and their intended use and that such zoning is
final and not subject to challenge.
(j) Evidence that each type of offsite improvement for
the real property has been completed and has been certified and/or
accepted by any municipality, utility, county or other governmental
entity whose certification or acceptance thereof is required.
(k) To the extent reasonably required by Lender, copies
of other agreements between Borrower and any architects, engineers,
managers or supervisors related to the construction, maintenance,
repair, leasing, management and operation of the real property and
improvements, together with written agreements by such persons or
entities that they will perform for Lender the services contracted to
Borrower, notwithstanding the occurrence of any Event of Default and
any trustee's sale or foreclosure of the Deed of Trust (provided that
such persons or entities continue to receive payments under their
respective contracts), and the consent of such persons or entities to
the collateral assignment by Borrower to Lender of their respective
contracts.
(l) When reasonably available, a list of the contractor,
all subcontractors, suppliers and materialmen employed or retained to
be employed in connection with the construction of the improvements,
together with, if required by Lender, copies of each such contract.
Such list shall show the name, address and telephone number of each
such person, a general statement of the nature of the work to be done,
the labor and material to be supplied, the names of materialmen if
known, and the approximate dollar value of such labor or work with
respect to each.
-4-
<PAGE> 6
(m) A Job Progress Schedule showing the planned timing,
progress of construction and completion date for the improvements.
(n) If required by Lender, a Certificate of Compliance
for the general contractor, or some other evidence reasonably
satisfactory to Lender that the general contractor's license is
currently in good standing in the applicable jurisdictions.
"Construction Line": See Paragraph 2.4(e).
"Contractual Debt Service": See Paragraph 7.14(d).
"Conversion Date" means that day on which the Loan is converted from
the Revolving Term to the Mini-Perm Term.
"Debt Service Coverage Ratio": See Paragraph 7.14(e).
"Deed of Trust": See Paragraph 4.2(b).
"Development Project": See Paragraph 2.4(e).
"EBITDA": See Paragraph 7.14(d).
"Event of Default": See Paragraph 10.1.
"Final Maturity Date" means that day that is thirty-six (36) months
after the last day of the Revolving Term.
"Financial Conditions" means that, based on the Financial Covenants
reported in the most recent fiscal quarter and calculated on the financial
results for that quarter and the prior three (3) quarters, all of the following
shall be accurate:
(a) the ratio of Borrower's aggregate Liabilities to its
Tangible Net Worth (each as described in Paragraph 7.14(a)) has not
exceeded 0.40 to 1.00 during such four (4) quarter period;
(b) the ratio of Borrower's EBITDA (as described in
Paragraph 7.14(d)) to its interest expense is not less than 4.00 to
1.00; and
(c) Borrower's Pro Forma Coverage Ratio (as described in
Paragraph 7.14(d)) is not less than 3.00 to 1.00.
"Financial Covenants": See Paragraph 7.14.
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"Financial Covenant Default": See Paragraph 7.14.
"Fixed Rate" means the rate per annum equal to the sum of (i) the
LIBOR Rate, and (ii) the Fixed Rate Factor in effect on the first day of the
applicable Interest Period.
"Fixed Rate Amount" means some or all of the indebtedness that bears
or is requested to bear interest at the Fixed Rate.
"Fixed Rate Factor" means, until the completion of a Qualified
Offering, two and one quarter percent (2.25%); after the completion of a
Qualified Offering:
(a) it means the sum of (i) one and nine-tenths percent
(1.90%) and (ii) the TNW Factor;
(b) provided, however, that so long as the Financial
Conditions are satisfied, it means the sum of (i) one and three-
quarters percent (1.75%) and (ii) the TNW Factor.
"Floating Rate" means the rate per annum equal to the sum of (i) the
Prime Rate, and (ii) the Floating Rate Factor.
"Floating Rate Amount" means some or all of the indebtedness that
bears or is requested to bear interest at the Floating Rate.
"Floating Rate Factor" means, until the completion of a Qualified
Offering, three-quarters percent (0.75%); after the completion of a Qualified
Offering, it means one-half percent (0.5%).
"Funds from Operations": See Paragraph 7.14(b).
"General Partner": See Paragraph 4.1(a)(i).
"Gross Expenses": See Paragraph 7.14(d).
"Gross Revenues": See Paragraph 7.14(d).
"Gross Sales Price": See Paragraph 4.3(a).
"Guarantees": See Paragraph 4.1(a).
"Guarantors": See Paragraph 4.1(a).
"Initial Projects" means the following hotel properties:
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(i) Holiday Inn in Provo, Utah;
(ii) Holiday Inn in Craig, Colorado;
(iii) Holiday Inn in Steamboat Springs, Colorado;
(iv) Hampton Inn in Denver (SE), Colorado;
(v) Hampton Inn in Pueblo, Colorado;
(vi) Hampton Inn in Mesa, Arizona;
(vii) Hampton Inn in Arcadia, California;
(viii) Hampton Inn in Silverthorne, Colorado;
(ix) Best Western in Santa Fe, New Mexico; and
(x) Courtyard by Marriott in Fresno. California.
"Initial Projects Closing Requirements": See Paragraph 5.1(l).
"Intangible Assets": See Paragraph 7.14(a).
"Interest Period" means a period commencing on the date selected by
Borrower and ending on the last day of the period selected by Borrower as
provided in the Note. The duration of each Interest Period shall be in 30, 60,
90, 120, 180, 270 or 360 day increments only, as selected by Borrower as
provided therein; provided, however, that:
A. Interest Periods commencing on the same date shall be
of the same duration;
B. Whenever the last day of an Interest Period would
otherwise occur on a day other than a Business Day, the last day
of the Interest Period shall be extended to occur on the next
succeeding Business Day, provided, however, that if the extension
would cause the last day of the Interest Period to occur in the next
following calendar month, the last day of the Interest Period shall
occur on the next preceding Business Day; and
C. No Interest Period shall extend beyond the Maturity
Date.
"IPAFM Values" means the aggregate of the appraised fair market values
of the Initial Projects, based on current appraisals acceptable to Lender in
its sole and absolute discretion.
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"Last Fifty Percent": See Paragraph 4.1(b)(i).
"Lender" means Bank One, Arizona, NA, a national banking association.
"Lessee" means Sunstone Hotel Properties, Inc., a Colorado
corporation, or such other successor lessee as shall be acceptable to Lender.
"Lessee Agreement" means a subordination and estoppel agreement
executed by Lessee for the benefit of Lender with respect to a Project Lease,
substantially in the form of Exhibit "C" attached hereto.
"Lessee Personal Property": See Paragraph 7.17.
"Liabilities": See Paragraph 7.14(a).
"LIBOR Rate" means the rate of interest determined by Lender, based on
Telerate System reports (Page 3807) or such other sources as may be selected by
Lender, to be the rate at which deposits in United States dollars are offered
by major banks in London, England, to other major banks in London interbank
market at 11:00 a.m. (London, England, local time) on the first day of the
Interest Period for the period in the London interbank market equal to or next
greater than the Interest Period.
"Liquidity": See Paragraph 7.14(c).
"Loan": See Paragraph 2.1.
"Loan Amount" means a Fixed Rate Amount or a Floating Rate Amount.
"Loan Balance": See Paragraph 2.3.
"Loan Documents" means this Agreement, the Note, the Security
Documents and all other agreements, documents, and instruments evidencing,
securing, or otherwise relating to the Loan, whether delivered pursuant to the
Original Agreement and modified in this Agreement, or amended and restated of
even date herewith.
"Loan Fee": See Paragraph 3.1.
"Loan-to-Value Ratio": See Paragraph 4.3(b).
"Loan Year": See Paragraph 7.14(d).
"LTV Amount" means an amount equal to fifty percent (50%) of the
Qualified Collateral Project Values.
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<PAGE> 10
"Management Company" means Sunstone Hotel Management, Inc., a Colorado
corporation, or such other successor management company as shall be acceptable
to Lender.
"Maturity Date" means the RLC Termination Date or, if Borrower shall
have elected to convert the Loan to the Mini-Perm Term, the Final Maturity
Date.
"Maximum Aggregate Liability": See Paragraph 4.1(b)(iii).
"Maximum Commitment" means an amount equal to the lesser of (i) the
LTV Amount, or (ii) the Maximum Loan Amount.
"Maximum Loan Amount" means $45,000,000.00, unless Borrower shall have
exercised the Option pursuant to Paragraph 2.9, after which it means
$50,000,000.00.
"Mini-Perm Fee": See Paragraph 3.3
"Mini-Perm Term" means a term commencing on the Conversion Date and
terminating on the Final Maturity Date.
"Net Aggregate Liability": See Paragraph 4.1(b)(iii).
"Net Loan Proceeds": See Paragraph 4.3(a).
"Net Revenue": See Paragraph 7.14(d).
"Net Sales Price": See Paragraph 4.3(a).
"Non-Collateral Project": See Paragraph 7.19.
"Note": See Paragraph 2.2.
"Option" means the option of Borrower to increase the Maximum
Loan Amount on or before the Option Termination Date.
"Option Fee" means the fee paid by Borrower to Lender pursuant to
Paragraph 3.4 upon Borrower's exercise of the Option pursuant to Paragraph 2.9,
which fee shall be equal to:
(a) $50,000.00 if the Option is exercised on or before
October 25, 1996;
(b) $40,000.00 if the Option is exercised after October
25, 1996, but on or before March 31, 1997; or
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(c) $30,000.00 if the Option is exercised after March 31,
1997, but on or before the Option Termination Date.
"Option Termination Date" means June 30, 1997.
"Original Closing Date" means October 25, 1995.
"Original Loan": See Paragraph 1.1.
"Original Loan Agreement": See Paragraph 1.1.
"Personal Guarantors": See Paragraph 4.1(b).
"Pledged Account": See Paragraph 4.2(a).
"Prime Rate" means the interest rate per annum designated by Lender,
or its successors, as its "Prime Rate," as publicly announced by Lender from
time to time as a means of pricing credit extensions to some customers and is
neither tied to any extended interest rate or index nor necessarily the lowest
rate of interest charged by Lender at any given time for any particular class
of customer or credit extension.
"Principal Guarantors" means Alter and Biederman.
"Pro Forma Coverage Ratio": See Paragraph 7.14(d).
"Pro Forma Interest Rate" means a rate per annum equal to the greater
of (i) ten percent (10%), (ii) the current interest rate on the Loan, or (iii)
the sum of 3.0% plus the Treasury Constant Maturities Rate.
"Project Cost": See Paragraph 5.1(k)(xxvi).
"Project Franchise Agreement": See Paragraph 5.1(k)(xviii).
"Project Gross Expenses": See Paragraph 7.16.
"Project Gross Revenues": See Paragraph 7.16.
"Project Lease" means a fully executed lease agreement with respect to
a Collateral Project between Borrower and Lessee, complying with the
requirements of Paragraph 7.17 and providing for rental payments equal to the
sum of base rent and percentage rent sufficient with that of all other
Collateral Projects to pay the debt service on the Loan.
"Project Management Agreement": See Paragraph 7.18.
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<PAGE> 12
"Project Net Revenues": See Paragraph 7.16.
"Purchase Price": See Paragraph 2.4(d).
"Qualified Collateral Project" means a Collateral Project satisfying
the following conditions:
(a) It shall be either an Initial Project or an
Additional Project except that a Development Project shall not be
deemed to be a Qualified Collateral Project until it shall have been
completed pursuant to Paragraph 2.11(c);
(b) It shall be subject to a Deed of Trust;
(c) It shall have satisfied without exception, unless
waived by Lender in its reasonable discretion, all of the Initial
Projects Closing Requirements; and
(d) It shall have satisfied all of the conditions for an
Additional Project specified in Paragraph 2.4(c).
"Qualified Collateral Project Values" means the aggregate of the
appraised fair market values of the Qualified Collateral Projects, based on
current appraisals acceptable to Lender in its sole and absolute direction.
"Qualified Offering" means that the General Partner shall have
successfully completed one or more secondary public offerings generating
aggregate gross proceeds of not less than $40,000,000.00.
"Receiver": See Paragraph 7.18(b).
"Release Price": See Paragraph 4.3(a).
"Revolving Term" means a term commencing on the Closing Date and
terminating on the RLC Termination Date.
"RLC Termination Date" means October 25, 1998, or such later date as
may be requested by Borrower and approved by Lender pursuant to Paragraph 2.10,
or such earlier date as Borrower shall elect to terminate the Revolving Term.
"Secured Account": See Paragraph 7.16.
"Security Documents": See Paragraph 4.2(f).
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"Tangible Net Worth": See Paragraph 7.14(a).
"Term-out Date" means the first date on which interest is otherwise
due and payable after the occurrence of the Financial Covenant Default.
"TNW Factor" means zero percent (0.0%), except that so long as the
Tangible Net Worth (as defined in Paragraph 7.14(a)) of Borrower is less than
$75,000,000.00 it means one quarter percent (0.25%).
"Treasury Constant Maturities Rate" means the yield in percent per
annum as calculated for each Business Day by the United States Treasury
Department for U.S. Government securities adjusted to ten (10) year Treasury
Constant Maturities, averaged for a calendar week, presently reported weekly in
the Federal Reserve Statistical Release H.15.
SECTION 2. LOAN COMMITMENT; ADVANCES
2.1 Subject to the terms and conditions herein set forth, Lender
agrees to loan to or for the benefit of Borrower in the manner and upon the
terms and conditions herein expressed, amounts that shall not exceed, in the
aggregate sum, at any one time, the Maximum Commitment (the "Loan").
Disbursements under the Loan are referred to herein individually as an
"Advance" and collectively as "Advances."
2.2 The Loan shall be evidenced by a Promissory Note (the "Note")
of Borrower, executed and delivered simultaneously with the execution of the
Original Loan Agreement, in the original amount of $30,000,000.00 and hereby
amended to equal the Maximum Commitment, payable to Lender upon the terms and
conditions contained therein, which may include, but need not be limited to,
the following provisions:
(a) Interest on the outstanding principal balance of the
Loan shall accrue at the Floating Rate except as to any Fixed Rate
Amount during an Interest Period. The interest rate on the Loan shall
change from time to time on the effective date of, and in conformity
with, changes in the Prime rate.
(b) Borrower may elect that as of any Business Day
designated by Borrower, upon notice that is received by Lender not
later than noon (Phoenix, Arizona, local time) two (2) Business Days
prior to such designated date, interest on a Fixed Rate Amount accrue
at a Fixed Rate during an Interest Period. Each such notice shall
specify (i) the amount of such Fixed Rate Amount, and (ii) the
Interest Period. In addition, Borrower may as of any designated
Business Day, upon notice that is received by Lender not later than
noon (Phoenix, Arizona local time) two (2) Business Days prior to such
designated Business Day, convert one type of Loan Amount into the
other type of Loan Amount or continue a Fixed Rate Amount as a Fixed
Rate Amount for a new Interest Period, provided, that
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<PAGE> 14
Borrower may make such conversion or continuation only on the last day
of the Interest Period. Each such notice of conversion or
continuation shall specify (A) the date of such conversion or
continuation, (B) the amount to be converted or continued, and (C) if
applicable, the Interest Period. Any amount not complying with the
foregoing requirements for an amount bearing interest at the Fixed
Rate shall bear interest at the Floating Rate. Any Fixed Rate Amount
not continued as a Fixed Rate Amount in compliance with the foregoing
requirements shall, after the end of the Interest Period, bear
interest at the Floating Rate, whether or not Borrower has elected to
convert the Fixed Rate Amount to a Floating Rate Amount.
(c) Each Fixed Rate Amount shall bear interest, during
the Interest Period for such Fixed Rate Amount, at the Fixed Rate.
The Fixed Rate as to any Fixed Rate Amount shall not change due to a
change in the Fixed Rate during the Interest Period for such Fixed
Rate Amount. Borrower may not have outstanding at any one time more
than seven (7) Fixed Rate Amounts.
(d) Notwithstanding any provision of the Note or this
Agreement to the contrary:
(1) Lender shall be entitled to fund and maintain
its funding of all or any part of the Note in any manner it
sees fit; provided, however, for the purpose of the Note, all
determinations thereunder shall be made as if Lender had
actually funded and maintained each Fixed Rate Amount through
the purchase of deposits having a maturity corresponding to
the last day of the Interest Period and bearing an interest
rate equal to the Fixed Rate for such Interest Period.
(2) If prior to the commencement of any Interest
Period, Lender determines by reason of circumstances affecting
the London interbank market, adequate and reasonable means do
not exist for ascertaining the LIBOR Rate in the manner
provided in the definition of such term, Lender shall promptly
give notice thereof to Borrower and the respective amount as
to which Borrower has requested the Fixed Rate shall bear
interest at the Floating Rate.
(3) A Fixed Rate Amount must be in a minimum
amount of $2,500,000.00, with increments of $100,000.00
thereafter.
(e) All unpaid and accrued interest shall be due and
payable on the first day of each and every month commencing with the
first month after the Closing Date.
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<PAGE> 15
(f) Should the Loan not be converted to the Mini-Perm
Term, all outstanding principal and accrued interest shall be due and
payable on the RLC Termination Date.
(g) Should the Loan be converted to the Mini-Perm Term,
on the Conversion Date the Amortization Schedule shall be calculated
and attached to the Note. Principal shall be due and payable on the
first day of each month in accordance with the Amortization Schedule.
All outstanding principal and accrued interest shall be due and
payable on the Final Maturity Date.
(h) Upon the occurrence of a Financial Covenant Default
and the failure of Borrower to cure such Financial Covenant Default
within thirty (30) days of receipt of written notice from Lender
describing the Financial Covenant Default, notwithstanding anything
herein to the contrary, principal shall be due and payable on the
Term-out Date and every six (6) months thereafter in an amount equal
to the lesser of $15,000,000.00 or the outstanding balance of the
Loan, with all outstanding principal, if any, and accrued interest due
and payable on the earliest to occur after the Term-out Date of (i)
eighteen (18) months after the Term-out Date, (ii) the RLC Termination
Date, or (iii) the Final Maturity Date; in the event, however, any
such Financial Covenant Default is cured within thirty (30) days of
receipt of written notice thereof from Lender, said Term-out
provisions shall not be applicable.
(i) If any payment required under the Note is not paid
within fifteen (15) days after the date such payment is due, then, at
the option of Lender, Borrower shall pay a "late charge" equal to four
percent (4%) of the amount of that payment to compensate Lender for
administrative expenses and other costs of delinquent payments. This
late charge may be assessed without notice, shall be immediately due
and payable and shall be in addition to all other rights and remedies
available to Lender.
(j) Upon the occurrence of an Event of Default and the
continuation thereof, and after maturity, including maturity upon
acceleration, the unpaid principal balance, all accrued and unpaid
interest and all other amounts payable under the Note shall bear
interest at that rate that is four percent (4%) above the rate that
would otherwise be payable under the term thereof.
(k) The Loan may be converted to the Mini-Perm Term upon
satisfaction of the following conditions:
(i) The Loan Balance shall not exceed the Maximum
Commitment:
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<PAGE> 16
(ii) No Event of Default and no event that, with
the giving of notice or the passage of time, or both, would be
an Event of Default, shall have occurred and shall be
continuing;
(iii) Borrower shall be in compliance with the Pro
Forma Coverage Ratio;
(iv) Receipt by Lender from Borrower of written
notice of the requested conversion to the Mini-Perm Term at
least thirty (30) days before the RLC Termination Date; and
(v) Borrower shall have paid to Lender the Mini-Perm
Fee.
(l) Borrower shall have the option to prepay the Note, in
full or in part, at any time as provided in the Note. All prepayments
shall be applied in the inverse order of maturity or, at the option of
Lender, in the regular order of maturity.
2.3 The outstanding principal balance of the Loan (the "Loan
Balance") shall not at any time exceed, in the outstanding aggregate sum of all
Advances, the Maximum Commitment. The Loan shall be a revolving line of
credit, against which Advances may be made to Borrower, repaid by Borrower, and
readvances made to Borrower, provided that (i) no Advance shall be made if an
Event of Default shall be continuing, or if any event shall have occurred
which, with the giving of notice or passage of time, or both, would constitute
an Event of Default, (ii) no Advance shall be made on or after the RLC
Termination Date or after the Term-out Date, and (iii) no Advance shall be made
which would cause the Loan Balance to exceed the Maximum Commitment. If at any
time the Maximum Commitment is exceeded by the Loan Balance, Lender shall so
notify Borrower in writing and a principal payment equal to such excess amount
shall be due and payable by Borrower within fifteen (15) days of such notice.
The revolving nature of the Loan shall terminate on the RLC Termination Date
and from and after such date Lender shall not be obligated to make any further
Advances.
2.4 Advances shall be made by Lender to Borrower no more
frequently than monthly pursuant to a disbursement request executed by Borrower
and delivered to Lender, setting forth the amount and the purpose of the
requested Advance as well as the amount, if any, of the requested Advance to
accrue at a Fixed Rate and the Interest Period for any such Fixed Rate Amount.
Advances shall be made by Lender to provide financing only for the following
business activities of Borrower:
(a) To fund the Pledged Account in an amount not to
exceed $8,400,000.00. Monies shall be released by Lender from the
Pledged Account to acquire Additional Projects upon satisfaction of
the same conditions as for the
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<PAGE> 17
disbursement of an Advance for the same purpose. Borrower
acknowledges that this requirement has been completed;
(b) For working capital and general corporate purposes;
provided, however, that the outstanding aggregate sum of all Advances
used for these purposes may not at any one time exceed $5,000,000.00;
(c) To acquire Additional Projects that satisfy all of
the Initial Projects Closing Requirements except that (i) an Appraisal
will not be required unless one is required for regulatory purposes,
and (ii) if a Project Franchise Agreement is not yet in place, Lender
may accept in its reasonable discretion a franchise commitment to
Borrower from a national hotel franchise company acceptable to Lender
to deliver a Project Franchise Agreement within the next twelve (12)
months. Lender shall reserve the right to review and evaluate each
Additional Project proposed by Borrower to determine in its reasonable
discretion whether the addition of such Additional Project as a
Collateral Project would adversely affect the LTV Amount and if so to
reject such proposed Additional Project; at the option of Lender, such
review and evaluation may be performed by either a qualified evaluator
employed by Lender or by a third party appraiser. No Additional
Project may be located outside of Arizona, California, Colorado, New
Mexico, Utah, Washington, Oregon, Idaho, Montana, Wyoming, Nevada,
North Dakota, South Dakota or Nebraska without the consent of Lender
in its sole and absolute discretion. Advances may be made with
respect to a proposed Additional Project when or after it becomes a
Collateral Project;
(d) The construction of capital improvements to, or the
expansion of, one or more of the Collateral Projects (each Advance
being a "Capital Improvement Advance"). The aggregate amount of
Capital Improvement Advances per Collateral Project shall not exceed
the lesser of (i) twenty-five percent (25%) of the appraised value of
the Project, (ii) twenty-five percent (25%) of the Purchase Price of
the Project plus the Acquisition Costs thereof, or (iii) the total of
the capital improvement expenses described and itemized in each
Capital Improvement Budget submitted by Borrower to Lender. "Purchase
Price" shall mean the purchase price described in an arm's-length
purchase contract between Borrower and a third-party for the
acquisition by Borrower of the Project. "Acquisition Costs" shall
mean the ordinary and customary expenses incurred by Borrower in
acquiring the Project including, without limitation, title fees,
appraisal fees, legal fees, recording fees, documentary transfer fees,
and real estate broker fees. Under no circumstances shall the
allocated Acquisition Costs exceed ten percent (10%) of the Purchase
Price for the applicable Project. "Capital Improvement Budget" shall
mean the total budget, in a form and in an amount acceptable to
Lender, in its reasonable discretion, setting forth the capital
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<PAGE> 18
improvements to be constructed by Borrower and the anticipated cost of
such capital improvements; and
(e) The construction and development of Additional
Projects, each such Additional Project being a "Development Project"
until completed pursuant to Paragraph 2.11(c). Each Advance for a
Development Project shall be a "Construction Advance." The outstanding
aggregate sum of all Construction Advances may not at any one time
exceed $5,000,000.00 (the "Construction Line"). The obligation of
Lender to make the first Construction Advance for a Development
Project is subject to the satisfaction of the Construction Advance
Conditions. Each Construction Advance shall be made in accordance
with the provisions of Paragraph 2.11. Upon satisfaction of the
completion conditions specified in Paragraph 2.11(c), the Construction
Advances for such Development Project shall be repaid by the Borrower
from its own funds or Loan funds disbursed pursuant to Paragraph
2.4(c) after which the amounts available under the Construction Line
for other Development Projects shall be deemed reinstated to the
extent of such repayment and the completed Development Project shall
be deemed to be a Qualified Collateral Project.
2.5 Borrower acknowledges and agrees that Lender has no obligation
to extend financial accommodations to Borrower under this Agreement after the
Maturity Date. Borrower also acknowledges and agrees that the Loan is payable
in full, together with all unpaid and accrued interest, no later than the
Maturity Date and that should Borrower fail to pay the Loan in full on such
date, Lender may and should be expected to exercise its lawful remedies under
this Agreement and the Security Documents.
2.6 Lender, from time to time upon giving written notice thereof
to Borrower, may make Advances in payment of insurance premiums, taxes,
assessments, liens or encumbrances existing against any Collateral Project,
interest accrued and payable upon the Loan, and any charges and expenses that
are the obligation of Borrower under this Agreement or any Security Document
and any charges or matters necessary to preserve any Collateral Project or to
cure any Event of Default.
2.7 Although Lender shall have no obligation to make any Advance
unless and until all of the conditions and prior performances set forth herein
have been kept, fulfilled or performed, Lender, at its sole discretion, may
make Advances prior to that time without waiving or releasing any of the
requirements or conditions of this Agreement; but Borrower shall continue to be
strictly obligated and subject thereto, and all such conditions, prior
performances and other requirements shall nevertheless be strictly and
punctually complied with, fulfilled and performed; and, notwithstanding any
such disbursement, Lender, at its sole discretion, may discontinue any further
Advances at any time until all of the conditions, prior performances and other
requirements of this Agreement have been strictly fulfilled, performed and
complied with.
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<PAGE> 19
2.8 Borrower shall have no right to any Advance other than to have
the same disbursed by Lender in accordance with the disbursement provisions
contained in this Agreement. Any assignment or transfer, voluntary or
involuntary, of this Agreement or any right hereunder shall not be binding upon
or in any way affect Lender without its written consent; Lender may make
Advances under the disbursement provisions herein, notwithstanding any such
assignment or transfer.
2.9 Pursuant to the Option, Borrower may elect to increase the
Maximum Loan Amount from $45,000,000.00 to $50,000,000.00 upon satisfaction of
the following conditions:
(a) Lender shall have received from Borrower written
notice from Borrower of its election to exercise the Option at least
fifteen (15) days before the Option Termination Date and shall have
paid to Lender the Option Fee, which Option Fee shall be returned by
Lender to Borrower in the event the conditions specified in this
Paragraph 2.9 shall not have been satisfied and as a result the
Maximum Loan Amount not have been increased. Otherwise, the Option
shall expire on the Option Termination Date;
(b) No Event of Default and no event that with the giving
of notice or the passage of time, or both, would be an Event of
Default, shall have occurred and be continuing at such time; and
(c) Lender, in its sole discretion, based on the results
of a review by Lender of the Collateral Projects and of the financial
condition of Borrower, shall have determined that there has been no
material adverse change in the financial condition of Borrower.
2.10 Each year during the Revolving Term, the RLC Termination Date
may be extended an additional twelve (12) months by the mutual agreement of
Lender and Borrower, subject to the following terms and conditions:
(a) On or before each July 1 beginning July 1, 1997,
Borrower shall have given Lender written notice (the "Extension
Notice") that Borrower desires such extension. Lender hereby agrees
to provide in writing to Borrower, on or before the October 1
subsequent to such Extension Notice, notice of its approval or
disapproval of such extension;
(b) Borrower shall have paid to Lender in cash or
immediately available funds an extension fee (the "Extension Fee") in
an amount equal to 37.50 basis points (0.375%) of the Maximum Loan
Amount. The Extension Fee shall be deemed earned by Lender upon
receipt by Lender of the Extension Notice from Borrower and shall be
payable to Lender upon the earliest of (i) Borrower's
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<PAGE> 20
termination of the Loan commitment hereunder after Lender's receipt of
such Extension Notice, or (ii) October 24 subsequent to the Extension
Notice; and
(c) No Event of Default and no event, that with the
giving of notice or the passage of time, or both, would be an Event of
Default, shall have occurred and be continuing on the date of
Borrower's notice of extension to Lender or on the commencement of the
extension period; provided, however, that should (i) any such Event of
Default be remedied within thirty (30) days of receipt of written
notice thereof from Lender, (ii) Borrower have paid Lender the
Extension Fee and (iii) Lender have previously approved such
extension, the extension shall go into effect upon the remedying of
such Event of Default.
2.11 The disbursement of Construction Advances for a Development
Project shall be subject to the following provisions:
(a) Lender shall make Construction Advances, subject to
all of the terms and conditions provided herein, in the following
manner and only in the amounts and for the costs set forth in the
project budget for said Development Project as payable from the Loan:
OPTION ONE
Upon receipt by Lender of a Disbursement Request
described below, together with all of the items described
below that are required by Lender in connection with that
Construction Advance, Lender shall make Construction Advances
no more frequently than monthly, as construction progresses,
in amounts equal to: (i) ninety percent (90%) of expenditures
for labor performed and material supplied under the
construction contract for construction of the Development
Project in accordance with the plans and specifications during
the period immediately preceding that Construction Advance,
plus (ii) one hundred percent (100%) of indirect construction
costs actually paid or incurred by Borrower that have not been
covered by previous Construction Advances. Indirect
construction costs shall mean those costs related to the
construction of the Development Project, other than the cost
of labor and materials, and include, but are not limited to,
title insurance premiums, permit fees, architect and
engineering fees, legal fees, taxes and interest during
construction, but do not include, any profit to Borrower or
any affiliate of Borrower, or any loan fees or interest
payments, except as provided on the project budget. The
amount equal to ten percent (10%) of the expenditures for
labor performed and material supplied under the construction
contract for construction of the Development Project in
accordance with the plans and specifications not disbursed
pursuant to the foregoing (hereinafter called the "Retention
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Funds") shall be disbursed upon a date to be determined at
Lender's discretion but not later than forty-five (45) days
after receipt by Lender of the items specified above and
receipt and approval by Lender of the items described in
Paragraph 2.11(c).
OPTION TWO
Upon the occurrence of any Event of Default, or at
any time that Lender determines from its own inspection that
the Development Project is not being constructed according to
the plans and specifications or in conformity with cost
estimates approved by Lender or that requisite and acceptable
standards of workmanship are not being met and Borrower fails
to cure such deficiency within thirty (30) days after written
notice thereof by Lender to Borrower, Lender shall have the
right, but not the obligation, to take over and complete
construction of the Development Project by or through any
agent, contractor or subcontractor of its selection and may
make Construction Advances and disburse any funds deposited
with Lender by Borrower in payment of the costs, expenses,
fees, attorneys' fees and other charges, together with
reasonable allowances for supervision, incurred in connection
with such taking over and completion. In the event proceeds
of the Loan and amounts deposited by Borrower are insufficient
to pay all of the same, the unpaid amount thereof shall be an
indebtedness of Borrower to Lender, payable immediately
without demand or notice, shall bear interest at the highest
rate payable under the Note, and shall be secured by all of
the Security Documents.
(b) When Borrower believes it is entitled to an
Construction Advance, Borrower shall furnish Lender with the
following, all in form and content satisfactory to Lender:
(i) A Disbursement Request, together with AIA
Forms G702 and G703 (and such other forms as may from time to
time be approved or required by Lender), setting forth such
details concerning the construction of the Development Project
as Lender may require, including the amounts expended to the
date of the Disbursement Request for the Development Project,
the amounts then due and unpaid for construction of the
Development Project and an itemized estimate of the amount
necessary to complete the Development Project. Any materials
covered by a Disbursement Request must be suitably stored at
the construction site, inventoried, and safeguarded and
insured against loss, damage, and theft.
(ii) The certification by Borrower's architect,
the general contractor, and to the best of Borrower's
knowledge by Borrower and at
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Lender's option by an independent architect or engineer of
Lender's selection, that: (1) all work performed is in
substantial accordance with the plans and specifications; (2)
all governmental licenses and permits required for the
Development Project as then completed have been obtained and
will be exhibited to Lender upon request; (3) the Development
Project as then completed do not violate, and, if further
completed in accordance with the plans and specifications,
will not violate, any law, ordinance, rule or regulation; and
(4) the remaining undisbursed proceeds of the Loan plus the
then existing balance of any borrower's funds held by Lender
are sufficient to pay for the completion of the Development
Project.
(iii) The certification by Borrower that no
monetary Event of Default exists, and no event has occurred
and no condition exists that, after notice or lapse of time,
or both, would constitute a monetary Event of Default.
(iv) Paid invoices and lien waivers relating to
the construction of the Development Project for all work
through the date of the previous Disbursement Request and
invoices for all work covered by the current Disbursement
Request.
(v) Evidence that any inspection required by any
state, city or other governmental authority has been completed
with results satisfactory to that authority.
(vi) Such other information and documents as
Lender may reasonably require, including without limitation
copies of any subcontracts and new change orders not
previously delivered to Lender.
(c) Upon completion of a Development Project, Borrower
shall furnish Lender with the following, all in form and content
satisfactory to Lender, as a condition precedent to disbursement of any
Retention Funds:
(i) The certification by the Borrower's
architect, the general contractor, if any, and to the best of
its knowledge Borrower that the Development Project has been
completed in accordance with the plans and specifications;
(ii) Final certificates of occupancy (or
equivalent) issued by the political subdivision authorized to
issue such certificate as required by such political
subdivision;
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(iii) At Lender's option, the certification on AIA
Form G704 by the architect or engineer selected by Lender, if
any, that the Development Project has been fully completed in
accordance with the plans and specifications;
(iv) Full, unconditional lien waivers from the
general contractor, if any, and, at Lender's option, from all
subcontractors and all other persons or entities for all labor
performed and/or materials supplied in connection with the
construction of the Development Project;
(v) An affidavit of payment of debts and claims
executed by the general contractor, if any;
(vi) Written certification on AIA Forms G706, 706A
or 707 from the Borrower's architect that each final punch
list item for the Development Project has been completed;
(vii) Copies of all special inspection reports,
certificates or any similar items as required by any political
subdivision relating to the Development Project;
(viii) The ALTA "as-built" survey, as described and
required by Subparagraph (f) of the Construction Advance
Conditions;
(ix) If required by Lender, copies of all
guaranties for workmanship, and all warranties and maintenance
agreements, relating to the completed Development Project; and
(x) "As-built" record drawings and specifications
that include all modifications and changes that have been
included in the plans and specifications.
(d) Borrower shall pay for all inspections, whether made
by an independent architect, engineer, or other inspector, or by
Lender.
(e) Any Construction Advance made by Lender under any
option for disbursement, or so much thereof as Lender may consider
proper, shall be disbursed at Lender's option (i) directly to Borrower
or the general contractor, (ii) jointly to Borrower and the general
contractor, (iii) directly to persons supplying labor, materials and
services in connection with the Development Project, or (iv) jointly
to Borrower and said person. Lender shall have no obligation to see
that the disbursements made by it to Borrower or any designee of
Borrower are actually used by that party to pay for labor and
materials furnished for construction of the Development Project.
Borrower acknowledges that this
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<PAGE> 24
is its responsibility, and Borrower assumes all risks in connection
with any disbursement to any such designee.
(f) Lender may withhold from any Construction Advance or,
on account of subsequently discovered evidence, withhold from a later
Construction Advance as Lender in its reasonable discretion considers
necessary to protect Lender from loss on account of (i) defective work
on the Development Project that has not been remedied by Borrower
within sixty (60) days after receiving written notice thereof from
Lender, (ii) any monetary obligation required by this Agreement to
have been performed by Borrower that has not been performed, (iii)
liens filed against the Development Project or reasonable evidence
that such liens will be filed (other than in connection with work the
cost of which is being properly contested in accordance with the
provisions hereof) and such liens are not avoided by Borrower within
sixty (60) days after receiving written notice thereof from Lender,
(iv) failure of Borrower to make payments to contractors or
subcontractors for material or labor (other than in connection with
work the cost of which is being properly contested in accordance with
the provisions hereof) and such failure is not remedied by Borrower
within sixty (60) days after receiving written notice thereof from
Lender, or (v) a reasonable doubt by Lender, based on information
provided by Borrower to Lender as to Project Costs overruns or change
orders the cost of which is not covered by Loan funds available under
the Construction Line or by the Borrower from its own funds, that
construction of the Development Project can be completed with the
undisbursed proceeds of the Loan, plus any amounts deposited by
Borrower with Lender. Subject to the other provisions of this
Agreement, any amount so withheld shall be disbursed after the basis
for such withholding has been cured or removed.
(g) Under any option for Construction Advances, Lender,
in its reasonable discretion, may withhold any payment or portion
thereof until Lender has received releases of lien, waivers of lien or
paid bills in form satisfactory to it. Lender shall have no
obligation to require and/or obtain lien waivers or receipts, and,
although Lender requires presentation to it of lien waivers and/or
receipts, Lender shall have no responsibility for the validity thereof
nor for the correctness of the amounts indicated thereon. No
Construction Advance by Lender shall constitute approval of any
certification or relieve any person making such certification of
responsibility therefor.
(h) Lender, from time to time, may, but shall not be
obligated to except to the extent provided for in the project budget
for the Development Project, make Construction Advances in payment of
insurance premiums, taxes, assessments, liens or encumbrances existing
against Development Project, interest accrued and payable upon the
Loan, and any charges and expenses that are the obligation of Borrower
under this Agreement or any Security Document and any charges or
matters necessary to preserve the Development Project or to cure any
Event of Default.
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<PAGE> 25
(i) Although Lender shall have no obligation to make any
Construction Advance unless and until all of the conditions set forth
herein have been kept, fulfilled or performed, and until all
inspections, certifications, releases, waivers, or paid bills or other
requirements set forth herein have been made, delivered and complied
with, Lender, at its sole discretion, may make Construction Advances
prior to that time without waiving or releasing any of the
requirements or conditions of this Agreement; but Borrower shall
continue to be strictly obligated and subject thereto, and all such
conditions and other requirements shall nevertheless be strictly and
punctually complied with, fulfilled and performed; and,
notwithstanding any such disbursement, Lender, at its sole discretion,
may discontinue any further Construction Advances at any time until
all of the conditions and other requirements of this Agreement have
been strictly fulfilled, performed and complied with.
(j) In the event of any dispute that, in the good faith
opinion of Lender, may endanger the timely completion of the
Development Project or the fulfillment of any condition precedent or
covenant herein, Lender may agree to make Construction Advances for
the account of Borrower without prejudice to Borrower's rights, if
any, to recover such funds from the party to whom paid. Such
agreement or agreements may take any form that Lender in its
reasonable discretion deems proper, including, without limitation,
agreements to indemnify a title insurer against possible assertion of
lien claims and agreements to pay disputed amounts to contractors in
the event Borrower is unable or unwilling to pay the same. All sums
paid or agreed to be paid pursuant to such agreement shall be for the
account of Borrower and shall be charged as an Construction Advance.
SECTION 3. LOAN FEES
3.1 A "Loan Fee" in the amount of the lesser of $375,000.00 or one
and one-quarter percent (1.25%) of the Maximum Commitment on the Closing Date
shall be earned and payable on the Closing Date by Borrower to Lender. The
Loan Fee shall be non-refundable under any circumstances. Any "application
fee" previously received by Lender shall be applied against the Loan Fee on the
Closing Date.
3.2 Borrower shall pay a "Facility Fee" for the Loan in an
annualized amount equal to one-quarter percent (0.25%) of the actual daily
undrawn balance of the Loan based on the Maximum Loan Amount since the prior
Quarter End Date, where "Quarter End Date" means the last day of each calendar
quarter. The Facility Fee shall be payable by Borrower in arrears on the first
business day after each such Quarter End Date, and continuing up to and through
the RLC Termination Date and shall be nonrefundable under any circumstances.
3.3 As the "Mini-Perm Fee" for the Loan, Borrower shall pay an
amount equal to one percent (1.0%) of the outstanding principal balance of the
Loan on the Conversion Date, payable by Borrower on the Conversion Date.
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<PAGE> 26
3.4 In the event that Borrower elects to exercise its Option to
increase the Maximum Loan Amount pursuant to Paragraph 2.9, Borrower shall pay
to Lender the Option Fee upon its notice to Lender of its exercise of the
Option.
SECTION 4. GUARANTEES; COLLATERAL; RELEASES
4.1 (a) Payment of the Loan shall be guaranteed pursuant to
separate Unconditional Guarantees of Payment (the "Guarantees") by
the following (the "Guarantors"):
(i) Sunstone Hotel Investors, Inc., a Maryland
corporation, the general partner of Borrower (the "General
Partner"). The General Partner shall also be subject to full
recourse as a general partner of Borrower with respect to all
of Borrower's obligations to Lender;
(ii) Robert A. Alter ("Alter");
(iii) Charles L. Biederman ("Biederman");
(iv) C. Robert Enever with respect to $500,000.00
of the Last Fifty Percent;
(v) Gerald N. Clark with respect to $60,000.00 of
the Last Fifty Percent; and
(vi) Daniel E. Carsello with respect to $80,000.00
of the Last Fifty Percent.
(b) With respect to the "Personal Guarantors" (the
Guarantors less the General Partner):
(i) Lender agrees not to enforce the Guarantees
against the Personal Guarantors for purposes of payment of the
Loan until Lender shall have first either recovered at least
fifty percent (50%) of the amount outstanding under the Loan
from the Collateral or completed the foreclosure of the Deeds
of Trust, whichever is the first to occur. Thereafter Lender
may seek to recover the remaining amount outstanding under the
Loan (the "Last Fifty Percent"), subject to the limitations
stated in Paragraph 4.l(a), from either one or more of the
Personal Guarantors and/or from the balance of the Collateral;
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<PAGE> 27
(ii) Lender agrees not to initiate a dual action
against the Collateral secured by the Deeds of Trust and
against the Personal Guarantors except to the extent legally
necessary to preserve Lender's remedies under the Guarantees;
(iii) Alter and Biederman shall each be jointly and
severally liable for the Net Aggregate Liability, where the
"Net Aggregate Liability" shall be equal to the lesser of (A)
the Maximum Aggregate Liability or (B) the remaining
deficiency after the application of proceeds received by
Lender from the sale of the foreclosed Collateral, and where
the Maximum Aggregate Liability shall be equal to the "Last
Fifty Percent," determined prior to the application of
proceeds received by Lender from the sale of the foreclosed
Collateral; and
(c) The Personal Guarantors shall each deliver to Lender,
together with their Guarantees, a disclaimer certificate from the
Guarantors' respective spouses (if any) in a form acceptable to Lender
in its sole and absolute discretion. Each certificate shall provide
that the spouse disclaims any interest in the assets of the Guarantor
subject to the Guarantee.
4.2 Borrower shall cause the Loan and Borrower's obligations under
the Loan documents to be secured by the following (collectively, the
"Collateral"):
(a) A security agreement with respect to the Pledged
Account. The "Pledged Account" shall be an account established by
Borrower with Lender as a bank controlled account, in the name of
Borrower but under the sole dominion and control of Lender. Any funds
on deposit therein may be (i) disbursed as described in Paragraph
2.4(c), or (ii) applied to the payment of the Loan upon the occurrence
of an Event of Default. The Pledged Account shall be funded on the
Closing Date in accordance with Paragraph 2.4(a);
(b) A deed of trust constituting a first and prior lien
on the Initial Projects and any Additional Projects, subject only to
such matters as specifically approved by Lender therein (as amended
from time to time, each a "Deed of Trust" and collectively the "Deeds
of Trust") substantially in the form of Exhibit "A" attached hereto.
Each Initial Project and each Additional Project subject to a Deed of
Trust is hereinafter referred to as a "Collateral Project";
(c) A valid and effectual assignment of rents and leases
covering each Collateral Project, including without limitation the
Project Lease;
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<PAGE> 28
(d) A valid and effectual security agreement granting
Lender a first and prior security interest in all of the property
described below in, to, or under which Borrower now has or hereafter
acquires any right, title or interest, whether present, future, or
contingent except that with respect to the equipment of any Additional
Project such security interest may be subject to any liens or leases
existing prior to the acquisition of such Additional Project of
Borrower: all equipment, inventory, accounts, security deposits,
general intangibles, instruments, documents, and chattel paper, as
those terms are defined in the Uniform Commercial Code, and all other
personal property of any kind (including without limitation money and
rights to the payment of money), whether now existing or hereafter
created, that are now or at any time hereafter (i) in the possession
or control of Lender in any capacity; (ii) erected upon, attached to,
or appurtenant to, each Collateral Project; (iii) located or used on
each Collateral Project or identified for use on each Collateral
Project (whether stored on each Collateral Project or elsewhere); or
(iv) used in connection with, arising from, related to, or associated
with each Collateral Project or any of the personal property described
herein, the construction of any improvements on each Collateral
Project, the ownership, development, maintenance, leasing, management,
or operation of each Collateral Project, the use or enjoyment of each
Collateral Project, or the operation of any business conducted on each
Collateral Project; together with all products and proceeds of all of
the foregoing, in any form;
(e) Valid and effectual assignments of Borrower's
interest in all operating, management and supervision agreements, and
all other documents relating to the ownership, development,
construction, maintenance, leasing, management and operation of each
Collateral Project, including without limitation the Project
Management Agreement and the Project Franchise Agreement; and
(f) Borrower shall also cause to be delivered to Lender
together with any UCC financing statements for filing and/or recording
and any other items required by Lender to fully perfect the liens and
security interests of Lender. The documents listed in this Paragraph
4.2, together with any other documents or instruments securing the
Loan, including without limitation assignments of the Project
Management Agreements, shall be in form and content satisfactory to
Lender and are hereinafter called the "Security Documents."
4.3 (a) Provided there has not occurred an Event of Default
which is continuing, Borrower may, from time to time and subject to
the conditions set forth below, cause Lender to release one or more of
the Collateral Projects. Lender shall, upon its receipt of not less
than thirty (30) days written notice from Borrower describing the
Collateral Projects which will be released and the Release Price(s) to
be paid, release its liens on the Collateral Projects to be released.
The
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Release Price shall be applied by Lender to the prepayment of the
outstanding principal balance of the Loan.
"Release Price" shall mean either the greater of (i) one
hundred percent (100%) of the Net Sales Price if Borrower is selling a
Collateral Project or the Net Loan Proceeds if Borrower is seeking to
refinance a Collateral Project, or (ii) seventy-five percent (75%) of
the current appraised fair market value of the Collateral Project or
of the IPAFM Value if it is an Initial Project. "Net Sales Price"
shall mean the difference between the Gross Sales Price less all
selling expenses incurred by Borrower. "Gross Sales Price" shall mean
all cash and noncash consideration paid or payable to Borrower by the
purchaser of a Collateral Project in an arm's-length transaction.
"Net Loan Proceeds" shall mean the amount of loan proceeds available
to Borrower after deducting therefrom the costs incurred by Borrower
to acquire the loan. If at any time the Maximum Commitment is
exceeded by the Loan Balance, Lender shall so notify Borrower in
writing and a principal payment equal to such excess amount shall be
due and payable by Borrower within fifteen (15) days of such notice.
Notwithstanding what may otherwise be provided herein, Lender shall
not be required to release any Collateral Projects if, immediately
after Lender's receipt of the applicable Release Price, the
Loan-To-Value Ratio under the Loan exceeds fifty percent (50%), where
"Loan-To-Value Ratio" shall mean the ratio of (i) the Loan Balance
plus any committed but undisbursed amount of the Loan, to (ii) the
aggregate of the appraised fair market value of the Initial Projects
that remain Collateral Projects, based on current appraisals.
SECTION 5. CONDITIONS PRECEDENT FOR ORIGINAL CLOSING DATE
The obligation of Lender to make the Original Loan was subject to the
following express conditions precedent:
5.1 Borrower shall have executed (or obtained the execution or
issuing of) and delivered to Lender the following documents and items, all in
form and content satisfactory to Lender in its sole and absolute discretion,
and satisfying the following conditions, subject to approval of Lender in its
sole and absolute discretion:
(a) Evidence satisfactory to Lender that the General
Partner:
(i) is a fully qualified real estate investment
trust, and
(ii) has successfully completed its public
offering substantially in accordance with its offering
prospectus dated August 10, 1995;
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<PAGE> 30
(b) The Note;
(c) This Agreement;
(d) An Arbitration Resolution executed by Borrower and
each Guarantor;
(e) The Guarantees;
(f) The Security Agreement with respect to the Pledged
Account;
(g) Certified copies of the Partnership Agreement and
Certificate of Partnership of Borrower, and Articles of Incorporation
and Bylaws of the General Partner, and all amendments thereto,
together with evidence of good standing in the state of incorporation
and evidence of qualification to do business and good standing in the
States of Arizona, California, Colorado, New Mexico and Utah, together
with proper resolutions and certificates and such other documents as
Lender may require relating to the existence and good standing of the
Borrower and the General Partner and the authority of any person
executing documents on behalf of the Borrower and the General Partner;
(h) Opinions of counsel to Borrower and to the General
Partner;
(i) A certified copy of a policy of General Liability
Policy of Insurance, providing coverage of not less than $1,000,000.00
(combined single limit for bodily injury and property damage), and an
umbrella excess liability coverage in an amount not less than
$30,000,000.00 with an endorsement naming Lender as an additional
insured and satisfying the requirements stated in Paragraph 7.2
hereof,
(j) The Borrower's current balance sheet, after giving
effect to the acquisition of the Initial Projects, shall have been
delivered to Lender and shall be, in Lender's sole and absolute
discretion, not materially adversely inconsistent with the projections
in the General Partner's offering prospectus dated August 10, 1995;
(k) Such other information and documents that Lender may
reasonably require; and
(l) With respect to each Initial Project, the following
(the "Initial Projects Closing Requirements"):
(i) A current appraisal (the "Appraisal") of the
Project by an appraiser acceptable to Lender in its sole and
absolute
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<PAGE> 31
discretion, showing the fair market value of the Project.
Lender acknowledges that it has received an acceptable
Appraisal with respect to each Initial Project;
(ii) A current as-built survey of the real
property of the Project by a licensed surveyor acceptable to
Lender describing the boundaries of the real property and
showing the location of the improvements upon the real
property and all means of ingress and egress, rights-of-way,
easements (each of which shall be identified by docket and
page or recording number where recorded) and all other
customary and relevant information pursuant to ALTA standards
and any title company requirements. All surveys shall be
certified to Lender and the title company issuing the title
policy required below;
(iii) An ALTA extended coverage mortgagee's title
insurance policy [ALTA Loan Policy - 1970 (Rev. 10-17-70) or
equivalent], with such endorsements as Lender may require,
issued by Fidelity National Title Insurance Company (or such
other title insurer as shall be mutually acceptable to Lender
and Borrower) in the amount of the Loan (with direct access
reinsurance in amounts, by companies and in form acceptable to
Lender as Lender may require), showing that title in the
Project is held by Borrower and insuring the lien of the Deed
of Trust to be a first and prior lien upon the Project as
security for all Advances, subject only to such exceptions as
Lender may expressly approve in writing;
(iv) An environmental questionnaire and disclosure
statement completed and signed by Borrower covering the
current and former condition and uses of the real property of
the Project and adjacent property; Borrower shall provide
Lender with a current update of the preliminary environmental
assessment (Phase I assessment) of the real property and
adjacent property previously provided Lender, plus any
sampling and analysis (Phase II assessment) or special limited
assessment that Lender may reasonably require after review of
the updated Phase I assessment, together with any other
environmental investigations and reports that Lender may
reasonably require, all of which shall be by a Lender-approved
environmental consulting firm and none of which shall reveal
any existing or potential environmental condition adversely
affecting the use or value of the real property;
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<PAGE> 32
(v) Original copies of policies of (from and
after the date of first occupancy), fire, lightning and other
perils extended coverage insurance on the Project on an
all-risk basis issued by insurance companies acceptable to
Lender in an amount not less than $30,000,000.00 and in such
greater amounts as shall be equal to the full insurable value
on a replacement-cost basis, with standard, without
contribution, first mortgagee's loss payable endorsements in
favor of Lender. Rental interruption and extra expense
insurance in amounts sufficient to cover any loss of income
from the Project and any anticipated expenses associated with
the same for a twelve (12) month period shall be effective
from the Closing Date;
(vi) Such other insurance as Lender may reasonably
require, including without limitation insurance covering
vandalism and malicious mischief, and sprinkler leakage;
(vii) Evidence whether the real property, or any
part thereof, lies within a "special flood hazard area" as
designated on maps prepared by the U.S. Department of Housing
and Urban Development pursuant to the Flood Disaster
Protection Act of 1973, as amended, and, if so designated, a
National Flood Insurance Association standard flood insurance
policy, plus insurance from a private insurance carrier if
required by Lender, for the duration of the Loan in the amount
of the full insurable value of the completed Improvements,
naming Lender as an additional loss payee;
(viii) If required by Lender, evidence that all
utilities and services to the Project, including without
limitation water, sewer, gas, electric and telephone, are
available, or will be available as required, and will be
provided in amounts that are sufficient to service the Project
for its intended use;
(ix) Copies of all agreements between Borrower and
any third parties related to the maintenance, repair, leasing,
management and operation of the Project, together with written
agreements by such persons or entities that they will perform
for Lender the services contracted to Borrower,
notwithstanding the occurrence of any Event of Default and any
trustee's sale or foreclosure of the Deed of Trust (provided
that such persons or entities continue to receive payments
under their respective contracts), and the consent of such
persons or entities to the
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<PAGE> 33
collateral assignment by Borrower to Lender of their
respective contracts;
(x) Copies of any Declaration of Covenants,
Conditions and Restrictions and related documents pertaining
to the Project;
(xi) Evidence that all taxes and assessments
levied against or affecting the real property of the Project
have been paid current, together with a Type B tax service
contract for the Project;
(xii) Evidence that there exists adequate legal
ingress and egress to the Project;
(xiii) A copy of the fully executed agreement
whereby Borrower has agreed to purchase or has already
purchased the Project;
(xiv) A copy of the certificate of occupancy for
the Project issued by the jurisdiction in which the Project is
located together with evidence that the Project and its use
are in accordance with building and governmental codes and
zoning requirements;
(xv) Evidence that Borrower has obtained all other
licenses, permits, consents, approvals and authorizations
necessary or appropriate in connection with the management and
operation of the Project;
(xvi) Copy of the Project Lease and a Lessee
Agreement;
(xvii) Copies of each other lease agreement
affecting the Project, together with, within ninety (90) days
of the Closing Date, subordination and estoppel agreements for
the benefit of Lender from each lessee;
(xviii) Copy of a franchise agreement with respect to
the Project (the "Project Franchise Agreement") with a
national hotel franchise company acceptable to Lender,
together with a "comfort" letter from the respective
franchisor of the Project which provides, among other things,
that in the event Lender obtains control of the applicable
Collateral Project: (A) Lender may make application for the
transfer to Lender of the respective franchise; (B) the
franchiser will not terminate the franchise during the
application process; and (C) the franchisor will not
unreasonably withhold its consent to the
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transfer of the franchise. Each letter shall be in a form
acceptable to Lender in its reasonable discretion. In place
of a Project Franchise Agreement with respect to a Project,
Lender may accept in its reasonable discretion (1) a franchise
commitment to Borrower or Lessee from a national hotel
franchise company acceptable to Lender to deliver a Project
Franchise Agreement within ninety (90) days, and (2) an
estoppel letter from said franchise company confirming that
any such franchise commitment remains outstanding and pending
the issuance of the Project Franchise Agreement the Project
may be operated under said franchise company's franchise;
(xix) Copy of a Project Management Agreement with
respect to the Project with the Management Company, together
with the executed collateral assignment of the Project
Management Agreement to Lender substantially in the form of
Exhibit "D" attached hereto, the consent of the Management
Company to said collateral assignment and the subordination
agreement of the Management Company, substantially in the
form of Exhibit "E" attached hereto;
(xx) If required by Lender, evidence of worker's
compensation insurance coverage satisfactory to Lender;
(xxi) The executed and recorded Deed of Trust;
(xxii) An environmental indemnity agreement executed
by Borrower and the General Partner, substantially in the form
of Exhibit "B" attached hereto;
(xxiii) Executed and filed UCC-1 Financing
Statements;
(xxiv) Physical condition reports as to the Project
acceptable to Lender;
(xxv) Certified income statements of the Project,
for the prior fiscal year, if available, and certified
year-to-date, by the then owner of the Project;
(xxvi) Evidence of the Project Cost of the Project,
certified by the Borrower or as evidenced to Lender by the
final escrow settlement statement for the Project. "Project
Cost" means the actual acquisition cost, including without
limitation reasonable fees as approved by Lender in its
reasonable discretion and all costs
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incurred in performing due diligence in connection with the
acquisition, and capital improvement, refurbishment and
rehabilitation expenditures incurred by Borrower with respect
to the Project;
(xxvii) A proposed monthly operating budget of the
Project for the next twelve months; and
(xxviii) Such other information and documents that
Lender may reasonably require.
5.2 The Loan Fee required by Paragraph 3.1 hereof shall have been
paid in full.
5.3 All representations and warranties by Borrower shall remain
true and correct and all agreements that Borrower is to have performed or
complied with by the date hereof shall have been performed or complied with.
5.4 No Event of Default shall exist, and no event shall have
occurred and no condition exists that, after notice or lapse of time, or both,
would constitute an Event of Default.
SECTION 5A CONDITIONS PRECEDENT FOR CLOSING DATE
The obligation of Lender to make the Loan, and each and every Advance,
is subject to Lender receiving at Borrower's expense on or before the Closing
Date, except as otherwise noted, all of the following, all of which shall be in
form and content satisfactory to Lender and shall be subject to approval by
Lender:
(a) An original of this Agreement fully executed by the
Borrower;
(b) A fee equal to one and one-quarter percent (1.25%)
of $15,000,000.00, pro-rated on the basis of the remaining Revolving
Term, based on the original RLC Termination Date of October 25, 1997;
(c) A certified copy of any amendments to the
organizational documents of the Borrower and the General Partner made
since October 25, 1995 together with evidence of good standing in the
State of Delaware and each state where a Collateral Project is located
which evidence of good standing shall be provided to Lender on or
before September 16, 1996, and certified approving resolutions and
incumbency certificates of Borrower and General Partner;
(d) With respect to each Collateral Project, a commitment
from the title insurance company that issued the lender's ALTA
extended coverage title insurance policy with respect to such
Collateral Project in connection with the
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Loan (the "Original Title Policy") to issue an endorsement to the
Original Title Policy or a replacement policy, with all endorsements
included as part of the Original Title Policy, in form satisfactory to
Lender, that: (i) increases the amount of the Original Title Policy to
$50,000,000.00; (ii) defines the insured mortgage as the Deed of Trust
described in the Original Title Policy as modified; (iii) changes the
"Date of Policy" to the date of the recording of an amendment to the
respective Deed of Trust; and (iv) insures that said Deed of Trust, as
modified hereby, continues to be a first lien upon the real property
described therein, as security for the Loan, as modified herein,
subject only to those exceptions contained in the Original Title
Policy and to such additional exceptions as Lender may specifically
approve in writing;
(e) An original amendment of each Deed of Trust fully
executed by the Borrower and recorded;
(f) A fully executed original of each of the following
documents:
(i) Amendment of each Subordination and Estoppel
Agreement previously executed by the Borrower and Lessee for
the benefit of Lender;
(ii) Amendment of each Management Subordination
Agreement previously executed by the Lessee and the Management
Company for the benefit of Lender; and
(iii) On or before July 31, 1996, amendments of the
Non Disturbance, Attornment, Estoppel and Subordination
Agreements (each an "NDA") previously delivered to Lender from
Rockin Robin L.C. (Provo) and Slope Ski Corporation (Steamboat
Springs) and a new NDA from Mitzel's American Kitchens II,
Inc. (Kent);
(g) Each Guarantor has executed and delivered to Lender a
Consent and Agreement of Guarantors;
(h) Payment of all the internal and external costs and
expenses reasonably incurred by Lender in connection with this
Agreement (including, without limitation, outside attorneys,
appraisal, appraisal review, processing, title, filing, and recording
costs, expenses, and fees); and
(i) Opinion of counsel to Borrower.
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SECTION 6. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lender to the best of its
knowledge as follows:
6.1 The recitals and statements of intent appearing in this
Agreement are true and correct.
6.2 Borrower is duly organized, validly existing and in good
standing under the laws of the state of its organization and is qualified to do
business and is in good standing in each state in which it is doing business.
6.3 Borrower has full power and authority to own its properties
and assets and to carry on its business as now being conducted.
6.4 Borrower is fully authorized and permitted to enter into this
Agreement, to execute any and all documentation required herein, to borrow the
amounts contemplated herein upon the terms set forth herein and to perform the
terms of this Agreement, none of which conflicts with any provision of any law,
rule or regulation applicable to Borrower. This Agreement, the Note and each
Security Document are valid and binding legal obligations of Borrower, and each
is enforceable in accordance with its terms.
6.5 The liens, security interests and assignments created by the
Security Documents will, when granted, be valid, effective and enforceable
liens, security interests and assignments.
6.6 The Guarantees constitute legal, valid and binding obligations
of the Guarantors according to the terms thereof.
6.7 To the best of Borrower's knowledge, the execution, delivery
and performance by Borrower of this Agreement, will not result in any breach of
the terms, conditions or provisions of, or constitute a default under, any
material agreement or instrument under which Borrower is a party or is
obligated.
6.8 To the best of Borrower's knowledge, no actions, suits or
proceedings are pending or threatened against Borrower that might materially
and adversely affect the repayment of the Loan, the performance by Borrower
under this Agreement or the financial condition, business or operations of
Borrower.
6.9 All financial statements, profit and loss statements,
statements as to ownership and other statements or reports previously or
hereafter given to Lender by or on behalf of Borrower are and shall be true,
complete and correct in all material respects as of the date thereof. There
has been no material adverse change in the financial condition or the results
of the operation of Borrower since the latest financial statements of Borrower
given to Lender.
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6.10 Borrower has filed all federal, state and local tax returns
and has paid all of its current obligations before delinquent, including all
federal, state and local taxes and all other payments required under federal,
state or local law.
6.11 Each request by Borrower for an Advance shall constitute an
affirmation on the part of Borrower that the representations and warranties
contained herein are true and correct as of the time of such request and that
the conditions precedent set forth herein have been fully satisfied. All
representations and warranties made herein shall survive the execution of this
Agreement, all Advances and the execution and delivery of all other documents
and instruments in connection with the Loan, so long as Lender has any
commitment to lend to Borrower hereunder and until the Loan and all
indebtedness hereunder have been paid in full and all of Borrower's obligations
hereunder have been fully discharged.
6.12 To the best of Borrower's knowledge, Borrower has no actions,
causes of action, claims, debts, damages, demands, liabilities, obligations or
suits of whatever kind or nature in law or equity, (i) in respect of the Loan,
the Loan Documents, or the actions or omissions of Lender in respect of the
Loan or the Loan Documents and (ii) arising from events occurring prior to the
date of this Agreement.
SECTION 7. AFFIRMATIVE COVENANTS
So long as Lender has any commitment to lend to Borrower hereunder or
until the Loan and all other indebtedness hereunder have been paid in full and
all of Borrower's obligations hereunder have been fully discharged:
7.1 Borrower shall maintain in full force and effect all material
rights and licenses necessary to carry on its business with respect to the
Collateral Projects, and all material permits, licenses, consents and approvals
necessary for the maintenance of each Collateral Project. Borrower shall
maintain its present existence and shall maintain executive personnel and
management at a level of experience and ability equivalent to present personnel
and management.
7.2 Borrower shall maintain in full force and effect at all times
all insurance coverages required to be provided as a condition of any Advance.
All insurance policies required to be delivered to Lender shall stipulate that
Lender is to receive at least thirty (30) days prior written notice prior to
any cancellation or modification thereof and shall be from an insurance company
acceptable to Lender.
7.3 Borrower shall immediately give notice to Lender of any
notification or advice that Borrower may receive from any municipality or other
third party of any intent or proposal to include all or any part of any
Collateral Project in any assessment district. Lender shall have the right to
file a written objection to the inclusion of all or any part of any Collateral
Project in any assessment district, either in its own name or in the name of
Borrower, and to appear at, and participate in, any hearing with respect to the
formation of any such district. The inclusion of all
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or any part of any Collateral Project in any assessment district shall not be
deemed of itself to be an Event of Default.
7.4 Borrower shall make when due all payments of interest and
principal on the Loan and shall keep and comply with all terms, conditions and
provisions of the Security Documents.
7.5 After the execution of this Agreement, any and all publicity
releases to newspapers of general or limited circulation or trade publications
announcing any of the financing by Lender provided for herein shall be issued
by or subject to prior approval by Lender.
7.6 Borrower shall pay all of its current obligations before
delinquent, including all federal, state and local taxes and all other payments
required under federal, state or local law if the failure to pay would
materially and adversely affect the repayment of the Loan or the performance by
Borrower under this Agreement.
7.7 Borrower shall maintain, in a safe place, proper and accurate
books and records relating to the operations and business affairs of the
Collateral Projects. Lender shall have the right from time to time upon 24
hours prior notice and during normal business hours to examine, and to make
abstracts from and photocopies of, Borrower's books and records with respect to
the Collateral Projects.
7.8 Within one hundred twenty (120) days after the close of each
fiscal year and within sixty (60) days after the close of each interim
quarterly accounting period of Borrower beginning with that quarter and fiscal
year that include the Closing Date, Borrower shall deliver to Lender financial
statements of Borrower consolidated with those of the General Partner,
including a balance sheet, statement of income and expenses and statement of
cash flows that include the results of the financial operation of all
Collateral Projects, all in reasonable detail and prepared according to
generally accepted accounting principles, consistently applied. Annual
statements shall be audited by an independent certified public accountant
("CPA") and quarterly statements shall be company prepared. Annual statements
shall be accompanied by a letter from the CPA, indicating the status of
Borrower's compliance with the Financial Covenants and the detailed
calculations supporting such compliance. Quarterly statements shall be
accompanied by a certificate signed by the chief financial officer of Borrower,
indicating the status of Borrower's compliance with the Financial Covenants and
the detailed calculations supporting such compliance. All statements shall be
certified by Borrower. Borrower shall deliver to Lender copies of Borrower's
federal income tax returns within thirty (30) days of their filing date. When
requested by Lender, Borrower shall promptly deliver, in writing, such further
information as Lender may reasonably request relating to any such financial
statements.
7.9 Borrower shall cause each Guarantor, other than the General
Partner, to deliver to Lender, within one hundred twenty (120) days after the
close of each fiscal year beginning with the fiscal year that includes the
Closing Date, his financial statements, all in reasonable detail satisfactory
to Lender and certified by Guarantor. Borrower shall cause Alter and Biederman
to
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deliver to Lender copies of their federal income tax returns within thirty (30)
days of their filing date. When requested by Lender, each such Guarantor shall
promptly deliver, in writing, such further information as Lender may reasonably
request relating to any such financial statements.
7.10 Within twenty (20) days of the end of each month, Borrower
shall deliver to Lender monthly and year-to-date income statements, operating
statements and operating statistics of each Collateral Project and of each
Non-Collateral Project.
7.11 On or before thirty (30) days before the beginning of each
fiscal year of Borrower, Borrower shall deliver to Lender a proposed monthly
operating budget for the following fiscal year for each Collateral Project.
7.12 Borrower shall immediately inform Lender of any actions, suits
or proceedings involving Borrower that could materially and adversely affect
the repayment of the Loan, the performance by Borrower under this Agreement, or
the financial condition, business or operations of Borrower.
7.13 Lender shall have the right to cause the Qualified Collateral
Projects to be reappraised at Borrower's expense no more frequently than once
each calendar year, unless Lender shall be required to reappraise the Qualified
Collateral Projects more frequently for regulatory reasons. Each appraisal is
subject to review and approval by Lender.
7.14 Borrower shall comply with the following financial covenants
(the "Financial Covenants"), failure to comply with any one of which at the end
of a fiscal quarter shall be a "Financial Covenant Default." Except as expressly
provided below, the violation of any of the Financial Covenants shall not
constitute an Event of Default:
(a) Debt To Net Worth Ratio: Beginning with the fiscal
quarter ending June 30, 1996, the ratio of Borrower's aggregate
Liabilities to its Tangible Net Worth may not exceed 1.00 to 1.00 and
beginning with the fiscal quarter ending after the completion of a
Qualified Offering, the ratio of Borrower's aggregate Liabilities to
its Tangible Net Worth may not exceed 0.75 to 1.00; where "Tangible
Net Worth" shall mean all assets appearing on a balance sheet of
Borrower determined in accordance with generally accepted accounting
principles, less the sum of: (a) Liabilities (other than Liabilities
subordinated to the satisfaction of Lender to the obligation of
Borrower to Lender); and (b) the amount, if any, of all Intangible
Assets. "Intangible Assets" shall mean all goodwill, trademarks,
tradenames and other similar intangible assets. "Liabilities" shall
mean indebtedness of Borrower which would, in accordance with
generally accepted accounting principles, be classified as liabilities
of a corporation or partnership conducting a business the same as or
similar to the business of Borrower, which shall not include the
amount of any subordinated debt or convertible debt, as the same are
reported in Borrower's financial statement;
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(b) Distributions: Beginning with the fiscal quarter
beginning September 30, 1995 based on the results of the current
quarter plus the prior three (3) quarters or, if there are less than
four (4) full quarters of operation, such figures on an annualized
basis, all distributions by Borrower to its partners or by the General
Partner of Borrower to its shareholders shall not exceed ninety-five
percent (95%) of Funds From Operations. "Funds From Operations"
shall mean net income (computed in accordance with generally accepted
accounting principles) of Borrower, excluding gains or losses from
debt restructuring and sales of property, plus depreciation and
amortization and after adjustment for unconsolidated partnerships and
joint ventures, which adjustment will be calculated to reflect funds
from operations on the same basis.
(c) Liquidity: Beginning with the fiscal quarter
beginning September 30, 1995, Liquidity may not be less than the
greater of $250,000.00 or ten percent (10%) of Liabilities (as defined
above), where "Liquidity" shall mean any and all cash (including
deposits in demand accounts), certificates of deposit, treasury bonds,
treasury bills or other securities or any other document or instrument
that is convertible to cash or readily available funds and, solely for
purposes of the 10% of Liabilities calculation, all undrawn amounts
under the Loan;
(d) Pro Forma Coverage Ratio: Beginning with the fiscal
quarter beginning September 30, 1996, Borrower shall maintain an
EBITDA from rent received under the Project Leases which is at least
1.75 times its Contractual Debt Service and beginning with the fiscal
quarter ending after the completion of a Qualified Offering, Borrower
shall maintain an EBITDA from rent received under the Project Leases
which is at least 2.00 times its Contractual Debt Service. "EBITDA"
shall mean Net Revenue plus taxes, depreciation, amortization and
interest expenses. "Net Revenue" shall mean the excess of Gross
Revenues over Gross Expenses for each Loan Year. "Gross Revenues"
shall mean all income, rentals, revenues and consideration of whatever
form or nature received by or paid to, or for the account or benefit
of the Borrower from any and all sources, resulting from or
attributable to, the leasing of the Collateral Projects and the
Non Collateral Projects, to be determined on the basis of the financial
information delivered in the Loan documents. "Gross Expenses" shall
mean all reasonable expenses actually incurred by Borrower in the
leasing, owning, maintaining or insuring of the Collateral Projects
and the Non-Collateral Projects. "Loan Year" shall mean each calendar
year after the Closing Date. "Contractual Debt Service" shall mean
the sum of (A) the debt service on the Loan which would be payable to
Lender if the payments under the Loan were based upon the following
terms: an amount necessary to fully amortize the Applicable Commitment
over a period of fifteen (15) years at the Pro Forma Interest Rate,
plus (B) the actual debt service on all other Liabilities of Borrower.
The Pro Forma Coverage Ratio shall be
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initially calculated based on the trailing twelve (12) month period
until Lender receives the financial statements of Borrower for
September 30, 1996 (or the first four full quarters of financial
operations up to March 31, 1997); thereafter, the ratio shall be
calculated based on the current quarter plus the prior three quarters;
(e) Debt Service Coverage Ratio: Beginning with the
fiscal quarter beginning September 30, 1996, Borrower shall maintain
its Debt Service Coverage Ratio at or in excess of 1.30 to 1.00. "Debt
Service Coverage Ratio shall mean that ratio obtained by dividing (A)
the sum of (i) five percent (5%) of Net Revenue plus (ii) taxes,
depreciation, amortization and interest expenses, by (B) Debt Service,
where "Debt Service" equals an amount necessary to fully amortize the
average Loan Balance outstanding during the applicable period over a
period of fifteen (15) years at the Pro Forma Interest Rate (as
defined in subparagraph (d) above);
(f) Franchise Commitment: Each Additional Project must be
subject to a commitment in a form reasonably acceptable to Lender from
a national hotel franchise company acceptable to Lender in its
reasonable discretion. Such franchise commitment shall provide that
the Project will be subject to a franchise agreement within twelve
(12) months of Borrower's acquisition of the Project. A franchise
commitment from Hampton Inn, Holiday Inns, Courtyard by Marriott,
Club Hotels by Doubletree, Doubletree Hotels (full service), Residence
Inn and other national hotel franchise companies reasonably acceptable
to Lender shall be deemed acceptable.
7.15 There shall be no secondary financing on any Collateral
Project. For this purpose, leases on any equipment shall not be considered as
"secondary financing."
7.16 Upon the occurrence of an Event of Default and only during the
continuation thereof, all Project Net Revenues from the operation of the
Collateral Projects shall be deposited on a daily basis in a demand account
maintained at a bank which is acceptable to Lender in its sole and absolute
discretion (the "Secured Account"), which Secured Account shall be in the
name of Lender and subject to a valid and perfected priority security interest
in favor of Lender; and Lender shall have the right to "sweep" the Secured
Account on Friday of each week and apply such funds to the payment of the
obligations of Borrower to Lender. "Project Net Revenues" shall mean the
excess of Project Gross Revenues over Project Gross Expenses for each calendar
month applied on a per diem basis. "Project Gross Revenues" shall mean all
income, rentals, revenues and consideration of whatever form or nature received
by or paid to, or on account or benefit of the Lessee and/or Management Company
from any and all sources, resulting from or attributable to, the operation
and/or management of the Collateral Projects to be determined on the basis of
the financial information delivered by Borrower to Lender as described in the
Loan documents "Project Gross Expenses" shall mean all reasonable expenses
actually incurred by Lessee and/or Management Company in the operation and/or
management of the Collateral Projects.
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7.17 With the exception of office equipment that is leased and of
personal property that is used in a Collateral Project's restaurant that has
been subleased to an unrelated third party, Borrower shall, during the term of
the Loan, own all personal property and fixtures used in the ownership,
operation and/or management of the Collateral Projects and such personal
property and fixtures shall be subject to the respective Project Leases.
Notwithstanding what may otherwise be provided in the immediately preceding
sentence, Lender acknowledges that the rights of Borrower as "franchisee" under
the Project Franchise Agreement, all inventory, accounts and certain licenses,
permits and contract rights shall be held by, and in the name of, Lessee (the
"Lessee Personal Property"). Each Project Lease shall provide that Borrower
shall maintain a lien on all such Lessee Personal Property and that, upon the
expiration and/or earlier termination of the Project Lease, the Lessee shall
cause all Lessee Personal Property to be transferred/assigned to Borrower to the
extent permitted by law and/or by the terms of any contracts affecting such
property.
7.18 Lender acknowledges Lessee's intent to enter into management
agreements (the "Project Management Agreements") with the Management Company
providing for the management of the Collateral Projects. The Project Management
Agreements shall be acceptable in all respects to Lender acting in its sole and
absolute discretion; provided, however, that Lender hereby acknowledges that the
Project Management Agreements shall provide for management fees to be paid in an
amount equal to two percent (2%) of gross revenue from all sources on the
Collateral Projects plus the Management Company's cost and expense of operation,
and Lender hereby consents to such management fees so long as:
(a) Such fees shall be payable no more frequently than
once every month in arrears and no fees shall be paid in advance;
(b) Each Project Management Agreement shall be terminable
at will at the option of the Lender at any time during the occurrence
and continuation of an Event of Default, with such termination to be
without penalty or premium payable to the Management Company. Lender
shall, upon the occurrence and continuation of an Event of Default by
Borrower, have the additional right to apply for the appointment of a
receiver (the "Receiver") through a court of competent jurisdiction to
manage the Collateral Projects in the place of the Management Company.
Each Project Management Agreement shall also include a provision that
the Management Company shall co-operate with Lender in (i) obtaining
the appointment of the Receiver; and (ii) turning over management and
control of the Collateral Project to the Receiver including, without
limitation, the assignment to the Receiver of any and all licenses
and/or permits used and/or necessary for the operation and/or
management of the Collateral Projects. In addition, the Project
Management Agreements shall provide that (a) upon the occurrence of an
Event of Default and the continuation thereof which has not been cured
during the applicable cure period, all Project Net Revenues shall be
deposited by the
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Management Company into the Secured Account; and (b) the Management
Company waives any and all defenses to the appointment of the
Receiver;
(c) Lessee shall not "materially" modify, amend or assign
the Project Management Agreements without the prior written consent of
Lender, which may be withheld in Lender's sole and absolute discretion.
A material modification or amendment shall include, without limitation,
a change in the termination date(s), compensation paid to the
Management Company, default provisions, parties to the Project
Management Agreements, key personnel, and reporting criteria;
(d) Lessee shall obtain and deliver to Lender an agreement
from the Management Company subordinating its right to all payments
under the Project Management Agreements to the Loan from and after any
notice from Lender to Borrower of an Event of Default by Borrower; and
(e) The Project Management Agreements shall be for a term
reasonably acceptable to Lender. Borrower shall notify Lender no later
than sixty (60) days prior to the termination of any Project Management
Agreement of the name of any replacement management company which shall
be reasonably acceptable to Lender.
7.19 Notwithstanding what may otherwise be provided herein, Borrower
shall have the right, during the term of the Loan, to acquire one or more
unrelated hotels (the "Non-Collateral Projects"), which Non-Collateral Projects
shall not be collateral for the Loan provided: (i) Borrower shall not directly
or indirectly apply any Advances toward the acquisition, operation, maintenance,
control or ownership of such Non-Collateral Project; and (ii) any and all loans
on each Non-Collateral Project shall be non-recourse to the Borrower. In the
event Borrower acquires a Non-Collateral Project and fails to comply with the
conditions set forth in the immediately preceding sentence, such failure shall
be deemed an Event of Default.
7.20 Each Project shall at all times be subject to either a Project
Franchise Agreement with, or a franchise commitment from, a national hotel
franchise company acceptable to Lender, provided that any franchise commitment
shall provide, except as to the Initial Projects, that a Project Franchise
Agreement shall be delivered with respect to said Project within the next twelve
(12) months; and provided further that all franchise commitments for which a
Project Franchise Agreement has not yet been issued shall be renewed prior to
their expiration dates.
7.21 Borrower shall execute and deliver such additional documents
and do such other acts as Lender may reasonably require in connection with this
Loan consistent with the terms of this Agreement.
7.22 Borrower agrees to maintain Capital Sources available at all
times sufficient to (i) complete all Development Projects, and (ii) fulfill all
of its obligations under any agreements to purchase Additional Projects, where
"Capital Sources" means all sources of capital available to
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Borrower, whether in the form of debt such as the Construction Line, or equity,
to the extent not otherwise committed.
7.23 Borrower agrees to provide Lender with respect to the Initial
Project at Silverthorne, Colorado a survey satisfying the requirements of
Paragraph 5.1(1)(ii) no later than June 21, 2004 if still a Collateral Project
on such date. In the event that Borrower fails to do so, Borrower agrees that
such failure shall be deemed to be an Event of Default.
SECTION 8. NEGATIVE COVENANTS
So long as Lender has any commitment to lend to Borrower hereunder and
until the Loan and all other indebtedness hereunder have been paid in full and
all of Borrower's obligations hereunder have been fully discharged, Borrower
shall not, without receiving the prior written consent of Lender which consent
shall not be unreasonably withheld:
8.1 Dissolve or liquidate, or merge or consolidate with or into any
other entity, or turn over the management or operation of the Collateral
Projects to any other person, firm or corporation.
8.2 Assign, transfer or convey any of its right, title and interest
in any property whether real or personal encumbered by the Security Documents
other than in the ordinary course of business with respect to personal property
with a value of less than $5,000.00 or create or suffer to be created any
mortgage, pledge, security interest, encumbrance or other lien on any property
encumbered by the Security Documents, except with respect to the equipment of
any Additional Project that was subject to liens or leases existing prior to the
acquisition of such Additional Project by Borrower.
8.3 Consent to, or vote in favor of, the inclusion of all or any
part of any Collateral Project in any assessment district.
8.4 Change the times of commencement or termination of its fiscal
year or other accounting periods; or change its methods of accounting other
than to conform to generally accepted accounting principles applied on a
consistent basis.
SECTION 9. WAIVER
9.1 Borrower waives presentment, demand, protest and notices of
protest, nonpayment, partial payment and all other notices and formalities
except as expressly called for in this Agreement. Borrower consents to and
waives notice of: (i) the granting of indulgences or extensions of time of
payment, (ii) the taking or releasing of security, and (iii) the addition or
release of persons who may be or become primarily or secondarily liable for the
Loan or any other indebtedness arising in connection with the Loan, or any part
thereof, and all in such manner and at such time as Lender may deem advisable.
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<PAGE> 46
9.2 No delay or omission by Lender in exercising any right, power
or remedy hereunder, and no indulgence given to Borrower, with respect to any
term, condition or provision set forth herein, shall impair any right, power or
remedy of Lender under this Agreement, or be construed as a waiver by Lender
of, or acquiescence in, any Event of Default. Likewise, no such delay,
omission or indulgence by Lender shall be construed as a variation or waiver of
any of the terms, conditions or provisions of this Agreement. Any actual
waiver by Lender of any Event of Default shall not be a waiver of any other
prior or subsequent Event of Default or of the same Event of Default after
notice to Borrower demanding strict performance.
SECTION 10. DEFAULT
10.1 The occurrence of any of the following events or conditions
shall constitute an "Event of Default" under this Agreement:
(a) Any failure to pay any principal or interest under
the Note when the same shall become due and payable, or the failure to
pay any other sum due under the Note, this Agreement or any Security
Document and such failure continues for ten (10) days after notice
thereof to Borrower. No notice, however, shall be required after
maturity of the Note.
(b) Any failure or neglect to perform or observe any of
the covenants, conditions or provisions of this Agreement, the Note,
any Security Document or any other document or instrument executed or
delivered in connection with the Loan (other than a failure or neglect
described in one or more of the other provisions of this Paragraph
10.1) and the continuation thereof for a period of thirty (30) days
after notice from Lender to Borrower or, so long as Borrower is
proceeding diligently to remedy such failure or neglect, sixty (60)
days after notice from Lender to Borrower.
(c) Any warranty, representation or statement contained
in this Agreement, in the Note or in any Security Document or any
other document or instrument executed or delivered in connection with
the Loan, or made or furnished to Lender by or on behalf of Borrower,
that shall be or shall prove to have been materially false when made
or furnished.
(d) The filing by Borrower, the Lessee, any endorser of
the Note or any Principal Guarantor (or against such party to which
such party acquiesces or that is not dismissed within ninety (90) days
after the filing thereof) of any proceeding under the federal
bankruptcy laws now or hereafter existing or any other similar statute
now or hereafter in effect; the entry of an order for relief under
such laws with respect to such party; or the appointment of a
receiver, trustee, custodian or conservator of all or any part of the
assets of such party.
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<PAGE> 47
(e) The insolvency of Borrower, the Lessee, any endorser
of the Note or any Principal Guarantor; or the execution by such party
of an assignment for the benefit of creditors; or the convening by
such party of a meeting of its creditors, or any class thereof, for
purposes of effecting a moratorium upon or extension or composition of
its debts; or the failure of such party to pay its debts as they
mature; or if such party is generally not paying its debts as they
mature.
(f) The admission in writing by Borrower, the Lessee, any
endorser of the Note or any Principal Guarantor that it is unable to
pay its debts as they mature or that it is generally not paying its
debts as they mature.
(g) The liquidation, termination or dissolution of
Borrower or any endorser of the Note, if a corporation, partnership or
joint venture.
(h) Any levy or execution upon, or judicial seizure of,
any portion of any collateral or security for the Loan.
(i) Any attachment or garnishment of, or the existence or
filing of any lien or encumbrance, other than any lien or encumbrance
permitted by the Deeds of Trust or the other Loan Documents, against
any portion of any collateral or security for the Loan, that is not
removed or released within thirty (30) days after its creation.
(j) The institution of any legal action or proceedings to
enforce any lien or encumbrance upon any portion of any collateral or
security for the Loan, that is not dismissed or bonded within thirty
(30) days after its institution, any such bonding to be for an amount
not less than the reasonably expected maximum liability of Borrower.
(k) The occurrence of any event of default under the
Note, any of the Security Documents or any other document or
instrument executed or delivered in connection with the Loan and the
expiration of any applicable cure period.
(l) The occurrence of any material event of default under
any Project Lease, any Project Franchise Agreement or any Project
Management Agreement and the expiration of any cure period thereunder.
10.2 Upon the occurrence of any Event of Default and at any time
while such Event of Default is continuing, Lender may do one or more of the
following:
(a) Cease making Advances and declare the entire Loan and
all other indebtedness of Borrower hereunder immediately due and
payable, without notice or demand;
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<PAGE> 48
(b) Proceed to protect and enforce its rights and remedies
under this Agreement, the Note, and all Security Documents; and
(c) Avail itself of any other relief to which Lender may
be legally or equitably entitled.
10.3 Borrower shall pay all costs and expenses, including without
limitation costs of title searches and title policy commitments, Uniform
Commercial Code searches, court costs and reasonable attorneys' fees, incurred
by Lender in enforcing payment and performance of the Loan and the other
indebtedness and obligations of Borrower hereunder or in exercising the rights
and remedies of Lender hereunder. All such costs and expenses shall be secured
by all Security Documents. In the event of any court proceedings, court costs
and attorneys' fees shall be set by the court and not by jury and shall be
included in any judgment obtained by Lender.
SECTION 11. ACTION UPON AGREEMENT
11.1 This Agreement is made for the sole protection and benefit of
the parties hereto and no other person or organization shall have any right of
action hereon.
11.2 This Agreement and the other loan documents executed in
connection herewith embody the entire agreement of the parties with regard to
the subject matter hereof. There are no representations, promises, warranties,
understandings or agreements expressed or implied, oral or otherwise, in
relation thereto, except those expressly referred to or set forth herein or in
the other loan documents executed in connection herewith. Borrower acknowledges
that the execution and delivery of this Agreement is its free and voluntary act
and deed, and that said execution and delivery have not been induced by, nor
done in reliance upon, any representations, promises, warranties, understandings
or agreements made by Lender, its agents, officers, employees or
representatives.
11.3 No promise, representation, warranty or agreement made
subsequent to the execution and delivery of this Agreement by either party
hereto, and no revocation, partial or otherwise, or change, amendment or
addition to, or alteration or modification of, this Agreement shall be valid
unless the same shall be in writing signed by all parties hereto.
11.4 Lender and Borrower each have separate and independent rights
and obligations under this Agreement. Nothing contained herein shall be
construed as creating, forming or constituting any partnership, joint venture,
merger or consolidation of Borrower and Lender for any purpose or in any
respect.
SECTION 12. GENERAL
12.1 This Agreement shall survive, the making of the Loan and shall
continue so long as any part of the Loan, or any extension or renewal thereof,
remains outstanding.
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<PAGE> 49
12.2 All rights, powers and remedies granted Lender herein, or
otherwise available to Lender, are for the sole benefit and protection of
Lender, and Lender may exercise any such right, power or remedy at its option
and in its sole and absolute discretion without any obligation to do so. In
addition, if, under the terms hereof, Lender is given two or more alternative
courses of action, Lender may elect any alternative or combination of
alternatives and absolute discretion. All monies advanced by Lender under the
terms hereof and all amounts paid, suffered or incurred by Lender in exercising
any authority granted herein, including reasonable attorneys' fees, shall be
secured by the Security Documents, shall bear interest at the highest rate
payable on the Loan until paid, and shall be due and payable by Borrower to
Lender immediately without demand.
12.3 Borrower shall indemnify and hold Lender harmless from and
against all claims, costs, expenses, actions, suits, proceedings, losses,
damages and liabilities of any kind whatsoever, including but not limited to
reasonable attorneys' fees and expenses, arising out of any matter relating,
directly or indirectly, to the Loan, to the ownership, development,
construction, or sale of any Collateral Project, whether resulting from internal
disputes of the Borrower, disputes between the Borrower and any guarantor, or
whether involving other third persons or entities, or out of any other matter
whatsoever related to this Agreement, the Security Documents, or any property
encumbered thereby, but excluding any claim or liability which arises as the
direct result of the negligence or willful misconduct of Lender. This indemnity
provision shall continue in full force and effect and shall survive not only the
making of the Loan and all Advances but shall also survive the repayment of the
Loan and the performance of all of Borrower's other obligations hereunder.
12.4 If Borrower consists of more than one person or entity their
liability shall be joint and several. The provisions hereof shall apply to
the parties according to the context thereof and without regard to the number
or gender of words or expressions used.
12.5 Time is expressly made of the essence of this Agreement.
12.6 All notices required or permitted to be given hereunder shall
be in writing and may be given in person or by United States mail, by delivery
service or by electronic transmission. Any notice directed to a party to this
Agreement shall become effective upon the earliest of the following: (i) actual
receipt by that party; (ii) delivery to the designated address of that party,
addressed to that party; or (iii) if given by certified or registered United
States mail, twenty-four (24) hours after deposit with the United States Postal
Service, postage prepaid, addressed to that party at its designated address.
The designated address of a party shall be the address of that party shown at
the beginning of this Agreement or such other address as that party, from time
to time, may specify by notice to the other parties.
12.7 Borrower shall pay all costs and expenses arising from the
preparation of this Agreement and the closing of the Loan, including but not
limited to title insurance premiums,
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<PAGE> 50
other title company charges, recording and filing fees, costs of Uniform
Commercial Code searches, Lender's attorneys' fees, any intangible or recording
taxes and any other charges that may be imposed on Lender as a result of this
transaction.
12.8 This Agreement shall be governed by and construed according to
the laws of the State of Arizona.
12.9 Except as otherwise provided herein, this Agreement shall be
binding upon, and shall inure to the benefit of, the parties hereto and their
successors and assigns.
12.10 The headings or captions of sections in this Agreement are for
reference only, do not define or limit the provisions of such sections, and
shall not affect the interpretation of this Agreement.
12.11 The Note is hereby amended (i) to evidence the increased
maximum amount of the Loan from $30,000,000.00 to the Maximum Loan Amount and
(ii) to be otherwise consistent with this Agreement.
12.12 All references in the Security Documents, the Environmental
Indemnity Agreements and the other Loan Documents from the Borrower to Lender
to "$30,000,000.00" are amended to read "Maximum Loan Amount."
12.13 Each reference in the Loan Documents to any of the Loan
Documents is hereby amended to be a reference to such document as modified
herein.
12.14 The Loan Documents are ratified and affirmed by Borrower and
shall remain in full force and effect as modified herein. Any property or
rights to or interests in property granted as security in the Loan Documents
shall remain as security for the Loan and the obligations of Borrower in the
Loan Documents.
12.15 Lender, at any time, shall have the right to sell
participation interests in the Loan and in any documents and instruments
executed in connection herewith. Lender is authorized to
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<PAGE> 51
furnish to any participant or prospective participant any information or
document that Lender may have or obtain regarding the Loan, Borrower or any
guarantor of the Loan.
IN WITNESS WHEREOF, these presents are executed as of the date first
indicated above.
SUNSTONE HOTEL INVESTORS, L.P., a
Delaware limited partnership
BY: SUNSTONE HOTEL INVESTORS, INC.,
a Maryland corporation,
its General Partner
By: /s/ ROBERT A. ALTER
------------------------
Name: Robert A. Alter
-----------------------
Title: President
----------------------
BORROWER
BANK ONE, ARIZONA, NA, a national
banking association
By: /s/ DANIEL A. NUNES
---------------------------
Name: Daniel A. Nunes
--------------------------
Title: Assistant Vice President
--------------------------
LENDER
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SCHEDULE "A"
DEEDS OF TRUST
Arizona:
1. Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing dated October 25, 1995 and recorded on October
31, 1995 in the Official Records of Maricopa County, State of
Arizona, at Recorder's No. 95-0668897.
California:
1. Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing dated October 25, 1995 and recorded on October
31, 1995 in the Official Records of Los Angeles County, State
of California, at Recorder's No. 95-1761343.
2. Deed Of Trust, Assignment of Rents, Security Agreement and
Fixture Filing dated October 25, 1995 and recorded on October
31, 1995 in the Official Records of Fresno County, State of
California, at Recorder's No. 95-139846.
3. Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing dated December 13, 1995 and recorded on
December 13, 1995 in the Official Records of Alameda County,
State of California, at Recorder's No. 95-288837.
Colorado:
1. Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing dated October 25, 1995 and recorded on November
1, 1995 in the Official Records of Moffat County, State of
Colorado, at Reception No. 362505.
2. Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing dated October 25, 1995 and recorded on November
1, 1995 in the Official Records of Routt County, State of
Colorado, at Reception No. 454471.
3. Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing dated October 25, 1995 and recorded on November
1, 1995 in the Official Records of Summit County, State of
Colorado, at Reception No. 502239.
4. Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing dated October 25, 1995 and recorded on November
1, 1995 in the Official Records of Arapahoe County, State of
Colorado, at Reception No. A5115354.
<PAGE> 53
5. Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing dated October 25, 1995 and recorded on November
1, 1995 in the Official Records of Pueblo County, State of
Colorado, at Book No. 2842, at Page 743.
New Mexico:
1. Real Estate Mortgage, Assignment of Rents, Security Agreement
and Fixture Filing dated October 25, 1995 and recorded on
October 31, 1995 in the Official Records of Santa Fe County,
State of New Mexico, at Book No. 1212, beginning at Page 571.
Oregon:
1. Line of Credit, Deed of Trust, Assignment of Rents, Security
Agreement and Fixture Filing dated February 1, 1996 and
recorded on February 2, 1996 in the Official Records of
Clackamas County, State of Oregon, at Recorder's No. 96-008080.
2. Line of Credit, Deed of Trust, Assignment of Rents, Security
Agreement and Fixture Filing dated February 1, 1996 and
recorded on February 2, 1996 in the Official Records of
Multnomah County, State of Oregon, at Recorder's No. 96-17505.
Utah:
1. Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing dated October 25, 1995 and recorded on October
31, 1995 in the Official Records of Utah County, State of Utah,
at Book No. 3805, at Page No. 338, as Entry No. 74445.
Washington:
1. Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing dated February 1, 1996 and recorded on February
2, 1996 in the Official Records of King County, State of
Washington, at Recorder's No. 960202-1789.
2. Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing dated February 1, 1996 and recorded on February
2, 1996 in the Official Records of Kitsap County, State of
Washington, at Recorder's No. 9602020194.
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EXHIBIT "A"
When recorded, return to:
BANK ONE, ARIZONA, NA
Post Office Box 29542
Phoenix, Arizona 85038
Attention: Western Region Real
Estate Finance, Dept. A-392
DEED OF TRUST, ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FILING
-----------------
This Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing (hereinafter called "Deed of Trust") is made as of the _________
day of ______________, 19____, by and among SUNSTONE HOTEL INVESTORS, L.P., a
Delaware limited partnership, whose mailing address is 115 Calle de Industrias,
Suite 201, San Clemente, California 92672, and whose chief executive office is
located at 115 Calle de Industrias, Suite 201, San Clemente, California 92672,
hereinafter called "Trustor," _________________________________, whose mailing
address is _____________________________________, hereinafter called "Trustee,"
and BANK ONE, ARIZONA, NA, a national banking association, whose mailing address
is Post Office Box 29542, Phoenix, Arizona 85038, Attention: Western Region Real
Estate Finance, Dept. A-392, hereinafter called "Beneficiary".
WITNESSETH:
SECTION 1. GRANTING CLAUSE; WARRANTY OF TITLE
1.1 Trustor hereby irrevocably grants, transfers, and assigns to
Trustee, in trust, with power of sale, all of Trustor's present and future
estate, right, title- and interest in and to that real property and all
buildings and other improvements now thereon or hereafter constructed thereon
(the "Premises"), in the County of___________________________, State of
_________________, described on Schedule "A" attached hereto and by this
reference made a part hereof, together with all of the following which, with
the Premises (except where the context otherwise requires), are hereinafter
collectively called the "Trust Property":
(a) All appurtenances in and to the Premises;
<PAGE> 55
(b) All water and water rights, ditches and ditch rights,
reservoir and reservoir rights, stock or interests in irrigation or
ditch companies, minerals, oil and gas rights, royalties, lease or
leasehold interests owned by Trustor, now or hereafter used or useful
in connection with, appurtenant to or related to the Premises;
(c) All right, title and interest of Trustor now owned or
hereafter acquired in and to all streets, roads, alleys and public
places, and all easements and rights of way, public or private, now or
hereafter used in connection with the Premises;
(d) All machinery, equipment, fixtures and materials now
or at any time attached to the Premises together with all processing,
manufacturing and service equipment and other personal property now or
at any time hereafter located on or appurtenant to the Premises and
used in connection with the management and operation thereof;
(e) Any licenses, contracts, permits and agreements
required or used in connection with the ownership, operation or
maintenance of the Premises, and the right to the use of any
tradename, trademark, or service mark now or hereafter associated with
the operation of any business conducted on the Premises;
(f) Any and all insurance proceeds, and any and all
awards, including interest, previously and hereafter made to Trustor
for taking by eminent domain of the whole or any part of the Premises
or any easements therein;
(g) Subject to the rights of Beneficiary under Section 3
hereof, all existing and future leases, subleases, licenses and other
agreements for the use and occupancy of all or any portion of the
Premises and all income, receipts, revenues, issues, rents, accounts
or other payments for the use or occupancy of rooms and other public
facilities, and profits arising from the use or enjoyment of all or
any portion of the Premises.
1.2 Trustor warrants that it is well and truly seized of a good
and marketable title in fee simple to the Premises, that it is the lawful owner
of the rest of the Trust Property, that it does not hold the Premises in trust,
and that, except for those matters specifically described on Schedule "B" Part
I attached to the title insurance policy delivered to Beneficiary with respect
to the Trust Property dated as of the date of the recording of the Deed of
Trust (hereinafter called the "Permitted Exceptions"), the title to all the
Trust Property is clear, free and unencumbered; Trustor shall forever warrant
and defend the same unto Beneficiary, its successors and assigns, against all
claims whatsoever.
TRUSTOR FURTHER REPRESENTS, WARRANTS, COVENANTS AND AGREES AS FOLLOWS:
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SECTION 2. OBLIGATION SECURED
This Deed of Trust is given for the purpose of securing, in such order
of priority as Beneficiary may elect:
2.1 Payment of the sum of FIFTY MILLION AND NO/100 DOLLARS
($50,000,000.00) according to the terms of that Promissory Note dated October
25, 1995, as amended by the amended and restated Loan Agreement dated as of
June 21, 1996 (the "Modification Agreement") by and between Trustor and
Beneficiary, made by Trustor, payable to the order of Beneficiary, evidencing a
revolving line of credit, all or any part of which may be advanced to Trustor,
repaid by Trustor and readvanced to Trustor, from time to time, subject to the
terms and conditions thereof, provided that the principal balance outstanding
at any time shall not exceed the sum set forth above in this Paragraph 2.1,
with interest thereon, extension and other fees, late charges, prepayment
premiums and attorneys' fees, according to the terms thereof, and all
extensions, modifications, renewals or replacements thereof (hereinafter called
the "Note"). The Note shall accrue interest at a rate per annum as such rate
shall change from time to time;
2.2 Payment, performance and observance by Trustor of each
covenant, condition, provision and agreement contained herein and of all monies
expended or advanced by Beneficiary pursuant to the terms hereof, or to
preserve any right of Beneficiary hereunder, or to protect or preserve the
Trust Property or any part thereof;
2.3 Payment, performance and observance by Trustor of each
covenant, condition, provision and agreement contained in that Loan Agreement
dated of even date with the Note, by and between Trustor and Beneficiary as
amended and restated by the Modification Agreement (as amended and restated,
hereinafter called the "Loan Agreement") and in any other document or
instrument related to the indebtedness hereby secured and of all monies
expended or advanced by Beneficiary pursuant to the terms thereof or to
preserve any right of Beneficiary thereunder;
2.4 Payment of any and all additional loans and future advances
made by Beneficiary to Trustor and/or to the then record owner or owners of the
Trust Property (excluding, however, any such loan to an individual for
personal, family or household purposes) with interest thereon, late charges,
extension and other fees, prepayment premiums and attorneys' fees, according to
the terms of the promissory note(s) and/or credit agreement(s) evidencing such
loans and advances, and all extensions, modifications, renewals or replacements
thereof.
All of the indebtedness and obligations secured by this Deed of Trust
are hereinafter collectively called the "Obligation."
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<PAGE> 57
SECTION 3. LEASES; ASSIGNMENT OF RENTS AND LEASES
3.1 To facilitate payment and performance of the Obligation,
Trustor hereby absolutely transfers and assigns to Beneficiary all right, title
and interest of Trustor in and to (i) all existing and future leases,
subleases, licenses and other agreements for the use and occupancy of all or
any part of the Trust Property, whether written or oral and whether for a
definite term or month to month, together with all guarantees of the lessee's
obligations thereunder and together with all extensions, modifications and
renewals thereof (hereinafter called the "Leases"), and (ii) all income,
receipts, revenues, rents, issues and profits now or hereafter arising from or
out of the Leases or from or out of the Trust Property or any part thereof,
including without limitation room rents, minimum rents, additional rents,
percentage rents, parking and maintenance charges and fees, tax and insurance
contributions, proceeds of the sale of utilities and services, cancellation
premiums, claims for damages arising from any breach of the Leases, proceeds
from any sale or other disposition of all or any portion of the Trust Property,
and all other benefits arising from the use or enjoyment of, or the lease, sale
or other disposition of, all or any portion of the Trust Property, together
with the immediate and continuing right to receive all of the foregoing
(hereinafter called the "Rents"). In furtherance of this Assignment, and not
in lieu hereof, Beneficiary may require a separate assignment of rents and
leases and/or separate specific assignments of rents and leases covering one or
more of the Leases; the terms of all such assignments are incorporated herein
by reference.
3.2 Trustor hereby authorizes and directs the lessees and tenants
under the Leases that, upon written notice from Beneficiary, all Rents shall be
paid directly to Beneficiary as they become due. Trustor hereby relieves the
lessees and tenants from any liability to Trustor by reason of the payment of
the Rents to Beneficiary. Nevertheless, Trustor shall be entitled to collect
the Rents until Beneficiary notifies the lessees and tenants in writing to pay
the Rents to Beneficiary. Beneficiary is hereby authorized to give such
notification upon the occurrence of an Event of Default and at any time
thereafter while such Event of Default is continuing. Receipt and application
of the Rents by Beneficiary shall not constitute a waiver of any right of
Beneficiary under this Deed of Trust or applicable law, shall not cure any
Event of Default hereunder, and shall not invalidate or affect any act done in
connection with such Event of Default, including, without limitation, any
trustee's sale or foreclosure proceeding.
3.3 All Rents collected by Trustor shall be applied in the
following manner:
First, to the payment of all taxes and lien assessments levied
against the Trust Property, where provision for paying such is not otherwise
made;
Second, to the payment of ground rents (if any) payable with
respect to the Trust Property;
Third, to the payment of any amounts due and owing under the
Obligation;
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<PAGE> 58
Fourth, to the payment of current operating costs and expenses
(including repairs, maintenance and necessary acquisitions of property and
expenditures for capital improvements) arising in connection with the Trust
Property;
Fifth, to Trustor or its designee.
All Rents collected by Beneficiary may be applied to the items above listed in
any manner that Beneficiary deems advisable and without regard to the
aforestated priorities.
3.4 Trustor represents and warrants that: (i) the Leases are in
full force and effect and have not been modified or amended; (ii) the Rents
have not been waived, discounted, compromised, setoff or paid more than one
month in advance; (iii) there are no other assignments, transfers, pledges or
encumbrances of any Leases or Rents; and (iv) to the best of Trustor's
knowledge neither Trustor nor the lessees and tenants are in default under the
Leases.
3.5 Trustor shall (i) fulfill or perform each and every term,
covenant and provision of the Leases to be fulfilled or performed by the lessor
thereunder; (ii) give prompt notice to Beneficiary of any notice received by
Trustor of default thereunder or of any alleged default or failure of
performance that could become a default thereunder, together with a complete
copy of any such notice; and (iii) enforce, short of termination thereof, the
performance or observance of each and every term, covenant and provision of
each Lease to be performed or observed by the lessees and tenants thereunder.
3.6 Trustor, without the prior written consent of Beneficiary,
shall not: (i) cancel, modify or alter, or accept the surrender of, any Lease;
(ii) assign, transfer, pledge or encumber, the whole or any part of the Leases
and Rents to anyone other than Beneficiary; (iii) accept any Rents more than
one month in advance of the accrual thereof; (iv) do or permit anything to be
done, the doing of which, or omit or refrain from doing anything, the omission
of which, could be a breach or default under the terms of any Lease or a basis
for termination thereof; or (v) enter in to any new tenant leases.
3.7 Beneficiary does not assume and shall not be liable for any
obligation of the lessor under any of the Leases and all such obligations shall
continue to rest upon Trustor as though this assignment had not been made.
Beneficiary shall not be liable for the failure or inability to collect any
Rents.
3.8 Neither the Assignment of Rents and Leases contained herein or
in any separate assignment nor the exercise by Beneficiary of any of its rights
or remedies thereunder or in connection therewith, prior to Beneficiary
obtaining actual possession of the Trust Property as provided in Paragraph 8.2
hereof, shall constitute Beneficiary a "mortgagee in possession" or otherwise
make Beneficiary responsible or liable in any manner with respect to the Trust
Property or the occupancy, operation or use thereof. In the event Beneficiary
obtains actual possession of
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<PAGE> 59
the Trust Property as provided in Paragraph 8.2 hereof, Beneficiary shall have
the rights, and Beneficiary's liability shall be limited, as provided in that
Paragraph.
SECTION 4. SECURITY AGREEMENT
4.1 This Deed of Trust shall cover, and the Trust Property shall
include, all property now or hereafter affixed or attached to or incorporated
upon the Premises, which, to the fullest extent permitted by law, shall be
deemed fixtures and a part of the Premises. To the extent any of the Trust
Property consists of rights in action or personal property covered by the
Uniform Commercial Code, this Deed of Trust shall also constitute a security
agreement, and Trustor hereby grants to Beneficiary, as secured party, a
security interest in such property, including all proceeds thereof, for the
purpose of securing the Obligation. In addition, for the purpose of securing
the Obligation, Trustor hereby grants to Beneficiary, as secured party, a
security interest in all of the property described below in, to, or under which
Trustor now has or hereafter acquires any right, title or interest, whether
present, future, or contingent: all equipment, inventory, accounts, general
intangibles, instruments, documents, and chattel paper, as those terms are
defined in the Uniform Commercial Code, and all other personal property of any
kind (including without limitation money and rights to the payment of money),
whether now existing or hereafter created, that are now or at any time
hereafter (i) in the possession or control of Beneficiary in any capacity; (ii)
erected upon, attached to, or appurtenant to, the Premises; (iii) located or
used on the Premises or identified for use on the Premises (whether stored on
the Premises or elsewhere); or (iv) used in connection with, arising from,
related to, or associated with the Premises or any of the personal property
described herein, the construction of any improvements on the Premises, the
ownership, development, maintenance, leasing, management, or operation of the
Premises, the use or enjoyment of the Premises, or the operation of any
business conducted on the Premises; including without limitation all such
property more particularly described as follows:
(a) Buildings, structures and improvements, and building
materials, fixtures and equipment to be incorporated into any buildings,
structures or improvements;
(b) Goods, materials, supplies, fixtures, equipment,
machinery, furniture and furnishings, including without limitation, all such
items used for (i) generation, storage or transmission of air, water, heat,
steam, electricity, light, fuel, refrigeration or sound; (ii) ventilation,
air-conditioning, heating, refrigeration, fire prevention and protection,
sanitation, drainage, cleaning, transportation, communications, maintenance or
recreation; (iii) removal of dust, refuse, garbage or snow; (iv) transmission,
storage, processing or retrieval of information; and (v) floor, wall, ceiling
and window coverings and decorations;
(c) Income, receipts, revenues, issues, rents, accounts
or other payments for the use or occupancy of rooms and other public
facilities, and profits, including without limitation, room rents, minimum
rents, additional rents, percentage rents, parking and maintenance charges
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and fees, tax and insurance contributions, proceeds of the sale of utilities
and services, cancellation premiums, and claims for damages arising from the
breach of any leases;
(d) Water and water rights, ditches and ditch rights,
reservoirs and reservoir rights, stock or interest in irrigation or ditch
companies, minerals, oil and gas rights, royalties, and lease or leasehold
interests;
(e) Plans and specifications prepared for the
construction of any improvements, including without limitation, all studies,
estimates, data, and drawings;
(f) Documents, instruments and agreements relating to, or
in any way connected with, the operation, control or development of the
Premises, including without limitation, any declaration of covenants,
conditions and restrictions and any articles of incorporation, bylaws and other
membership documents of any property owners association or similar group;
(g) Claims and causes of action, legal and equitable, in
any form whether arising in contract or in tort, and awards, payments and
proceeds due or to become due, including without limitation those arising on
account of any loss of, damage to, taking of, or diminution in value of, all or
any part of the Premises or any personal property described herein;
(h) Sales agreements, escrow agreements, deposit
receipts, and other documents and agreements for the sale or other disposition
of all or any part of the Premises or any of the personal property described
herein, and deposits, proceeds and benefits arising from the sale or other
disposition of all or any part of the Premises or any of the personal property
described herein;
(i) Policies or certificates of insurance, contracts,
agreements or rights of indemnification, guaranty or surety, and awards, loss
payments, proceeds, and premium refunds that may be payable with respect to
such policies, certificates, contracts, agreements or rights;
(j) Contracts, agreements, permits, licenses,
authorizations and certificates, including without limitation all architectural
contracts, construction contracts, management contracts, service contracts,
maintenance contracts, franchise agreements, license agreements, building
permits and operating licenses;
(k) Trade names, trademarks, and service marks (subject
to any franchise or license agreements relating thereto);
(l) Refunds and deposits due or to become due from any
utility companies or governmental agencies;
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(m) Replacements and substitutions for, modifications of,
and supplements, accessions, addenda and additions to, all of the personal
property described herein;
(n) Books, records, correspondence, files and electronic
media, and all information stored therein;
together with all products and proceeds of all of the foregoing, in any form,
including all proceeds received, due or to become due from any sale, exchange
or other disposition thereof, whether such proceeds are cash or non-cash in
nature, and whether represented by checks, drafts, notes or other instruments
for the payment of money. The personal property described or referred to in
this Paragraph 4.1 is hereinafter called the "Personal Property." The security
interests granted in this Paragraph 4.1 are hereinafter severally and
collectively called the "Security Interest."
4.2 The Security Interest shall be self-operative with respect to
the Personal Property but Trustor shall execute and deliver on demand such
additional security agreements, financing statements and other instruments as
may be requested in order to impose the Security Interest more specifically
upon the Personal Property. The Security Interest, at all times, shall be
prior to any other interests in the Personal Property except any lien or
security interest granted in connection with any Permitted Exception. Trustor
shall act and perform as necessary and shall execute and file all security
agreements, financing statements, continuation statements and other documents
requested by Beneficiary to establish, maintain and continue the perfected
Security Interest. Trustor, on demand, shall promptly pay all costs and
expenses of filing and recording, including the costs of any searches, deemed
necessary by Beneficiary from time to time to establish and determine the
validity and the continuing priority of the Security Interest.
4.3 Trustor shall not sell, transfer, assign or otherwise dispose
of any Personal Property or any interest therein without obtaining the prior
written consent of Beneficiary, except Personal Property that Trustor is
obliged to replace pursuant to the terms hereof. Unless Beneficiary then
agrees otherwise in writing, all proceeds from any permitted sale or
disposition in excess of that required for replacements shall be paid to
Beneficiary to be applied to the Obligation, whether or not then due. Trustor
shall keep the Personal Property free of all security interests or other
encumbrances, except the Security Interest and any security interests and
encumbrances granted in connection with any Permitted Exception. Although
proceeds of Personal Property are covered hereby, this shall not be construed
to mean that Beneficiary consents to any sale of the Personal Property.
4.4 Trustor shall keep and maintain the Personal Property in good
condition and repair, and shall promptly replace any part thereof that from
time to time may become obsolete, badly worn or in a state of disrepair. All
such replacements shall be free of any other security interest or encumbrance,
except any security interest or encumbrance granted in connection with any
Permitted Exception.
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4.5 Except for purposes of replacement and repair, Trustor,
without the prior written consent of Beneficiary, shall not remove, or permit
the removal of, any Personal Property from the Premises.
4.6 Trustor hereby warrants, covenants and agrees that: (i) the
Personal Property is or will be used primarily for business (other than farm)
purposes; (ii) the Personal Property will be kept at the Premises; and (iii)
Trustor's records concerning the Personal Property will be kept at Trustor's
address as set forth in the beginning of this Deed of Trust.
4.7 Trustor represents and warrants that (i) the name specified
above for Trustor is the true and correct legal name of Trustor, and (ii) the
address specified above is the address of Trustor's chief executive office (or
residence if Trustor is an individual without an office). Trustor shall give
Beneficiary immediate written notice of any change in the location of (i)
Trustor's chief executive office (or residence if Trustor is an individual
without an office), as set forth in the beginning of this Deed of Trust; (ii)
the Personal Property or any part thereof; or (iii) Trustor's records
concerning the Personal Property. Trustor shall give Beneficiary immediate
written notice of any change in the name, identity or structure of Trustor.
4.8 All covenants and warranties of Trustor contained in this Deed
of Trust shall apply to the Personal Property whether or not expressly referred
to in this Section 4. The covenants and warranties of Trustor contained in this
Section 4 are in addition to, and not in limitation of, those contained in the
other provisions of this Deed of Trust.
4.9 Upon its recording in the real property records, this Deed of
Trust shall be effective as a financing statement filed as a fixture filing.
In addition, a carbon, photographic or other reproduced copy of this Deed of
Trust and/or any financing statement relating hereto shall be sufficient for
filing and/or recording as a financing statement. The filing of any other
financing statement relating to any personal property, rights or interests
described herein shall not be construed to diminish any right or priority
hereunder.
SECTION 5. PROTECTION AND PRESERVATION OF THE TRUST PROPERTY
5.1 Trustor shall neither commit nor permit to occur any waste
upon the Trust Property but shall at all times make or cause to be made all
repairs, maintenance, renewals and replacements as may be necessary to maintain
the Trust Property in good condition and repair. Trustor shall keep the Trust
Property free of termites, dry rot, fungus, beetles and all other harmful or
destructive insects and shall keep all plants, trees and shrubs included in the
Trust Property neatly pruned and in good condition. Trustor shall keep the
Trust Property free of rubbish and other unsightly or unhealthful conditions.
Trustor shall neither use nor permit the use of the Trust Property in violation
of any applicable statute, ordinance or regulation, including, without
limitation, the Americans With Disabilities Act of 1990 and corresponding rules
and regulations (the "ADA"), or any policy of insurance insuring the Trust
Property.
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5.2 Trustor shall promptly complete any improvements that may be
commenced, in good and workmanlike manner and in conformity with the ADA and
with plans and specifications approved by Beneficiary. Trustor shall repair
and restore, in conformity with the ADA, any portions of the Trust Property
that may be damaged or destroyed. Trustor shall pay when due all claims for
work performed and materials furnished on or in connection with the Trust
Property or any part thereof and shall pay, discharge, or cause to be removed,
all mechanic's, artisan's, laborer's or materialman's charges, liens, claims of
liens or encumbrances upon the Trust Property. Trustor shall comply with all
laws, ordinances and regulations now or hereafter enacted, including, without
limitation, the ADA, affecting the Trust Property or requiring any alterations
or improvements to be made. Except as required by law, Trustor shall not
remove, substantially alter, or demolish any building or improvement included
in the Trust Property without Beneficiary's prior written consent.
5.3 (a) Trustor shall provide and maintain policies of
insurance on the Trust Property in accordance with the Loan Agreement.
(b) In the event of loss, Trustor shall give immediate notice to
Beneficiary, and Beneficiary may make proof of loss if not made promptly by
Trustor. Each insurance company is hereby authorized and directed to make
payment for loss directly to Beneficiary, instead of to Trustor or to Trustor
and Beneficiary jointly; Beneficiary may apply all or any part of such
insurance proceeds to the payment of the Obligation, whether or not then due,
or the restoration or repair of the Trust Property. Beneficiary shall not be
responsible for any insurance, for the collection of any insurance proceeds, or
for the insolvency of any insurer. Application of insurance proceeds by
Beneficiary shall not cure nor waive any Event of Default nor invalidate any
act done hereunder because of any such Event of Default. In the event of the
sale of the Trust Property under the power of sale herein granted to Trustee,
or upon foreclosure of this Deed of Trust as a mortgage, or in the event
Beneficiary or a receiver appointed by the court shall take possession of the
Trust Property without sale, then all right, title and interest of Trustor in
and to all insurance policies then in force shall inure to the benefit of and
pass to the beneficiary in possession, receiver or purchaser at such sale, as
the case may be. Beneficiary is hereby appointed attorney in fact for Trustor
to assign and transfer such policies.
(c) If the insurance proceeds are to be used for the restoration
and repair of the Trust Property, they shall be held by Beneficiary in a
non-interest bearing account selected by Beneficiary in its sole and absolute
discretion (the "Restoration Account"). Trustor, at its expense, shall
promptly prepare and submit to Beneficiary all plans and specifications
necessary for the restoration and repair of the damaged Trust Property,
together with evidence acceptable to Beneficiary setting forth the total
expenditure needed for the restoration and repair based upon a fixed price
contract with a reputable builder and covered by performance and labor and
material payment bonds. The plans and specifications and all other aspects of
the proposed restoration and repair shall be subject to Beneficiary's approval.
In the event the insurance proceeds held in the Restoration Account are
insufficient to complete the restoration and repair, Trustor shall deposit
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in the Restoration Account an amount equal to the difference between the amount
then held in the Restoration Account and the total contract price for the
restoration and repair. Trustor may commence restoration and repair of the
damaged Trust Property only when authorized in writing by Beneficiary to do so
and thereafter shall proceed diligently with the restoration and repair until
completed. Disbursements shall be made from the Restoration Account for the
restoration and repair in accordance with a disbursement schedule, and subject
to other terms and conditions, acceptable to Beneficiary. Disbursements from
the Restoration Account shall be charged first against funds deposited by
Trustor and, after such funds are exhausted, against the insurance proceeds
deposited therein. In the event the amounts held in the Restoration Account
exceed the cost of the restoration and repair of the damaged Trust Property,
the excess funds shall be disbursed to Trustor to the extent of any amounts
deposited therein by Trustor. Any funds remaining after such disbursement, at
Beneficiary's option, may be applied by Beneficiary to the payment of the
Obligation, whether or not then due, or may be disbursed to Trustor. All funds
held in the Restoration Account are hereby assigned to Beneficiary as further
security for the Obligation. Beneficiary, at any time, may apply all or any
part of the funds held in the Restoration Account to the curing of any Event of
Default.
5.4 Trustor shall pay or cause to be paid all taxes and
assessments of every kind, nature and description levied or assessed on or
against the Trust Property and shall deliver to Beneficiary, at least ten (10)
days before they become delinquent, receipts showing payment of all such taxes
and assessments and shall pay when due all dues and charges for water and water
delivery, electricity, gas, sewers, waste removal, bills for repairs, and any
and all other claims, encumbrances and expenses incident to the ownership of
the Trust Property.
5.5 Trustor, or upon the occurrence of an Event of Default and the
continuation thereof, Beneficiary may contest, by appropriate legal
proceedings, the validity of any valuation for real or personal property tax
purposes or of any levy or assessment of any real or personal property taxes
against the Trust Property either in the name of Beneficiary or the name of
Trustor or both. Trustor, upon notice and request by Beneficiary, shall join
in any such proceedings. Trustor shall cooperate with Beneficiary in any such
proceeding and execute any documents or pleadings required for such purposes.
Trustor shall provide Beneficiary with a copy of the Notice of Valuation within
ten (10) days after receipt (five (5) days in the case of personal property).
Trustor shall reimburse Beneficiary for all costs and legal expenses incurred
by Beneficiary in connection with any such proceedings, but in no event shall
such reimbursement exceed the tax savings achieved for the period covered by
the Notice of Valuation. To facilitate the right of Beneficiary to contest any
real or personal property tax valuation, levy, or assessment as described
above, Trustor does hereby make, constitute and appoint Beneficiary, and its
successors and assigns, Trustor's true and lawful attorney-in-fact, in
Trustor's name, place and stead, or otherwise, to file any claim or proceeding
or to take any action, either in its own name, in that of its nominee, in the
name of Trustor, or otherwise, to contest any real or personal property tax
valuation, levy, or assessment. The power of attorney given herein is a power
coupled with an interest and shall be irrevocable so long as any part of the
Obligation remains unpaid or
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unperformed. Beneficiary shall have no obligation to exercise any of the
foregoing rights and powers in any event.
5.6 In order to insure the payment of taxes and assessments that
are now, or hereafter may be, a lien upon the Trust Property, and to insure the
payment of all premiums on policies of insurance required herein, Trustor, if
required by Beneficiary after the occurrence of any Event of Default and only
during the continuation thereof, shall pay to Beneficiary each month, in
addition to any other payments required hereunder, an amount equal to the taxes
and special assessments levied or to be levied against the Trust Property and
the premium or premiums that will become due and payable to maintain the
insurance on the Trust Property, all as reasonably estimated by Beneficiary
(giving due consideration to the previous year's taxes, assessments and
premiums) less all deposits therefore already made, divided by the number of
months remaining before one month prior to the date when the taxes, assessments
and premiums become delinquent. If amounts paid to Beneficiary under the terms
of this paragraph are insufficient to pay all taxes, assessments and premiums
as they become due, Trustor shall pay to Beneficiary upon demand all additional
sums necessary to fully pay and discharge these items. All moneys paid to
Beneficiary under the terms of this paragraph may be either held by Beneficiary
to pay the taxes, assessments and premiums before the same become delinquent or
applied to the Obligation upon payment by Beneficiary from its own funds of the
taxes, assessments and premiums. To the extent provision is not made for
payment pursuant to this paragraph, Trustor shall remain obligated to pay all
taxes, assessments and premiums as they become due and payable. Deposits made
under this paragraph may* commingled with Beneficiary's general funds;
Beneficiary shall have no liability to Trustor for interest on any deposits.
5.7 Trustor hereby assigns, transfers and conveys to Beneficiary
all compensation and each and every award of damages in connection with any
condemnation for public or private use of, or injury to, the Trust Property or
any part thereof, to the extent of the Obligation then remaining unpaid, and
all such compensation and awards shall be paid directly to Beneficiary.
Beneficiary may apply all or any part of such compensation and awards to the
payment of the Obligation, whether or not then due, or to the restoration or
repair of the Trust Property.
SECTION 6. PROTECTION AND PRESERVATION OF BENEFICIARY'S INTEREST
6.1 Trustor, by the payment of any such tax or taxes, shall
protect Beneficiary against any and all loss from any taxation of indebtedness
or deeds of trust, direct or indirect, that may be imposed upon this Deed of
Trust, the lien of this Deed of Trust on the Trust Property, or upon the
Obligation, by any law, rule, regulation or levy of the federal government, any
state government, or any political subdivision thereof. In the event the
burden of such taxation cannot lawfully be shifted from Beneficiary to Trustor,
Beneficiary may declare the entire Obligation due and payable sixty (60) days
after notice to Trustor.
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6.2 If Trustor shall fail to pay any taxes, assessments, expenses
or charges, to keep all of the Trust Property free from liens and claims of
liens, to maintain and repair the Trust Property, or to procure and maintain
insurance thereon, or otherwise fail to perform as required herein, Beneficiary
may advance the monies necessary to pay the same, to accomplish such
maintenance and repairs, to procure and maintain such insurance or to so
perform; Beneficiary is hereby authorized to enter upon the Trust Property for
such purposes.
6.3 Upon written request by Beneficiary, Trustor shall appear in
and prosecute or defend any action or proceeding that may affect the lien or
the priority of the lien of this Deed of Trust or the rights of Beneficiary
hereunder and shall pay all costs, expenses (including the cost of searching
title) and attorneys' fees incurred in such action or proceeding. Beneficiary
may appear in and defend any action or proceeding purporting to affect the lien
or the priority of the lien of this Deed of Trust or the rights of Beneficiary.
Beneficiary may pay, purchase, contest or compromise any adverse claim,
encumbrance, charge or lien that in the judgment of Beneficiary appears to be
prior or superior to the lien of this Deed of Trust, other than any Permitted
Exceptions.
6.4 Without obtaining the prior written consent of Beneficiary,
Trustor shall not sell, transfer, convey, assign or otherwise dispose of, or
further encumber, all or any part of the Trust Property or any interest
therein, voluntarily or involuntarily, by operation of law or otherwise. If
Trustor is a corporation, partnership, joint venture or trust, any material
change in the ownership or management of, or interest in, Trustor, or any
pledge or encumbrance of any interest in Trustor, shall be deemed to be a
transfer of the Trust Property. Upon the occurrence of any such transaction
with Beneficiary's consent, or without Beneficiary's consent if Beneficiary
elects not to exercise its rights and remedies for an Event of Default,
Beneficiary (i) may increase the interest rate on all or any part of the
Obligation to its then current market rate for similar indebtedness; (ii) may
charge a loan fee and a processing fee in connection with the change; and (iii)
shall not be obligated to release Trustor from any liability hereunder or for
the Obligation except to the extent required by law. Consent to any such
transaction shall not be deemed to be consent or a waiver of the requirement of
consent to any other such transaction.
6.5 Without obtaining the prior written consent of Beneficiary,
Trustor shall not consent to, or vote in favor of, the inclusion of all or any
part of the Trust Property in any special district. Trustor shall immediately
give notice to Beneficiary of any notification or advice that Trustor may
receive from any municipality or other third party of any intent or proposal to
include all or any part of the Trust Property in a special district.
Beneficiary shall have the right to file a written objection to the inclusion
of all or any part of the Trust Property in a special district, either in its
own name or in the name of Trustor, and to appear at, and participate in, any
hearing with respect to the formation of any such district.
6.6 All rights, powers and remedies granted Beneficiary herein, or
otherwise available to Beneficiary, are for the sole benefit and protection of
Beneficiary, and Beneficiary may exercise
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any such right, power or remedy at its option and in its sole and absolute
discretion without any obligation to do so. In addition, if, under the terms
hereof, Beneficiary is given two or more alternative courses of action,
Beneficiary may elect any alternative or combination of alternatives, at its
option and in its sole and absolute discretion. All monies advanced by
Beneficiary under the terms hereof and all amounts paid, suffered or incurred
by Beneficiary in exercising any authority granted herein, including reasonable
attorneys' fees, shall be added to the Obligation, shall be secured by this
Deed of Trust, shall bear interest at the highest rate payable on any of the
Obligation until paid, and shall be due and payable by Trustor to Beneficiary
immediately without demand.
6.7 Trustor, upon request of Beneficiary, shall promptly correct
any defect, error or omission that may be discovered in the content of this
Deed of Trust or in the execution or acknowledgment hereof. In addition,
Trustor shall do such further acts as may be necessary or that Beneficiary may
reasonably request to carry out more effectively the purposes of this Deed of
Trust, to subject any property intended to be encumbered hereby to the lien and
security interest hereof, and to perfect and maintain the lien and security
interest hereof.
SECTION 7. REPRESENTATIONS AND WARRANTIES
7.1 Trustor (i) is duty organized, validly existing and in good
standing under the laws of the state in which it is organized; (ii) is
qualified to do business and is in good standing under the laws of the state in
which the Trust Property is located and in each state in which it is doing
business; (iii) has full power and authority to own its properties and assets
and to carry on its business as now conducted; and (iv) is fully authorized and
permitted to execute and deliver this Deed of Trust. To the best of Trustor's
knowledge, the execution, delivery and performance by Trustor of this Deed of
Trust and all other documents and instruments relating to the Obligation will
not result in any breach of the terms or conditions or constitute a default
under any agreement or instrument under which Trustor is a party or is
obligated. To the best of Trustor's knowledge, Trustor is not in default in
the performance or observance of any covenants, conditions or provisions of any
such agreement or instrument.
7.2 The liens, security interests and assignments created hereby
will be valid, effective, properly perfected and enforceable liens, security
interests and assignments.
7.3 All financial statements, profit and loss statements,
statements as to ownership and other statements or reports previously or
hereafter given to Beneficiary by or on behalf of Trustor are and shall be
true, complete and correct as of the date thereof. There has been no material
adverse change in the financial condition or the results of the operation of
Trustor since the latest financial statement of Trustor given to Beneficiary.
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7.4 Trustor has filed all federal, state and local tax returns and
has paid all of its current obligations before delinquent, including all
federal, state and local taxes and all other payments required under federal,
state or local law.
7.5 To the best of Trustor's knowledge, the Trust Property is not
in violation of the ADA and is not subject to any existing, pending or
threatened investigation in Connection with the ADA.
7.6 All representations and warranties made herein shall survive
the execution hereof, the execution and delivery of all other documents and
instruments in connection with the Obligation, and until the Obligation has
been fully paid and performed.
SECTION 8. DEFAULTS; REMEDIES
8.1 The occurrence of any of the following events or conditions
shall constitute an "Event of Default" under this Deed of Trust:
(a) Any failure or neglect to perform or observe any of
the covenants, conditions, provisions or agreements of this Deed of Trust, the
Note, the Loan Agreement or any other document or instrument executed or
delivered in connection with the Obligation (other than a failure or neglect
described in one or more of the other provisions of this Paragraph 8.1) and the
continuation thereof for a period of thirty (30) days after notice from
Beneficiary to Trustor or so long as Trustor is proceeding diligently to remedy
such failure or neglect, sixty (60) days after notice from Beneficiary to
Trustor.
(b) Any warranty, representation or statement contained
in this Deed of Trust, the Note, the Loan Agreement or any other document or
instrument executed or delivered in connection with the Obligation, or made or
furnished to Beneficiary by or on behalf of Trustor, that shall be or shall
prove to have been intentionally false when made or furnished.
(c) The abandonment by Trustor of all or any part of the
Trust Property.
(d) The existence of any material encroachment upon the
Trust Property that has occurred without the approval of Beneficiary that is
not removed or corrected within thirty (30) days after its creation.
(e) The demolition or destruction of, or any substantial
damage to, any substantial portion of the Trust Property that is not adequately
covered by insurance, or the loss, theft or destruction of, or any substantial
damage to, any portion of the Personal Property or any other collateral or
security for the Obligation, that is not adequately covered by insurance if
after giving effect to such loss the Loan Balance shall exceed the Maximum
Commitment (both as
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defined in the Loan Agreement) unless Trustor shall deposit with Beneficiary
monies equal to such loss within thirty (30) days of such loss.
(f) The occurrence of any event of default under the
Note, the Loan Agreement, or any other document or instrument executed or
delivered in connection with the Obligation.
8.2 Upon the occurrence of any Event of Default, and at any time
while such Event of Default is continuing, Beneficiary may do one or more of
the following:
(a) Declare the entire Obligation to be immediately due
and payable, and the same, with all costs and charges, shall be collectible
thereupon by action at law.
(b) Give such notice of default and of election to cause
the Trust Property to be sold as may be required by law or as may be necessary
to cause Trustee to exercise the power of sale granted herein. Trustee shall
then record and give such notice of trustee's sale as then required by law and,
after the expiration of such time as may be required by law, may sell the Trust
Property at the time and place specified in the notice of sale, as a whole or
in separate parcels as directed by Beneficiary, or by Trustor to the extent
required by law, at public auction to the highest bidder for cash in lawful
money of the United States, payable at time of sale, all in accordance with
applicable law. Trustee, from time to time, may postpone or continue the sale
of all or any portion of the Trust Property by public declaration at the time
and place last appointed for the sale. No other notice of the postponed sale
shall be required. Upon any sale, Trustee shall deliver its deed conveying the
property sold, without any covenant or warranty, express or implied, to the
purchaser or purchasers at the sale. The recitals in such deed of any matters
or facts shall be conclusive as to the accuracy thereof. Any person, including
Trustor, Trustee or Beneficiary, may purchase at the sale.
(c) Commence proceedings for foreclosure of this Deed of
Trust in any other manner provided by law for the foreclosure of a real
property mortgage.
(d) Exercise any or all of the remedies of a secured
party under the Uniform Commercial Code with respect to the Personal Property.
If Beneficiary should proceed to dispose of any of the Personal Property in
accordance with the provisions of the Uniform Commercial Code, five (5) days'
notice by Beneficiary to Trustor shall be deemed to be commercially reasonable
notice under any provision of the Uniform Commercial Code requiring notice.
Trustor, however, agrees that all property of every nature and description,
whether real or personal, covered by this Deed of Trust, together with all
personal property used on or in connection with the Premises or any business
conducted thereon by the Trustor and covered by separate security agreements,
is encumbered as one unit, that this Deed of Trust and such security interests,
at Beneficiary's option, may be foreclosed or sold in the same proceeding, and
that all
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property encumbered (both realty and personalty), at Beneficiary's option, may
be sold as such in one unit as a going business, subject to the provisions of
applicable law.
(e) Without regard to the adequacy of any security for
the Obligation or the solvency of Trustor or any other person or entity, send
notifications to any and all lessees and tenants under the Leases that all
Rents shall be paid to Beneficiary. Thereafter, Beneficiary shall be entitled
to collect the Rents until Trustor cures all Events of Default and may apply
the Rents collected at its sole discretion to the maintenance of the Trust
Property and/or the payment of the Obligation.
(f) Apply any funds in the possession or control of
Beneficiary under the provisions of Paragraph 5.6 hereof to the payment of the
Obligation, in lieu of the purposes specified in that paragraph.
(g) Apply for and obtain, without regard to the adequacy
of any security for the Obligation or the solvency of the Trustor or any other
person or entity, a receiver by any court of competent jurisdiction to take
charge of all the Trust Property, to manage, operate and carry on any business
then being conducted or that could be conducted on the Premises, to carry on,
protect, preserve, replace and repair the Trust Property, and receive and
collect all Rents and to apply the same to pay the receiver's expenses for the
operation of the Trust Property and then in the manner provided in Paragraph
3.3 herein. Upon appointment of said receiver, Trustor shall immediately
deliver possession of all of the Trust Property to such receiver. Neither the
appointment of a receiver for the Trust Property by any court at the request of
Beneficiary or by agreement with Trustor nor the entering into possession of
all or any part of the Trust Property by such receiver shall constitute
Beneficiary a "mortgagee in possession" or otherwise make Beneficiary
responsible or liable in any manner with respect to the Trust Property or the
occupancy, operation or use thereof. Trustor agrees that Beneficiary shall
have the absolute and unconditional right to the appointment of a receiver in
any independent and/or separate action brought by Beneficiary regardless of
whether Beneficiary seeks any relief in such action other than the appointment
of a receiver.
(h) Without regard to the adequacy of any security for
the Obligation or the solvency of Trustor or any other person or entity, enter
upon and take possession of all or any part of the Trust Property, either in
person or by agent or employee, or by a receiver appointed by a court of
competent jurisdiction; Trustor shall on demand peaceably surrender possession
of the Trust Property to Beneficiary. Beneficiary, in its own name or in the
name of Trustor, may operate and maintain all or any part of the Trust Property
to such extent as Beneficiary deems advisable, may rent and lease the same to
such persons, for such periods of time, and on such terms and conditions as
Beneficiary in its sole discretion may determine, and may sue for or otherwise
collect any and all Rents, including those past due and unpaid.
Notwithstanding anything Beneficiary does, it will not be a mortgagee or
beneficiary in possession, and Beneficiary shall not be subject to any
liability, charge, or obligation therefor to Trustor, other than for wilful
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<PAGE> 71
misconduct, and shall be entitled to operate any business then being conducted
or which could be conducted thereon or therewith at the expense of and for the
account of Trustor (and all net losses, costs and expenses thereby incurred
shall be advances governed by Paragraph 6.6 hereof), to the same extent as the
owner thereof could do, and to apply the Rents to pay the receiver's expenses,
if any, for the operation of the Trust Property and then in the manner provided
in Paragraph 3.3 herein.
8.3 Trustor shall pay all costs and expenses, including without
limitation costs of title searches and title policy commitments, Uniform
Commercial Code searches, court costs, reasonable attorneys' fees, appraisals,
environmental studies and site assessments, incurred by Beneficiary in
enforcing payment and performance of the Obligation or in exercising the rights
and remedies of Beneficiary hereunder. All such costs and expenses shall be
secured by this Deed of Trust and by all other lien and security documents
securing the Obligation. In the event of any court proceedings, court costs
and attorneys' fees shall be set by the court and not by jury and shall be
included in any judgment obtained by Beneficiary.
8.4 In addition to any remedies provided herein for an Event of
Default, Beneficiary shall have all other legal or equitable remedies allowed
under applicable law (including specifically that of foreclosure of this
instrument as though it were a mortgage). No failure on the part of
Beneficiary to exercise any of its rights hereunder arising upon any Event of
Default shall be construed to prejudice its rights upon the occurrence of any
other or subsequent Event of Default. No delay on the part of Beneficiary in
exercising any such rights shall be construed to preclude it from the exercise
thereof at any time while that Event of Default is continuing. Beneficiary may
enforce any one or more remedies or rights hereunder successively or
concurrently. By accepting payment or performance of any of the Obligation
after its due date, Beneficiary shall not thereby waive the agreement contained
herein that time is of the essence, nor shall Beneficiary waive either its
right to require prompt payment or performance when due of the remainder of the
Obligation or its right to consider the failure to so pay or perform an Event
of Default. In any action by Beneficiary to recover a deficiency judgment for
any balance due under the Note upon the foreclosure of this Deed of Trust or in
any action to recover the Obligation or Obligations secured hereby, and as a
material inducement to making the loan evidenced by the Note, Trustor
acknowledges and agrees that the successful bid amount made at any judicial or
non-judicial foreclosure sale, if any, shall be conclusively deemed to
constitute the fair market value of the Premises, that such bid amount shall be
binding against Trustor in any proceeding seeking to determine or contest the
fair market value of the Premises and that such bid amount shall be the
preferred alternative means of determining and establishing the fair market
value of the Premises. Trustor hereby waives and relinquishes any right to
have the fair market value of the Premises determined by a judge or jury in any
action seeking a deficiency judgment or any action on the Obligation or
Obligations secured hereby, including, without limitation, a hearing to
determine fair market value pursuant to A.R.S. Section 12-1566, Section 33-814,
Section 33-725 or Section 33-727.
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<PAGE> 72
SECTION 9. GENERAL PROVISIONS
9.1 Trustor shall defend, indemnify and hold harmless Beneficiary,
any successors to Beneficiary's interest in the Trust Property, any purchaser
of the Trust Property upon foreclosure, and all shareholders, directors,
officers, employees and agents of all of the foregoing and their heirs,
personal representatives, successors and assigns from and against all claims,
costs, expenses, actions, suits, proceedings, losses, damages and liabilities
of any kind whatsoever, including but not limited to all amounts paid in
settlement of, and all costs and expenses (including attorneys' fees) incurred
in defending or settling, any actual or threatened claim, action, suit or
proceeding, directly or indirectly arising out of or relating to the
Obligation, this Deed of Trust, or the Trust Property, including but not
limited to (i) any violation of or claim of violation of the ADA with respect
to the Trust Property; or (ii) any breach of any of the warranties,
representations and covenants contained herein. This indemnity provision shall
continue in full force and effect and shall survive the payment and performance
of the Obligation, the release of record of the lien of this Deed of Trust, any
foreclosure (or action in lieu of foreclosure) of this Deed of Trust, the
exercise by Beneficiary of any other remedy under this Deed of Trust or any
other document or instrument evidencing or securing the Obligation, and any
suit, proceeding or judgment against Trustor by Beneficiary hereon.
9.2 The acceptance of this Deed of Trust by Beneficiary shall not
be considered a waiver of or in any way to affect or impair any other security
that Beneficiary may have, acquire simultaneously herewith, or hereafter
acquire for the payment or performance of the Obligation, nor shall the taking
by Beneficiary at any time of any such additional security be construed as a
waiver of or in any way to affect or impair the security of this Deed of Trust;
Beneficiary may resort, for the payment or performance of the Obligation, to
its several securities therefor in such order and manner as it may determine.
9.3 Without notice or demand, without affecting the obligations of
Trustor hereunder or the personal liability of any person for payment or
performance of the Obligation, and without affecting the lien or the priority
of the lien of this Deed of Trust, Beneficiary, from time to time, may: (i)
extend the time for payment of all or any part of the Obligation, accept a
renewal note therefor, reduce the payments thereon, release any person liable
for all or any part thereof, or otherwise change the terms of all or any part
of the Obligation; (ii) take and hold other security for the payment or
performance of the Obligation and enforce, exchange, substitute, subordinate,
waive or release any such security; (iii) consent to the making of any map or
plat of the Trust Property; (iv) join in granting any easement on or in
creating any covenants, conditions or restrictions affecting the use or
occupancy of the Trust Property; (v) join in any extension or subordination
agreement; or (vi) release or direct Trustee to release any part of the Trust
Property from this Deed of Trust. Any such action by Beneficiary, or Trustee
at Beneficiary's direction, may be taken without the consent of any junior
lienholder and shall not affect the priority of this Deed of Trust over any
junior lien.
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<PAGE> 73
9.4 Trustor waives and agrees not to assert: (i) any right to
require Beneficiary to proceed against any guarantor, to proceed against or
exhaust any other security for the Obligation, to pursue any other remedy
available to Beneficiary, or to pursue any remedy in any particular order or
manner; (ii) the benefits of any legal or equitable doctrine or principle of
marshalling; (iii) the benefits of any statute of limitations affecting the
enforcement hereof, (iv) demand, diligence, presentment for payment, protest
and demand, and notice of extension, dishonor, protest, demand and nonpayment,
relating to the Obligation; and (v) any benefit of, and any right to
participate in, any other security now or hereafter held by Beneficiary.
9.5 Upon written request of Beneficiary and upon surrender of this
Deed of Trust and the Note to Trustee for cancellation and retention or, if
requested, delivery, then Trustee (and Beneficiary if necessary to clear
title), upon payment of Trustee's fees, shall release, without warranty, the
Trust Property. The recitals in such release of any matters or facts shall be
conclusive as to the accuracy thereof. The grantee in such release may be
described as "the person or persons legally entitled thereto." Five years after
issuance of such full release, Trustee may destroy the Note and this Deed of
Trust (unless directed in such request to retain them), unless prior thereto
Trustee has been directed to deliver them to the person or persons to whom the
property was released.
9.6 Beneficiary or Trustee, or both, shall have the right to
inspect the Trust Property at all reasonable times.
9.7 Time is of the essence hereof. All liability hereunder shall
be joint and several. This Deed of Trust shall be binding upon, and shall inure
to the benefit of, the parties hereto and their heirs, personal representatives,
successors and assigns. The term "Beneficiary" shall include not only the
original Beneficiary hereunder but also any future owner and holder, including
pledgees, of the Note. The provisions hereof shall apply to the parties
according to the context thereof and without regard to the number or gender of
words or expressions used.
9.8 The acceptance by Trustee of this trust shall be evidenced
when this Deed of Trust, duly executed and acknowledged, is made a public
record as provided by law. The trust created hereby is irrevocable by Trustor.
9.9 This Deed of Trust cannot be changed except by agreement, in
writing, signed by Trustor and Beneficiary.
9.10 No setoff or claim that Trustor now has or may in the future
have against Beneficiary shall relieve Trustor from paying or performing the
Obligation.
9.11 Each term, condition and provision of this Deed of Trust shall
be interpreted in such manner as to be effective and valid under applicable law
but if any term, condition or provision of this Deed of Trust shall be held to
be void or invalid, the same shall not affect the
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<PAGE> 74
remainder hereof which shall be effective as though the void or invalid term,
condition or provision had not been contained herein. In addition, should this
instrument be or become ineffective as a deed of trust, then these presents
shall be construed and enforced as a realty mortgage with the Trustor being the
Mortgagor and Beneficiary being the Mortgagee.
9.12 This Deed of Trust, the Obligation and the agreements of any
person or entity to pay or perform the Obligation shall be governed by and
construed according to the laws of the State of Arizona, except to the extent
that the state in which the Trust Property is located may require that its laws
be applied to the creation and priority of liens, to the perfection of security
interests and to any foreclosure, trustee's sale, appointment of receiver or
other remedy with respect to the Trust Property. Any procedures provided
herein for such remedies shall be modified by and replaced with, where
inconsistent with or required by, any procedures or requirements of the laws of
the state in which the Trust Property is located.
9.13 All notices required or permitted to be given hereunder shall
be in writing and may be given in person or by United States mail, by delivery
service or by electronic transmission. Any notice directed to a party to this
Deed of Trust shall become effective upon the earliest of the following: (i)
actual receipt by that party; (ii) delivery to the designated address of that
party, addressed to that party; or (iii) if given by certified or registered
United States mail, twenty-four (24) hours after deposit with the United States
Postal Service, postage prepaid, addressed to that party at its designated
address. The designated address of a party shall be the address of that party
shown at the beginning of this Deed of Trust or such other address as that
party, from time to time, may specify by notice to the other parties.
IN WITNESS WHEREOF, these presents are executed as of the date
indicated above.
SUNSTONE HOTEL INVESTORS, L.P., a
Delaware limited partnership
BY: SUNSTONE HOTEL INVESTORS, INC.,
a Maryland corporation,
its General Partner
By:
-------------------------
Name:
-----------------------
Title:
----------------------
TRUSTOR
-21-
<PAGE> 75
STATE OF )
) ss.
County of)
On ______________________________, 19______, before me, the
undersigned, a Notary Public in and for said County and State, personally
appeared ____________________, personally known to me or proved to me on the
basis of satisfactory evidence to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies) and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
----------------------------------------------
Notary Public in and for said County and State
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<PAGE> 76
SCHEDULE "A"
Legal Description:
All that real property situate in the County of _________________,
State of ______________________, more particularly described as follows:
<PAGE> 77
EXHIBIT "B"
ENVIRONMENTAL INDEMNITY AGREEMENT
Items to be Attached:
Schedule "A": Description of the Property
Environmental Questionnaire and Disclosure Statement
In connection with and as partial consideration for the loan by BANK
ONE, ARIZONA, NA, a national banking association ("BANK"), to SUNSTONE HOTEL
INVESTORS, L.P., a Delaware limited partnership ("BORROWER"), and for the
benefit of SUNSTONE HOTEL INVESTORS, INC., a Maryland corporation ("GUARANTOR")
(Borrower and Guarantor are referenced to herein collectively as
"INDEMINITOR"), and other entities in the amount of FIFTY MILLION AND N0/100
DOLLARS ($50,000,000.00) (the "LOAN") secured or to be secured in part by a
lien and encumbrance on the property described on Schedule "A" attached hereto
and by this reference made a part hereof (the "PROPERTY"), Indemnitor hereby
certifies, represents and warrants to Bank, and agrees as follows:
1. As used herein, the following terms shall have the meanings
specified below:
The term "ENVIRONMENTAL LAWS" shall mean any federal, state or local
law, whether by common law, statute, ordinance, or regulation, pertaining to
health, industrial hygiene, or environmental conditions, including without
limitation, the Comprehensive Environmental Response Compensation and Liability
Act of 1980, 42 U.S.C. Section 9601, et seq. ("CERCLA"); the Resource
Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901, et seq. ("RCRA");
the Toxic Substances Control Act of 1976, 15 U.S.C. Section 2501, et seq.
"TSCA"); the Superfund Amendments and Reauthorization Act of 1986, Title III,
42 U.S.C. Section 11001, et seq, ("SARA"); the Clean Air Act, 42 U.S.C. Section
7401, et seq.; the Federal Water Pollution Control Act, 33 U.S.C. Section 1251,
et seq. et seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300f, et seq.;
the Solid Waste Disposal Act, 42 U.S.C. Section 3251, et seq.; and any other
federal, state or local law, common law, statute, ordinance, or regulation now
in effect or hereinafter enacted which pertains to health, industrial hygiene,
or the regulation or protection of the environment.
The term "Hazardous Substance" shall include:
<PAGE> 78
(a) Those substances included within the
definitions of "HAZARDOUS MATERIALS," "TOXIC
SUBSTANCES" or "SOLID WASTE" in CERCLA, RCRA, TSCA,
SARA, and the Hazardous Materials Transportation Act,
49 U.S.C. Section 1801, et seq., and in the
regulations promulgated pursuant thereto;
(b) Those substances defined as
"HAZARDOUS SUBSTANCES" in applicable state law and in
rules adopted or guidelines promulgated pursuant
thereto;
(c) Those substances listed in the
United States Department of Transportation Table (49
C.F.R. 172.1010 and amendments thereto) or by the
Environmental Protection Agency as hazardous
substances (40 C.F.R. Part 302 and amendments
thereto); and
(d) All other substances, materials and
wastes that are, or that become, regulated under, or
that are classified as hazardous or toxic under any
Environmental Law.
The term "RELEASE" shall mean any releasing, spilling,
leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, disposing, or dumping.
2. Except as stated in the responses contained in the
"ENVIRONMENTAL QUESTIONNAIRE AND DISCLOSURE STATEMENT," a copy
of which is attached hereto and incorporated herein by this
reference, to the best knowledge of Indemnitor, neither the
Property nor Indemnitor are in violation of any Environmental
Law and neither the Property nor Indemnitor are subject to any
existing, pending or threatened investigation by any federal,
state or local governmental authority or are subject to any
remedial obligation or lien under or in connection with any
Environmental Law.
3. Except as stated in the responses contained in the
"ENVIRONMENTAL QUESTIONNAIRE AND DISCLOSURE STATEMENT," to the
best knowledge of Indemnitor, Indemnitor has not obtained, and
is not required by any Environmental Law to obtain, any permit
or license to construct or use any improvements, fixtures or
equipment that are part of, or are located on, the Property or
to operate any business that is being conducted or intended to
be conducted on the Property.
4. Indemnitor has made a diligent investigation of the
present and former uses of the Property and after such
investigation declares that to the best of its knowledge the
<PAGE> 79
information disclosed in the "Environmental Questionnaire and Disclosure
Statement" is true, complete and correct.
5. Indemnitor shall not knowingly permit any third party
to use, generate, manufacture, produce, store, or Release, on, under or about
the Property, or transfer to or from the Property, any Hazardous Substance
except in compliance with all applicable Environmental Laws and Indemnitor
shall not knowingly permit any environmental liens to be placed on any portion
of the Property.
6. Except as stated in the responses contained in the
"ENVIRONMENTAL QUESTIONNAIRE AND DISCLOSURE STATEMENT," Indemnitor has not
caused or knowingly permitted the Release of, and has no knowledge of the
Release or presence of, any Hazardous Substance on the Property in excess of
the reportable quantities prescribed by CERCLA or applicable state law, or the
migration of any Hazardous Substance from or to any other property adjacent to
or in the vicinity of the Property. Borrower's intended future use of the
Property will not result in the Release of any Hazardous Substance on the
Property.
7. Indemnitor shall give prompt written notice to Bank at the
address set forth in the loan agreement executed in connection with the Loan
of:
(a) Any proceeding, including lawsuit,
investigation or settlement by or with any federal,
state or local governmental authority (including,
without limitation, any applicable state agency or
the U.S. Environmental Protection Agency) with
respect to the presence of any Hazardous Substance on
the Property or the migration thereof from or to any
other property adjacent to, or in the vicinity of,
the Property;
(b) All claims made or threatened by any
third party against Indemnitor or the Property
relating to any loss or injury resulting from any
Hazardous Substance;
(c) Indemnitor's discovery of any
occurrence or condition on any property adjoining or
in the vicinity of the Property that could cause the
Property or any part thereof to be subject to any
restrictions on its ownership, occupancy,
transferability or use under any Environmental Laws;
and
(d) Indemnitor's discovery of a
violation of Environmental Laws that Indemnitor is
legally required to report to any federal, state or
local governmental authority or the discovery of a
Release of a Hazardous Substance in sufficient
quantities to be reportable under CERCLA or
applicable state law to any federal, state or local
governmental authority.
<PAGE> 80
8. Indemnitor shall conduct and complete all
investigations, studies, sampling, testing and all remedial, removal, and other
actions necessary to clean up and remove all Hazardous Substances in, from or
affecting the Property:
(a) In accordance with all applicable
Environmental Laws;
(b) To the satisfaction of Bank; and
(c) In accordance with the orders and
directives of all governmental authorities.
9. Indemnitor shall, within thirty (30) days after
demand by Bank, provide Bank with a bond, letter of credit, or similar
financial assurance evidencing to Bank's satisfaction that sufficient funds are
available to pay the cost of complying with the requirements of Paragraph 8
above.
10. If Bank shall ever have reason to believe that there
are Hazardous Substances (other than those described in the "ENVIRONMENTAL
QUESTIONNAIRE AND DISCLOSURE STATEMENT") affecting any of the Property, Bank
(by its officers, employees, and agents) at any time and from time to time may
contract for the services of persons (the "SITE REVIEWERS") to perform
environmental site assessments ("SITE ASSESSMENTS") on the Property for the
purpose of determining whether there exists on the Property any environmental
condition that could result in any liability, cost, or expense to the owner,
occupier, or operator of such Property arising under any Environmental Laws.
The Site Assessments may be performed at any time or times, upon reasonable
notice, and under reasonable conditions established by Indemnitor that do not
impede the performance of the Site Assessments. The Site Reviewers are hereby
authorized to enter upon the Property for such purposes. The Site Reviewers
are further authorized to perform both above and below the ground testing for
environmental damage or the presence of Hazardous Substances on the Property
and such other tests on the Property as may be necessary to conduct the Site
Assessments in the reasonable opinion of the Site Reviewers. Indemnitor will
supply to the Site Reviewers such historical and operational information
regarding the Property as may be reasonably requested by the Site Reviewers to
facilitate the Site Assessments and will make available for meetings with the
Site Reviewers appropriate personnel having knowledge of such matters. On
request, Bank shall make the results of such Site Assessments fully available
to Indemnitor, which (prior to an Event of Default under the Loan documents)
may, at its election, participate under reasonable procedures in the direction
of such Site Assessments and the description of tasks of the Site Reviewers.
The cost of performing such Site Assessments shall be paid by Indemnitor upon
demand of Bank.
11. Bank shall have the right, but not the obligation,
without in any way limiting Bank's other rights and remedies under the Loan
documents, to enter onto the Property or to take
<PAGE> 81
such other actions as it deems necessary or advisable to clean up, remove,
resolve, or minimize the impact of, or otherwise deal with, any Hazardous
Substances on or affecting the Property following receipt of any notice from
any person or entity asserting the existence of any Hazardous Substances
pertaining to the Property or any part thereof that, if true, could result in
an order, notice, suit, imposition of a lien on the Property, or other action
and/or that, in Bank's sole opinion, could jeopardize Bank's security under the
Loan documents. All reasonable costs and expenses paid or incurred by Bank in
the exercise of any such rights shall be secured by the Loan documents and
shall be payable by Indemnitor upon demand.
12. Bank shall have the right at any time to appear in
and to participate in, as a party if it so elects, and be represented by
counsel of its own choice in, any action or proceeding initiated in connection
with any Environmental Law that affects the Property.
13. Indemnitor shall indemnify and hold harmless Bank,
the initial successor to Bank's interest in the Property, the initial purchaser
of the Property upon foreclosure of Bank's interest in the Property, and all
directors, officers, employees and agents of all of the foregoing, from and
against all claims, costs, expenses, actions, suits, proceedings, losses,
damages and liabilities of any kind whatsoever, including but not limited to
attorney's fees and expenses, directly or indirectly arising out of or
attributable to (i) the use, generation, manufacture, production, storage,
Release, threatened Release, or presence of a Hazardous Substance on, under or
about the Property; (ii) any violation or claim of violation of any
Environmental Law with respect to the Property; or (iii) any breach of any of
the warranties, representations and covenants contained herein.
14. This Environmental Indemnity Agreement shall be
binding upon Indemnitor and its successors and assigns and shall inure to the
benefit of Bank and its successors and assigns. The indemnity contained
herein shall continue in full force and effect and shall survive the payment
and performance of the Loan, the release of any lien or encumbrance securing
the Loan, any foreclosure (or action in lieu of foreclosure) of any lien or
encumbrance securing the Loan, the exercise by Bank of any other remedy under
any documents securing the Loan, and any suit, proceeding or judgment against
Indemnitor by Bank hereon; provided that Bank agrees that Indemnitor shall not
be liable for any claims, costs, expenses, losses, damages and liabilities (i)
that arise after the transfer (the "Transfer") of the Property to the Bank or
to the initial purchaser of the Property upon foreclosure of Bank's interest in
the Property, and (ii) that were caused solely by the actions of the Bank, any
successor to Bank's interest in the Property or said initial purchaser after
the Transfer; and provided further that Bank agrees that Indemnitor's indemnity
obligation contained herein shall expire on the second anniversary after the
Loan shall have been paid in full; satisfaction of the Loan in connection with
a foreclosure sale shall not constitute a repayment of the Loan for the purpose
of terminating Indemnitor's indemnity obligation hereunder.
<PAGE> 82
15. The indemnity contained herein shall not be subject
to any nonrecourse or other limitation of liability provisions contained in any
document or instrument executed and delivered in connection with the Loan and
the liability of Indemnitor hereunder shall not be limited by any such
nonrecourse or similar limitation of liability provisions.
16. If any material warranty, representation or statement
contained herein shall be or shall prove to have been false when made or if
Indemnitor shall fail or neglect to perform or observe any of the terms,
provisions or covenants contained herein, the same shall constitute an Event of
Default under the Loan and under all documents and instruments executed and
delivered in connection therewith that shall entitle Bank to pursue any and all
remedies provided for such default.
17. Any notice required or permitted in connection
herewith shall be given in the manner provided in any loan agreement or other
documents executed and delivered in connection with the Loan.
18. Indemnitor acknowledges that Bank has and will rely
upon the representations, warranties and agreements herein set forth in closing
and funding (or modifying as the case may be) the Loan and that the execution
and delivery of this Environmental Indemnity Agreement is an essential
condition but for which Bank would not close or fund (or modify) the Loan.
19. Indemnitor waives any right or claim of right to
cause a marshalling of the assets of Indemnitor or to cause Bank to proceed
against any of the security for the Loan before proceeding under this
Environmental Indemnity Agreement against Indemnitor; Indemnitor agrees that
any payments required to be made hereunder shall become due on demand;
Indemnitor expressly waives and relinquishes all rights and remedies accorded
by applicable law to indemnitor or guarantors (including, without limitation,
A.R.S. Sections 12-1641, et seq.), except any rights of subrogation that
Indemnitor may have, provided that the indemnity provided for hereunder shall
neither be contingent upon the existence of any such rights of subrogation nor
subject to any claims or defenses whatsoever that may be asserted in connection
with the
<PAGE> 83
enforcement or attempted enforcement of such subrogation rights, including,
without limitation, any claim that such subrogation rights were abrogated by
any acts or omissions of Bank.
20. This Environmental Indemnity Agreement shall be
governed by and construed according to the laws of the State of Arizona except
as otherwise provided herein.
IN WITNESS WHEREOF, Indemnitor has executed this Environmental
Indemnity Agreement as of the date set forth herein.
Date: October 25, 1995.
INDEMNITOR: SUNSTONE HOTEL INVESTORS, L.P., a Delaware
limited partnership
BY: SUNSTONE HOTEL INVESTORS, INC.,
Maryland corporation, its General Partner
By
--------------------------------
Its
----------------------------
(Borrower)
SUNSTONE HOTEL INVESTORS, INC., a
Maryland corporation
By
--------------------------------
Its
----------------------------
(Guarantor)
<PAGE> 84
SCHEDULE "A"
LEGAL DESCRIPTION
<PAGE> 85
ENVIRONMENTAL QUESTIONNAIRE AND DISCLOSURE STATEMENT
<PAGE> 86
EXHIBIT "C"
When recorded, return to:
Streich Lang, P.A.
Renaissance One
Two North Central Avenue
Phoenix, Arizona 85004-2391
Attention: Henry A. Perras, Esq.
SUBORDINATION AND ESTOPPEL AGREEMENT
(_____________________)
The undersigned, SUNSTONE HOTEL PROPERTIES, INC., a Colorado
corporation (hereinafter called "Lessee"), whose address is 115 Calle de
Industrias, Suite 201, San Clemente, California 92672, and SUNSTONE HOTEL
INVESTORS, L.P., a Delaware limited partnership (hereinafter called
"Borrower"), whose address is 115 Calle de Industrias, Suite 201, San Clemente,
California 92672, in consideration of One Dollar ($1.00) and other good and
valuable consideration, the receipt of which is hereby acknowledged, hereby
certify to BANK ONE, ARIZONA, NA, a national banking association (hereinafter
called "Beneficiary"), whose address is Post Office Box 29542, Phoenix, Arizona
85038, Attention: Western Region Real Estate Finance, Dept. A-392, and
covenant and agree as follows:
1. Lessee, as lessee/tenant, hereby subordinates the lien and
every term, condition and provision of that Lease Agreement (hereinafter called
the "Lease") dated ___________, wherein Borrower is landlord/lessor (together
with its successors and assigns, hereinafter called "Lessor"), covering a
portion of the real property described on Schedule "A" attached hereto and by
this reference incorporated herein (hereinafter called the "Leased Premises"),
to the lien and every term, condition and provision of that Deed of Trust,
Assignment of Rents, Security Agreement and Fixture Filing executed by Borrower,
in favor of Beneficiary, dated ________________________ and recorded in the
records of_________________________ County, __________________________ and to
all extensions, modifications, renewals, replacements, substitutions, and/or
consolidations thereof (hereinafter called the "Deed of Trust"), it being the
intention of Lessee that by reason hereof, all of its right, title and interest
arising under the Lease shall be and is hereby declared to be inferior,
subsequent and subordinate to the Deed of Trust with respect only to the real
property covered by the Lease.
<PAGE> 87
2. Lessor and Lessee certify to Beneficiary as follows: (a) a
true and correct copy of the Lease has been delivered to Beneficiary, and the
Lease is presently in full force and effect and unmodified or unchanged; (b)
the term shall commence or did commence on ________________, and full rental
will then accrue or is now accruing thereunder; (c) all conditions required
under the Lease to have been satisfied as of the date hereof have been
satisfied; (d) no rent under the Lease has been paid more than thirty (30) days
in advance of its due date; (e) the amount of lease deposit paid or to be paid
under the terms of the Lease is $________________________; (f) Beneficiary
shall have no liability or responsibility for the application or return of any
security deposit of Lessee; (g) no default exists under the Lease; (h) Lessee,
as of the date hereof, has no charge, lien or claim of offset under the Lease
or otherwise, against rents or other charges due or to become due thereunder;
(i) Lessee has not received notice of any assignment, mortgage or pledge of
Lessor's interest in the Lease or any rents or other amounts payable
thereunder; (j) the Lease constitutes the entire rental agreement between the
parties; (k) the only persons, firms or corporations in possession of the
Leased Premises or having any right to the possession or use of the Leased
Premises (other than the record owner or holders of recorded easements) are
those holding under the Lease; (1) Lessee has no right of interest in or under
any contract, option or agreement involving the sale or transfer of the Leased
Premises; and (m) as of the date hereof, Lessee has not assigned the Lease or
sublet the Leased Premises.
3. Lessee shall give written notice to Beneficiary of any failure
by Lessor to perform or observe any of the covenants, conditions or provisions
of the Lease, and Beneficiary shall have the right, but not the obligation, to
cure such failure. In the event of any such failure by Lessor, Lessee shall
not take any action with respect to such failure, including without limitation
any action to terminate, rescind or avoid the Lease or to withhold any rent
thereunder, for a period of thirty (30) days after notice thereof to
Beneficiary; provided, however, that if such failure cannot reasonably be
remedied within that thirty (30) day period, Lessee shall not take any action
with respect to such failure, including without limitation any action to
terminate, rescind or avoid the Lease or to withhold any rent thereunder, so
long as Beneficiary shall commence to remedy the failure within the thirty (30)
day period and thereafter shall diligently prosecute the remedy to completion.
4. All notices required or permitted to be given hereunder shall
be in writing and may be given in person or by United States mail, by delivery
service or by electronic transmission. Any notice directed to a party to this
Agreement shall become effective upon the earliest of the following: (i) actual
receipt by that party; (ii) delivery to the designated address of that party,
addressed to that party; or (iii) if given by certified or registered United
States mail, twenty-four (24) hours after deposit with the United States Postal
Service, postage prepaid, addressed to that party at its designated address.
The designated address of a party shall be the address of that party shown at
the beginning of this Agreement or such other address as that party, from time
to time, may specify by notice to the other parties.
<PAGE> 88
5. Nothing herein contained shall be deemed or construed as
limiting or restricting the enforcement by Beneficiary of any of the terms,
covenants, provisions or remedies of the Deed of Trust, whether or not
consistent with the Lease.
6. This Agreement shall inure to the benefit of and be binding
upon the parties hereto, their successors and assigns.
7. This Agreement shall be governed by and construed according to
the laws of the State of Arizona.
IN WITNESS WHEREOF, these presents are executed as of the day
of 19 . -------
- -------------, --
SUNSTONE HOTEL INVESTORS, L.P., a
Delaware limited partnership
BY: SUNSTONE HOTEL INVESTORS, INC.,
Maryland corporation, its General Partner
By
------------------------------
Name
------------------------------
Title
------------------------------
LESSOR
SUNSTONE HOTEL PROPERTIES, INC., a
Colorado corporation
By
------------------------------
Name
------------------------------
Title
------------------------------
LESSEE
<PAGE> 89
STATE OF ________________________)
) ss.
County of _______________________)
The foregoing instrument was acknowledged before me this ____________
day of _______ 19____, by _________________________, the ______________________,
of SUNSTONE HOTEL PROPERTIES, INC., a Colorado corporation, on behalf of that
corporation.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
------------------------------
Notary Public
My commission expires:
- ------------------------------
STATE OF ________________________)
) ss.
County of _______________________)
The foregoing instrument was acknowledged before me this _____ day of
___________________, 19___, by _________________________, the __________
____________________________ of SUNSTONE HOTEL INVESTORS, INC., a Maryland
corporation, General Partner of SUNSTONE HOTEL INVESTORS, L.P., a Delaware
limited partnership, on behalf of that partnership.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
------------------------------
Notary Public
My commission expires:
- ------------------------------
<PAGE> 90
SCHEDULE "A"
All that real property situate in the County of ________________________, State
of _________________, more particularly described as follows:
<PAGE> 91
EXHIBIT "D"
ASSIGNMENT OF RIGHTS UNDER MANAGEMENT AGREEMENT
(______________________)
KNOW ALL MEN BY THESE PRESENTS:
BY THIS ASSIGNMENT, the undersigned _______________________________,
a(n) ___________________________ corporation (hereinafter called "Assignor"),
whose address is 115 Calle de Industrias, Suite 201, San Clemente, California
92672, for valuable consideration, the receipt of which is hereby acknowledged,
does hereby assign, transfer, convey and set over to BANK ONE, ARIZONA, NA, a
national banking association (hereinafter called "Assignee"), whose address is
Post Office Box 29542, Phoenix, Arizona 85038, Attention: Western Region Real
Estate Finance, Dept. A-392, and does hereby grant to Assignee a security
interest in, all of Assignor's right, title and interest in and to the
following document or instrument: Management Agreement dated
_____________________, together with all obligations of
_______________________________ (hereinafter called "Management Company") due
or to be performed thereunder or with respect thereto (all hereinafter called
the "Management Agreement").
TO HAVE AND TO HOLD the same from this day forward so long as any part
of the obligations of Assignor hereinafter described remains unpaid and
unperformed.
This Assignment is made as and shall constitute collateral security
for any and all indebtedness and liabilities of any kind and nature of Assignor
to Assignee, direct or indirect, absolute or contingent, due or to become due,
now existing or hereafter arising, under or related to those financial
accommodations by Assignee to Sunstone Hotel Investors, L.P., a Delaware
limited partnership ("Borrower"), pursuant to that Loan Agreement between
Borrower and Assignee dated June 21, 1996 (as amended, modified or restated,
hereinafter called the "Loan Agreement"), in the principal amount of FIFTY
MILLION AND NO/100 DOLLARS ($50,000,000.00) and secured by one or more deeds of
trust and other lien and security instruments, all of even date herewith (all
of the foregoing hereinafter called the "Obligation").
1. Assignor represents, warrants and covenants that:
(a) The Management Agreement, as of the date hereof, is
valid and in good and current standing, not having been altered,
amended, changed, terminated or cancelled in any way, and no breach or
default exists therein or thereunder.
(b) Assignor had full power, right and authority to
execute and deliver the Management Agreement and has full power, right
and authority to execute and deliver this Assignment.
<PAGE> 92
(c) Assignor has not conveyed, transferred, or assigned
the Management Agreement or any right or interest therein and has not
executed any other document or instrument that might prevent or limit
Assignee from operating under the terms, conditions and provisions of
this Assignment.
(d) Assignor shall make no other assignment of the
Management Agreement or of any right or interest therein.
(e) Assignor shall perform and observe, in timely
fashion, all of the covenants, conditions, obligations and agreements
of Assignor under the Management Agreement in strict accordance with
the terms, conditions and provisions thereof.
(f) Assignor shall not waive, execute any agreement that
could be interpreted as waiving, or in any manner release or discharge
Management Company from, any covenants, conditions, obligations or
agreements under or related to the Management Agreement to be
performed or observed by Management Company, or condone any
nonperformance thereof, but shall, at its sole cost and expense,
enforce and secure the performance of all such covenants, conditions,
obligations and agreements under or related to the Management
Agreement to be performed or observed by Management Company.
2. Assignor hereby authorizes Assignee, upon the occurrence of
any Event of Default, as that term is defined in the Loan Agreement or any
document or instrument securing the Obligation, and at any time while such
Event of Default is continuing, or upon any default by Assignor under the
Management Agreement that remains uncured after the expiration of any grace
period provided therein, and upon the election by Assignee to exercise its
rights under this Assignment, to enforce Assignor's rights under the Management
Agreement and to receive any performance of Management Company thereunder.
Assignor hereby authorizes Management Company to accept this Assignment and
authorizes and directs Management Company, upon such default by Assignor and
election by Assignee, to make and render all acts and performances required of
Management Company under the terms of the Management Agreement directly to
Assignee or its nominee as Assignee may direct. Assignor hereby relieves
Management Company from any liabilities to Assignor that Assignor might
otherwise have or assert by reason of the making or rendering of any
performance by Management Company under the Management Agreement to Assignee or
its nominee.
3. Assignor does hereby make, constitute and appoint Assignee,
and its successors and assigns, Assignor's true and lawful attorney in fact, in
Assignor's name, place and stead, or otherwise, upon the occurrence of any
Event of Default, and at any time while such Event of
-2-
<PAGE> 93
Default is continuing, or upon any default by Assignor under the Management
Agreement that remains uncured after the expiration of any grace period
provided therein:
(a) To do all acts and to execute, acknowledge, obtain
and deliver any and all instruments, documents, items or things
necessary, proper or required as a term, condition or provision of the
Management Agreement or in order to exercise any rights of Assignor
under the Management Agreement or to receive and enforce any
performance due Assignor under the Management Agreement;
(b) To give any notices, instructions, or other
communications to Management Company or to any other person or entity
in connection with the Management Agreement;
(c) To demand and receive all performances due under or
with respect to the Management Agreement and to take all lawful ways
and means for the enforcement thereof and to compromise and settle any
claim or cause of action in Assignor arising from or related to the
Management Agreement and give acquittances and other sufficient
discharges relating thereto; and
(d) To file any claim or proceeding or to take any other
action, either in its own name, in that of its nominee, in the name of
Assignor, or otherwise, to enforce performance due under or related to
the Management Agreement or protect and preserve the right, title and
interest of Assignee hereunder.
The power of attorney given herein is a power coupled with an interest and
shall be irrevocable so long as any part of the Obligation remains unpaid or
unperformed. Assignee shall have no obligation to exercise any of the
foregoing rights and powers in any event.
4. Except as otherwise permitted in the Loan Agreement, no
change, amendment or modification shall be made to the Management Agreement or
to the instructions of Assignor contained herein without the prior written
approval of Assignee.
5. Assignor shall promptly notify Assignee of any default or
breach under of the Management Agreement or of any failure of performance or
other condition that, after notice or lapse of time, or both, could become a
default or breach by Management Company of or under the Management Agreement.
6. Assignor, immediately upon receipt, shall deliver to Assignee
at the address set forth above a true and complete copy of any notice of
default or breach and all other communications respecting a default or breach,
alleged default or breach, failure of performance, or other condition that with
lapse of time or after additional notice, or both, could become a
-3-
<PAGE> 94
default or breach by Assignor of or under the Management Agreement, or
otherwise relating to Assignor's good standing with respect to the Management
Agreement.
7. Assignee, by accepting this Assignment, shall not be subject
to any obligation or liability under the Management Agreement, including,
without limitation, any duty to perform any of the covenants, conditions,
provisions or agreements made by Assignor, but all such obligations and
liabilities shall continue to rest upon Assignor as though this Assignment had
not been made. Upon the occurrence of an Event of Default by Assignor and the
election of Assignee as described in Paragraph 2 hereof, however, the
performance by Assignee of the covenants, conditions, obligations and
agreements of Assignor under the Management Agreement shall be a condition of
the continued performance of Management Company to Assignee.
8. Assignee shall have the right at any time to appear in and
defend and be represented by counsel of its own choice in any action or
proceeding purporting to affect Assignor's rights under the Management
Agreement.
9. Assignor shall indemnify and hold Assignee harmless from any
and all damages and losses arising as a result of or related to the Management
Agreement, this Assignment or the exercise by Assignee of any of its rights
under this Assignment, including, without limitation, any judgment, amounts
paid in settlement, and all costs and expenses, including reasonable attorneys'
fees, incurred in defending or settling any action, suit or proceeding in
connection with the foregoing.
10. All sums advanced or paid by Assignee under the terms hereof,
all amounts paid, suffered or incurred by Assignee in exercising any authority
granted herein, including reasonable attorneys' fees, and all other amounts due
Assignee from Assignor in connection with this Assignment shall be added to the
Obligation, shall be secured by all deeds of trust and other lien and security
documents securing the Obligation, shall bear interest at the highest rate
payable on any of the Obligation until paid, and shall be due and payable by
Assignor to Assignee immediately without demand.
11. Neither the execution and delivery of this Assignment nor any
failure on the part of Management Company to comply with, honor and perform in
accordance with the Management Agreement shall affect the liability of any
party to pay and perform the Obligation.
12. The taking of this Assignment by Assignee shall not effect the
release of any other collateral now or hereafter held by Assignee as security
for the Obligation, nor shall the taking of additional security for the
Obligation hereafter effect a release or termination of this Assignment or any
terms, conditions or provisions hereof.
-4-
<PAGE> 95
13. Assignor, upon request of Assignee, shall execute and deliver
such additional documents, including but not limited to financing statements,
and do such other acts as may be reasonably necessary to fully implement the
intent of this Assignment and to perfect and preserve the rights and interests
of Assignee hereunder and the priority thereof.
14. Time is of the essence hereof. This Assignment shall be
binding upon Assignor and its successors and assigns and shall inure to the
benefit of Assignee and its successors and assigns; this Assignment, however,
is not intended to confer any right or remedies upon any person other than the
parties hereto and their successors and assigns.
15. Assignor shall pay all costs and expenses, including without
limitation costs of Uniform Commercial Code searches, court costs and
reasonable attorneys' fees, incurred by Assignee in exercising the rights and
remedies of Assignee hereunder. In the event of any court proceedings, court
costs and attorneys' fees shall be set by the court and not by jury and shall
be included in any judgment obtained by Assignee.
16. No failure or delay on the part of Assignee in exercising any
right, power or remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, power, or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy. The rights, powers and remedies hereunder are
cumulative and may be exercised by Assignee either independently of or
concurrently with any other right, power or remedy contained herein or in any
document or instrument executed in connection with the Obligation.
17. By executing this Assignment, Assignor acknowledges receipt of
a copy hereof. A carbon, photographic or other reproduced copy of this
Assignment and/or any financing
-5-
<PAGE> 96
statement relating hereto shall be sufficient for filing and/or recording as a
financing statement. This Assignment shall be governed by and construed
according to the laws of the State of Arizona.
IN WITNESS WHEREOF, these presents are executed as of the _______day
of _________________, 19___.
------------------------------
a(n) ______________ corporation
By
---------------------------
Its
-----------------------
ASSIGNOR
-6-
<PAGE> 97
ACKNOWLEDGMENT AND CONSENT
The undersigned is referred to in the foregoing Assignment of Rights
under Management Agreement (the "Assignment") as Management Company. The
undersigned acknowledges and consents to the Assignment and agrees that, upon a
default of Assignor and the election of Assignee to exercise its rights under
the Assignment, it will render all acts and performances required of it under
the terms of the Management Agreement directly to Assignee or its nominee as
Assignee may direct.
This Acknowledgment and Consent and the agreement of the undersigned
contained herein is conditioned upon the following: (i) neither the Assignment
nor this Acknowledgment and Consent shall give Assignee any greater rights under
the Management Agreement than those of Assignor, and (ii) upon the occurrence of
an Event of Default by Assignor and the election of Assignee to exercise its
rights under the Assignment, Assignee will perform all of the covenants,
conditions, obligations and agreements of Assignor under the Management
Agreement; the undersigned acknowledges, however, that unless and until such
Event of Default by Assignor and election by Assignee, Assignee has absolutely
no obligation to perform the covenants, conditions, obligations and agreements
of Assignor under the Management Agreement.
The undersigned hereby certifies to Assignee and agrees that:
1. The Management Agreement is in full force and effect
and no breach or default exists under the Management Agreement and no
event has occurred and no condition exists that, after notice or lapse
of time, or both, would constitute a breach or default under the
Management Agreement.
2. All conditions precedent to the obligation of the
undersigned to perform pursuant to the Management Agreement have been
fully satisfied.
3. The undersigned will notify Assignee in writing in
the event of any breach or default by Assignor under the Management
Agreement.
------------------------------
a(n) _____________ corporation
By
---------------------------
Its
---------------------
MANAGEMENT COMPANY
<PAGE> 98
EXHIBIT "E"
MANAGEMENT SUBORDINATION AGREEMENT
THIS MANAGEMENT SUBORDINATION AGREEMENT (the "Subordination
Agreement") is made and entered into this __________ day of __________ , 1995,
by and between SUNSTONE HOTEL MANAGEMENT, INC., a Colorado corporation (the
"Management Company"), SUNSTONE HOTEL PROPERTIES, INC., a Colorado corporation
("Obligor"), and BANK ONE, ARIZONA, NA, a national banking association (with
its successors and assigns, the "Lender").
WITNESSETH:
WHEREAS, the Management Company has entered into that Management
Agreement dated as of ______________________ (the "Management Agreement") with
Obligor under which Obligor has agreed to make certain payments ("Payments") to
the Management Company; and
WHEREAS, Sunstone Hotel Investors, L.P., a Delaware limited partnership
("Borrower"), of even date herewith, and Lender have entered into a Loan
Agreement dated as of __________________ (as amended, modified or restated, the
"Loan Agreement") whereby Lender has agreed to make certain financial
accommodations (the "Loan") to Borrower. All undefined capitalized terms used
herein shall have the meaning given them in the Loan Agreement; and
WHEREAS, it is a condition precedent to obtain and continue the Loan
from Lender that Management Company agree that, upon the occurrence of an Event
of Default, all Payments by Obligor to Management Company shall cease and be
subordinate to Borrower's obligations to Lender under the Loan Agreement and be
subject to the agreements in this Subordination Agreement; and
WHEREAS, it is to the mutual benefit of the parties hereto that
Borrower obtain and continue the Loan from Lender and Management Company is
willing to in fact subordinate the obligations of Obligor to it under the
Management Agreement to the obligations of Borrower to Lender under the Loan
Agreement in accordance with the agreements in this Subordination Agreement.
NOW, THEREFORE, in consideration of the mutual benefits accruing to
the parties hereto and other valuable consideration, the receipt and
sufficiency of which consideration is hereby acknowledged, and in order to
induce Lender to make the Loan available to Borrower, it is hereby declared,
understood and agreed as follows:
<PAGE> 99
1. That Lender would not make the Loan available to Borrower
without this Subordination Agreement.
2. That upon the occurrence of an Event of Default and the
continuation thereof, until satisfaction of Borrower's obligations to Lender
under the Loan Agreement:
(a) All payments due and payable to Management
Company from Obligor with respect to the Management Agreement shall be
suspended; and
(b) Should any funds or property of any kind be
received by Management Company with respect to the Management
Agreement, Management Company will deliver the same to Lender in the
form received and, until so delivered, the same shall be held in trust
by Management Company as property of Lender.
3. That Management Company declares, agrees and acknowledges that:
3.1 It consents to and approves all provisions of the
Loan Agreement.
3.2 Lender in making any Advance pursuant to the Loan
Agreement is under no obligation or duty to, nor has Lender represented that
they will, see to the application of such Advance. Any application or use of
such Advance for purposes other than those provided for in the Loan Agreement
shall not defeat the subordination herein made in whole or in part.
3.3 It intentionally and unconditionally waives,
relinquishes and subordinates any lien or charge held by Management Company
with respect to the Management Agreement or any other obligation of Obligor to
Management Company in favor of Borrower's obligations to Lender under the Loan
Agreement and understands that in reliance upon, and in consideration of, this
waiver, relinquishment and subordination, specific loans and advances are being
and will be made and letters of credit issued and, as part and parcel thereof,
specific monetary and other obligations are being and will be entered into
which would not be made or entered into but for said reliance upon this waiver,
relinquishment and subordination.
3.4 The priorities specified herein are applicable
irrespective of the time or order of attachment or perfection of any security
interest or the time or order of filing financing statements or the giving or
failing to give notice of the acquisition or expected acquisition of security
interests.
3.5 In the event of any bankruptcy, insolvency or other
proceeding leading to the distribution, division or application, partial or
complete, voluntary or involuntary, by operation of law or otherwise, of all or
any part of the assets of Obligor or the proceeds thereof, Lender shall have
the right to prove and vote Management Company claim based on any security
<PAGE> 100
interest in Obligor's property held by Management Company and to receive all
distributions therefrom until Lender's claim is paid in full.
3.6 It shall not assign or transfer to others any claim
it has or may have against Obligor while any obligation of Borrower to Lender
remains outstanding under the Loan Agreement, unless such assignment or
transfer is made expressly subject to this Subordination Agreement.
3.7 This Subordination Agreement is a continuing
agreement of subordination, and Lender may continue, without notice to
Management Company, to extend future credit and make other accommodations to or
for the account of Obligor under the Loan Agreement in reliance on this
Subordination Agreement.
3.8 The Lender may, at any time, enter into such
agreement or agreements with Borrower as Lender may deem proper, altering the
terms of all or any of the obligations of Borrower to Lender under the Loan
Agreement or affecting any security underlying any or all of such obligations,
without notice to Management Company and without in any way impairing or
affecting this Subordination Agreement.
3.9 All fees paid to the Management Company by Obligor
shall be payable no more frequently than once every month in arrears and no
fees shall be paid in advance.
3.10 Lender shall, upon the occurrence and continuation of
an Event of Default have the right to apply for the appointment of a receiver
("Receiver") through a court of competent jurisdiction to manage the Properties
(as defined in the Management Agreement).
3.11 Upon the occurrence and continuation of an Event of
Default, it shall cooperate with Lender in obtaining the appointment of the
Receiver and turning over management and control of the Properties to the
Receiver, including, without limitation, the assignment to the Receiver of any
and all licenses and/or permits used and/or necessary for the operation and/or
management of the Properties.
3.12 It waives any and all defenses to the appointment
of the Receiver.
3.13 It shall not change, amend or modify the Management
Agreement without the prior written approval of Lender except as otherwise
permitted in the Loan Agreement.
3.14 Upon the occurrence and continuation of an Event of
Default, it shall deposit all Project Net Revenues (as defined in the Loan
Agreement) into the Secured Account (as defined in the Loan Agreement).
<PAGE> 101
4. That Subordination Agreement shall be governed by the laws of
the State of Arizona, as the same from time to time may be in effect.
WHEREFORE, this Subordination Agreement is executed by the parties on
the date first above set forth.
SUNSTONE HOTEL MANAGEMENT, INC., a
Colorado corporation
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
MANAGEMENT COMPANY
SUNSTONE HOTEL PROPERTIES, INC., a
Colorado corporation
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
OBLIGOR
BANK ONE, ARIZONA, NA, a national banking
association
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
LENDER
<PAGE> 1
EXHIBIT 10.37
<PAGE> 2
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "Agreement" is entered by
RENTON JOINT VENTURE. a Washington Joint Venture ("Seller") and SUNSTONE HOTEL
INVESTORS L.P, a Delaware limited partnership ("Purchaser"). Seller and
Purchaser are sometimes Collectively referred to as the "Parties", or
Individually as a "Party".
Section 1. Contract
Seller agrees to sell and convey the Property (hereinafter defined) to
Purchaser, and Purchaser agrees to purchase the Property from Seller, pursuant
to the terms of this Agreement.
Section 2. Property.
(a) Except as provided in subsection (c) of this Section 2 to the
contrary, the real and personal property which is the subject of this Agreement
is described as follows:
(i) the parcel of land (the "Land") situated in
King County, Washington, described on Exhibit "A" attached hereto and
made a part hereof for all purposes, together with all appurtenant
easements and all improvements (the "Improvements") located on the
Land, including, without limitation, that certain full services
interior corridor commercial hotel consisting of two guest room towers,
one six-story building and one three-story building containing 188
guest rooms, restaurant, lounge, meeting space, swimming pool and
whirlpool (the "Hotel"), located on the Land, commonly referred to as
the "Holiday Inn" located in Renton, Washington;
(ii) all of the tangible personal property and
fixtures attached to or used in connection with the ownership,
maintenance or operation of the Hotel including furniture, fixtures,
computers, machinery, signage, equipment (specifically including any
equipment currently leased which Seller shall be required to acquire)
not less than a customary amount of linen terry, opened inventory, all
vehicles used in the operation of the Hotel, and supply and consumable
open inventory, and all other names and intangible property used at or
in connection with the Hotel (the "Personalty");
(iii) all (A) leases and other agreements demising
space in the Hotel (the "Leases"); (B) rents, if any, actually received
by Seller which are allocable to any period of time after the Closing
Date, as hereinafter defined (the "Rents"); (C) security, damage and
other deposits, if any, from existing tenants ("Tenants") (the
"Deposits"); and
-1-
<PAGE> 3
(iv) to the extent assignable, all of Seller's right, title and
interest in and to (A) subject to the provision of Sections 34 and 30(c)
below, any contracts, including, without limitation, maintenance,
service, supply, leasing and utility service contracts, and franchises,
but expressly excluding contracts of insurance (other than as provided
in Section 13(d)(ii) herein), to the extent the same are assumed by
Purchaser (except as set forth in Section 34 below); (B) all warranties,
indemnities and guaranties thereunder [items (A) and (B) are herein
collectively called the "Contracts"]; (C) to the extent the same are
assignable, certificates of occupancy, permits, licenses and similar
documents relating to the Land, the Improvements or the Hotel; to the
extent assumed by Purchaser (D) telephone numbers and directory listings
of or relating to the Hotel; (E) to the extent the same are in Seller's
possession, but without any representations or warranties as to the
accuracy or completeness thereof, all plans, specifications, drawings,
engineering, environmental and other technical reports, tradenames,
goodwill, [items (C), (D) and (E) are herein collectively called the
"Related Documents"].
(b) The Land, the Improvements, the Hotel, the Personalty, the
Leases, the Rents, the Deposits, the Contracts and the Related Documents which
are to be transferred to Purchaser at the Closing (hereafter defined) are
herein collectively called the "Property".
(c) Notwithstanding any other provisions of this Agreement to the
contrary, the following properties, rights and interests are excluded from the
Property: (i) all uncollected credit card charges and all reserves for
furniture, fixtures, equipment or for any other purposes, whether maintained on
or off the Property, by or on behalf of Seller with respect to the Property;
(ii) inventory, equipment and other property owned by tenants; (iii) all
deposits, cash on hand, house bank accounts or cash in any bank accounts of
Seller as of Closing; (iv) the existing management agreement for the Hotel; and
(v) all accounts receivable due to Seller as of the Closing (said properties,
rights and interests described in this Section 2(c) are herein called the
"Excluded Properties").
(d) Purchaser is not assuming any of Seller's accounts payable nor
any of Seller's payroll obligations or payroll-related costs with respect to
the Property arising prior to the Closing.
Section 3. Title Company; Delivery Date; Effective Date.
This Agreement shall not be effective with respect to either Party
unless it has been duly executed by both parties and, together with the Earnest
Money (hereafter defined), delivered to Fidelity National Title Insurance
Company, 17911 VonKarmon, Suite 540, Irvine, California 92714 Attention: Patty
Beverly (the "Title Company"). If Purchaser does not deliver to the Title
Company the Earnest Money (hereinafter defined), prior to 5:00 p.m. on the
second day following delivery of a fully executed copy of this Agreement by
Seller to the Title Company (the "Delivery Date"), this Agreement automatically
shall terminate and neither Party shall have any further right or obligation
hereunder. The "Effective Date" of this Agreement shall be the date on which
the Title Company acknowledges receipt of this Agreement and the Earnest Money.
<PAGE> 4
Section 4. Purchase Price; Earnest Money; Independent Contract
Consideration.
(a) The purchase price (the "Purchase Price") of the Property is
(i) $8,150,000,000.00 plus the actual cost to Seller of all unopened
inventories of food, beverage, and housekeeping inventory items up to a two
month supply thereof, located at the Hotel as of the Closing Date subject to
the credits and adjustments set forth in this Agreement. Purchaser agrees to
pay the Purchase Price at the Closing by cash, wire transfer or other
immediately available funds. The Purchase Price shall be allocated among the
Property assets as Purchaser and Seller mutually agree. Purchaser shall
cooperate fully with Seller on such allocation for purposes of establishing any
transfer tax associated with this transaction.
(b) Prior to 5:00 p.m. on the Delivery Date, Purchaser shall pay to
the Title Company, in current funds the sum of $150,000 as earnest money (along
with any other amounts delivered to the Title Company as provided herein, the
"Earnest Money"). Upon Purchaser furnishing the Title Company with all
required information, the Title Company shall invest the Earnest Money in one
or more short-term investments reasonably acceptable to Purchaser. All
interest earned thereon shall be credited to Purchaser. Any investment into
which the Earnest Money is invested must permit the Title Company to withdraw
all of the Earnest Money immediately without penalty or prior notice. At the
Closing, the Earnest Money, at Purchaser's election, may be applied to the
Purchase Price.
(c) Prior to 5:00 p.m. on the Delivery Date, Purchaser shall pay to
Seller, by check, the sum of $10.00 (the "Independent Contract Consideration")
as consideration for Seller's entering into this Agreement. The Independent
Contract Consideration (i) is in addition to and independent of any other
consideration or payment provided for in this Agreement, (ii) is wholly earned
by Seller upon Seller's execution of this Agreement, (iii) is not refundable,
and (iv) shall be retained by Seller notwithstanding any other provisions of
this Agreement.
Section 5. Title Commitment; Survey Documents for Review.
(a) Promptly after the Effective Date, Seller will use its best
efforts to provide or otherwise make available to Purchaser the items set forth
on Exhibit "E" attached hereto and made a part hereof for all purposes (to the
extent listed as a Seller obligation therein).
(b) Purchaser has received a preliminary title report for the Real
property and Improvements related to each Hotel (each a "Title Report" or
collectively the "Title Reports"), together with copies of all underlying title
documentation which are referred to as exceptions in said Title Reports and
copies of all recorded deeds to current owners of all land which adjoins each
Hotel. Purchaser has ordered and anticipates receiving the Survey on or before
May 28, 1996. Purchaser shall have until expiration of the Inspection Period
(as defined herein) within which to notify Seller and Title Company of any
objections to any matter shown on each of the Title Report and Survey.
Purchaser shall use its best efforts to notify Seller of any objections on or
before May 30, 1996. Except as otherwise provided herein, Purchaser's failure
to so notify Seller and Title Company within the Inspection Period shall
constitute approval of all matters contained therein. If Purchaser disapproves
of any survey or title matter, Seller shall have until the expiration of the
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<PAGE> 5
Closing Date to cure any such disapproved matter. If after use of its best
efforts (without cost to Seller), Seller fails to cure any disapproved title
matter from the Title Report or Survey on or before Closing, Purchaser may
terminate its obligation to purchase the Property and Earnest Money together
with all interest earned thereon shall be refunded to Purchaser, less
Purchaser's share of fees and costs.
Section 6. The Inspection Period: Purchaser's Evaluation of the
Property, Audit.
(a) Purchaser shall have until 5:00 p.m. (Pacific Time Zone) on
June 7, 1996, the "Inspection Period") in which to review and inspect the
Property and to determine whether the Property is suitable for Purchaser's
needs. In connection therewith, Purchaser and its accountants shall have the
right to inspect and conduct an audit of the Property's books and records for
the two most recent full fiscal years and the most recent partial fiscal year as
of April 30, 1996. Any entry unto the Property by Purchaser or Purchaser's
agents shall be subject to 24 hour advance notice to Seller, and in all such
entries, Purchaser or its agents shall be accompanied by a representative of
Seller. Any tests or other work performed on the Property shall not interfere
with Seller's use of the Property, shall not require the closing of any access
route to the Property and shall not violate any applicable federal, state or
local laws. Purchaser shall pay for all labor performed on the Property and for
all materials provided to the Property in connection with any tests and other
work done on the Property by Purchaser. All inspections, tests and studies
shall be conducted in a manner that will not damage any of the Property and that
will minimize disruption and disturbance of tenants and of the on-going
operations of the Hotel. Purchaser hereby indemnifies Seller its agents,
partners and employees and agrees to hold Seller, its agents, partners and
employees harmless from and against any loss, damage, claim, cost or liability,
including attorney's fees, that Seller, its agents, partners or employees may
incur or become subject to as a result of the actions and activities on the
Property of Purchaser or Purchaser's employees, contractors, subcontractors,
representatives or agents, other than claims resulting from the acts of Seller
or its agents, employees or contractors. This indemnity and Purchaser's other
obligations under this Section 6 shall survive the Closing or termination of
this Agreement and shall not be subject to any limitation or liquidation of
damages set forth herein.
(b) If Purchaser determines that the Property is not suitable for
Purchaser's needs, Purchaser may terminate this Agreement by delivering to
Seller a written termination notice by no later than 5:00 p.m. (Pacific Time
Zone) on the final day of the Inspection Period, in which event this Agreement
shall thereupon be terminated, whereupon neither Party shall have any further
rights, duties or obligations hereunder, except as otherwise specifically stated
in this Agreement, and Title Company shall distribute the Earnest Money as
provided in Section 29 below. If Purchaser terminates this Contract as herein
provided, at no cost or expense to Seller, Purchaser shall promptly deliver to
Seller all documents and materials (and all copies thereof) supplied by Seller,
including, but not limited to, all financial information, and all other
documents, audits, reports or studies of the results of any tests and
investigations relating to the Property, and Purchaser shall not keep any copies
thereof. If the sale of the Property is not consummated, Purchaser shall
restore, or cause to be restored, the Property to the condition thereof as
existed prior to any entry by Purchaser, its agents, employees, contractors or
representatives, to the extent any change in condition resulted from Purchaser's
inspections or studies. The provisions of this Section
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<PAGE> 6
6(b) shall survive the termination of this Agreement. The failure of Purchaser
to give such written termination notice to Seller by the end of the Inspection
Period shall be deemed Purchaser's waiver of the right to terminate this
Contract under this Section 6(b).
(c) If Purchaser does not terminate this Agreement pursuant to
Section 6(b) above, the Contracts, Leases and Related Documents made available
to Purchaser as provided in Section 6(a) above shall be the Contracts, the
Leases and the Related Documents identified in the Bill of Sale (hereinafter
defined) and the Assignment (hereinafter defined).
Section 7. Condition of the Property.
Seller represents to Purchaser that to the best of Sellers knowledge,
information and belief, the Property is in moderately good condition taking into
consideration the age of the Improvements, and Seller is not aware of any
material patent or latent defects in the Improvements. Purchaser is aware of the
core modernization program currently in place with respect to the Property
required by Holiday Inn Hotels, and Purchaser shall be responsible for all costs
and expenses related to such modernization. Wherever used herein, "To the best
of Seller's knowledge, information and belief" shall be limited to the
knowledge, information and belief of the existing general manager of the
Property and the existing regional operations manager for Seller. Purchaser
acknowledges that, except for any express warranty and representation contained
in this Agreement, Purchaser is not relying on any written, oral, implied or
other representations, statements or warranties by Seller or any agent of Seller
or any real estate broker or salesman. All previous written, oral, implied or
other statements, representations, warranties or agreements, if any, are merged
herein. Except as expressly set forth herein, Seller shall have no liability to
Purchaser, and Purchaser releases Seller from any liability (including, but not
limited to, contractual and/or statutory actions for contribution or indemnity),
for, concerning or regarding (i) the nature and condition of the Property,
including, but not limited to, the suitability thereof for any activity or use,
(ii) any improvements or substances located thereon; (iii) the compliance of the
Property with any laws, rules, ordinances or regulations of any government or
other body, (iv) the suitability, habitability, merchantability or fitness of
the Property for Purchaser's planned use of the Property or (v) the existence of
any hazardous substance in, on or about the Property resulting from acts
occurring following Closing.
Section 8. Closing.
(a) The consummation of the transaction contemplated in this
Agreement (the "Closing") shall occur on July 1, 1996, unless an earlier date is
mutually acceptable to the Parties (the "Closing Date"), the parties anticipate
closing via mail services, provided however, if such a closing can not be
completed by the Closing Date, then the Closing shall be at the offices of Lane
Powell Spears Lubersky in Seattle, Washington, or as otherwise agreed upon by
the parties.
(b) Provided Purchaser contemporaneously performs all of Purchaser's
obligations set forth in Sections 8(c) and 8(d) hereof, at the Closing (except
as otherwise specifically provided below), Seller shall deliver or cause to be
delivered to Purchaser through the Title Company each of the following:
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<PAGE> 7
(i) a statutory warranty deed (the "Deed") covering the Lane
and the Improvements and subject only to the Permitted Exceptions,
executed and acknowledged by Seller, in the form set forth on Exhibit
"B" attached hereto and made a part hereof for all purposes together
with a real estate excise tax affidavit executed by Seller and
Purchaser;
(ii) Bills of Sale (the "Bills of Sale") covering the
Personalty, executed by Seller in favor of Purchaser and (with respect
to the Inventory) Purchaser's Lessee, Sunstone Hotel Properties Inc., in
the forms set forth on Exhibit "C" attached hereto and made a part
hereof for all purposes;
(iii) an Assignment and Assumption of Contracts, covering the
Leases, Contracts and Related Documents, executed by Seller and to be
executed by Purchaser, in the form set forth on Exhibit "D" attached
hereto and made a part hereof for all purposes;
(iv) subject to Section 8(d) below, Standard Coverage Owner
and Mortgage Policies of Title Insurance (the "Owner Policy") in form
approved by Purchaser and Bank One, Arizona, N.A. in the amount of the
portion of the Purchase Price allocable to the Land and the Improvements
as reasonably determined by the Parties, dated no earlier than the
Closing Date, issued to Purchaser and Mortgagee by Title Company within
a reasonable length of time after the Closing, insuring that Purchaser
is the owner of fee simple title to the Land and the Improvements
Mortgagee has a first and prior lien, affirmatively insuring roadway
access to public streets and insuring any appurtenant easements to the
Property, subject only to the Permitted Exceptions, and to all printed
exceptions agreed upon during the Inspection Period; provided, however,
cost of the basis ALTA Owner and Mortgagee Policies shall be split
equally between Purchaser and Seller; provided further, Purchaser shall
pay the premium associated with all affirmative insurance and
endorsements.
(v) a duly executed Non-Foreign Certification in the form
prescribed by Section 1445 of the Internal Revenue Code;
(vi) to the extent in Seller's possession, originals of all
Leases, Contracts and Related Documents;
(vii) to the extent in Seller's possession, keys to all locks
on the Property; and
(viii) documentation reasonably satisfactory to the Title
Company and Purchaser establishing that the person or persons executing
this Agreement and all other documents with respect to the transaction
contemplated by this Agreement on behalf of Seller has or have full
authority to do so.
(c) Purchaser, on the Closing Date, shall execute, acknowledge (when
the form of the document so provides) and deliver to Seller through the Title
Company, the documents described in Section 8(b)(iii) and each of the following:
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<PAGE> 8
(i) the Purchase Price (subject to the credits and
adjustments provided in this Agreement), plus the amount due for up to
a two month supply of all unopened inventories of food, beverage,
housekeeping items, tableware, linens and other consumable and
nonconsumable inventory items located at the Hotel as of the Closing
Date, that are in reasonably good condition and which are being used
in the Hotel on a day-to-day basis, and such additional amounts, if
any, as may be necessary to pay Purchaser's Closing costs as set forth
in Section 8(d) hereof, delivered to the Title Company by wire
transfer, and
(ii) evidence reasonably satisfactory to Seller and the
Title Company that the person or persons executing this Agreement and
any documents with respect to the transaction contemplated by this
Agreement as or on behalf of Purchaser has or have full authority to
do so;
(d) Purchaser shall pay each and all of the following
Closing costs:
(i) Purchasers attorneys' fees incurred in drafting and
negotiating this Agreement and in closing the transaction contemplated
in this Agreement;
(ii) all costs incurred by Purchaser in performing
Purchaser's review and inspections of the Property;
(iii) Purchaser's proportionate share of the expense items
prorated pursuant to Section 9 hereof;
(iv) the 1/2 of the cost of the premium for the basic ALTA
Owner's and Mortgagee Title policies and all costs of the premiums for
any affirmative insurance or endorsements thereto:
(v) unless otherwise expressly provided herein, all other
fees, costs and expenses customarily paid by a purchaser of improved
real property in the county where the Hotel is located;
(vi) all sales and use tax with respect to all or any
portion of the Property; and
(vii) one-half of any escrow fee of the Title Company.
(e) Seller shall pay all costs specified in this Agreement to be
paid by Seller and each and all of the following costs:
(i) Seller's attorneys' fees incurred in drafting and
negotiating this Agreement and in closing the transaction contemplated
in this Agreement; .
(ii) one-half of the premium for the issuance of the basic
ALTA Owner and Mortgagee Policies;
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<PAGE> 9
(iii) one-half of any escrow fee of the Title Company.
(iv) filing and recording fees for the Deed;
(v) Seller's proportionate sham of the expense items
prorated pursuant to Section 2 hereof; and
(vi) unless otherwise expressly provided herein, all other
fees, costs and expenses customarily paid by a seller of improved real
property in the county where the Hotel is located.
(f) Upon completion of the Closing, subject to the rights of
tenants and others using the Hotel facilities in the ordinary course of
business, Purchaser shall have the right to possession of the Property, subject
to the Permitted Exceptions.
(g) Seller shall indemnify and hold Purchaser harmless from any
expense (including attorney's fees and costs), claim, action or award in favor
of or to the benefit of any employee or manager relating to employment matters
or events arising or occurring prior to the Closing Date. The provisions of
this Article shall survive the Closing Date and shall continue until either
obligations to employees are paid in full or the final disposition of any
action to enforce these obligations has been completed.
(h) Purchaser shall not assume any employment relationship or
obligation between Seller and its employees with respect to any Hotel. Seller
will terminate all employees of the Hotels as of Closing and shall have paid as
of the Closing all compensation and other benefits due such employees,
including accrued vacation and sick pay. Purchaser may hire any or all of
Seller's employees upon such terms as Purchaser elects. All obligations of
Seller to any employees of the Hotels shall remain obligations of Seller.
Purchaser agrees to indemnify Seller against liability with respect to the
following matters, to the extent, but only to the extent, the same occur on or
after the Closing Date and Seller agrees to indemnify Purchaser against
liability with respect to the following matters, to the extent, but only to the
extent the same occurred prior to the Closing Date; (i) physical damage to
property (other than the Property) occurring at the Hotel, (ii) personal
injuries suffered at the Property; (iii) the cost of work or services ordered by
Purchaser, performed at or in connection with the Property, (iv) the costs of
goods ordered by Purchaser, delivered to the Property, and (v) liability under
the Contracts and the Leases.
Section 9. Prorations
(a) Except as otherwise provided in this Section 9, at the
Closing, all items customarily prorated in the sale of a hotel business,
including without limitation, rents, banquet and catering fees, music and
entertainment expenses, telephone service, permit fees, expenses under
Contracts assumed by Purchaser, maintenance fees and assessments, standby fees
and ad valorem taxes for the current year [based on the most recent tax
statement(s) for the Property, adjusted for the most
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<PAGE> 10
current tax rates and assessed value], payroll, and utility services being
continued to the Property, shall be prorated as of 12:01 a.m. on the Closing
Date, subject to the provisions of Section 9(f) below. Seller shall be charged
for and credited with all prorated items up to 12:01 a.m. on the Closing Date.
In the event any amount to be prorated is unknown at the Closing, Purchaser and
Seller shall make best estimate of the amount, and such estimated shall be used
at the Closing.
(b) Standby fees, ad valorem taxes, maintenance fees and assessments
with respect to the Property for the year in which the Closing occurs shall be
prorated and assumed by Purchaser, and Purchaser hereby agrees to pay the same
and to indemnify Seller from all liability therefor. Seller shall pay all such
items as of 12:01 a.m. on the Closing Date and Purchaser shall assume
responsibility for payment of such items which accrue from and after 12:01 a.m.
on the Closing Date.
(c) Premiums for hazard, liability and any other insurance will not
be prorated, and Seller will terminate Seller's insurance coverage with respect
to the Property on the Closing Date. Purchaser is solely responsible for
obtaining Purchaser's own insurance coverage.
(d) Purchaser shall be solely responsible to make arrangements for
continuation of existing utility services to the Property after 12:01 a.m. on
the Closing Date. Upon request by Purchaser, the amount of any deposits held by
utilities will be assigned by Seller to Purchaser at Closing, provided that
Purchaser shall reimburse Seller at Closing for such amounts, and provided
further that the holders of such deposits shall have consented in writing to the
assignment and have agreed tin writing to refund the deposits to or apply the
deposits on behalf of Purchaser.
(e) Unearned, prepaid deposits with respect to the use of the
Improvements on or after the Closing Date (including advance payment in the form
of gift certificates) shall be delivered to Purchaser at the Closing in the form
of a credit against the Purchaser Price.
(f) Seller shall receive one-half of all room rents for the night
immediately preceding the Closing Date, and Purchaser shall receive the other
half of such room rents, and all room rents for the night beginning on the
Closing Date.
(g) Trade association dues, travel agency commissions, prepaid
advertising expenses, trade subscriptions, publication subscriptions,
commissions of credit referral organizations and similar expenses shall be
prorated as of 12:01 a.m. on the Closing Date.
(h) Charges and revenues with respect to washing machine and/or
vending machine contracts and video games shall be adjusted as of 12:01 a.m. on
the Closing Date. For the account of Seller, coins shall be removed from all
laundry and vending equipment owned or leased by Seller as of 12:01 a.m. on the
Closing Date.
(i) All other customary unbilled expenses as of 12:01 a.m. on the
Closing Date, and expenses prepaid in the ordinary course of business by Seller
for periods after the Closing Date, which arise out of the existence, use,
ownership, occupancy, operation and/or maintenance of the Property in the normal
course of business shall be prorated between the Parties as of 12:01 a.m. on the
Closing Date. At Seller's request, Purchaser shall assist Seller in the
collection of any accounts receivable as of Closing. In the event that Purchaser
assists Seller in the collection of accounts
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receivable, Purchaser shall remit to Seller by wire transfer, and account for
all receipts collected for and on behalf of Seller on a weekly basis for the
first 30 days following Closing, and on a bi-weekly basis thereafter. Seller
shall remit to Purchaser any amounts it receives that is properly payable to
Purchaser. Any amounts received from an account debtor shall be applied to the
oldest receivable first.
The Parties agree to use the best information available on the
Closing Date to prorate all items of income and expense hereunder and such
estimates shall be final.
Section 10. Notices.
Whenever any notice (a "Notice") is to be given pursuant to the
provisions of this Agreement, such Notice must be in writing. If the Notice is
sent by telecopier, it must be properly addressed, reflecting the telecopier
telephone number of the addressee(s), and must be transmitted by a telecopier
which produces a dated message completed confirmation. If the Notice is sent
by other than telecopier, the Notice must be enclosed in a scaled wrapper,
properly addressed and either (i) delivered to and receipted for by a messenger
or overnight delivery service, with instructions for delivery on the same day
or the next day which is not a Saturday, Sunday or legal holiday, or (ii)
deposited with the domestic mail service of the United States Postal Service at
a post office or official depository under the care and custody of the United
States Postal Service with sufficient postage prepaid, sent by United States
registered or certified mail, return receipt requested. The addresses and
telecopier telephone numbers to which any Notice is to be sent are as follows:
If to Seller, to: Renton Joint Venture
7551 Westminster Highway
Richmond B.C. Canada
V6X lA3
Attn: Mehdi Khimji
Telephone number: (604) 273-4336
Telecopier number: (604) 273-3302
with a copy to: Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
Attn: Michael J. Dalton
Telephone number: (214) 939-5500
Telecopier number: (214) 939-6100
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<PAGE> 12
if to Purchaser, to: Sunstone Hotel Investors, L.P.
115 Calle de Industrias
Suite 201
San Clemente, California 92672
Attn: David R. Kinkade
Telephone number: (714)-569-8984
Telecopier number: (714) 361-4157
with a copy to: Brobeck Phleger & Harrisson
4675 MacArthur Court
Newport Beach, CA 92660-1936
Attn: R. Terrence Crowley
Telephone number: (714) 752-7535
Telecopier number: (714) 752-7522
or to such other telecopier number or address within the continental United
States as any addressee(s) shall specify in writing, which change of telecopier
or telephone number or address, in order to be effective, must actually have
been received not fewer than ten days prior to the giving of any such Notice.
Any Notice sent by telecopier shall be timely given if transmitted by telecopier
on the date the Notice is to be given; any Notice sent by messenger or overnight
delivery service shall be timely given if receipted for by such messenger or
overnight delivery service on the date the Notice is to be given; any Notice
sent by mail shall be timely given if deposited with the domestic mail service
of the United States Postal Service on or before 5:00 p.m. of the date the
Notice is to be given. Any notice given other than as set forth above shall be
effective from and after the date actually received by an addressee, however
addressed or delivered.
Section 11. Assignment: Binding Effect: No Third Party Beneficiary.
(a) This Agreement may not be assigned by Purchaser without the
prior written consent of Seller except to an entity wholly owned by Purchaser.
No such assignment shall be effective unless such assignee signs an assumption
agreement reasonably acceptable to Seller. No such assignment shall release
Sunstone Hotel Investors, L.P. for the obligations of Purchaser under this
Agreement. This Agreement is binding upon and inures to the benefit of the
Parties and their respective successors and permitted assigns.
(b) Except for the Parties and their respective successors and
permitted assigns, no person or entity has any rights or benefits under this
Agreement and no person or entity is a third party beneficiary of this
Agreement.
Section 12. Remedies.
(a) If Purchaser does not purchase the Property at the Closing for
any reason other than the prior termination of this Agreement as specifically
allowed herein or the existence of a default by Seller hereunder; or in the
event of any other default by Purchaser hereunder, then, at such time or at any
time thereafter, Seller shall, as its sole and exclusive remedies, be entitled
to terminate this
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<PAGE> 13
Agreement by notifying Purchaser in writing thereof, in which event neither
Party shall have any further rights, duties or obligations hereunder, except as
otherwise specifically provided herein, and the Earnest Money shall be
delivered to Seller as reasonable, agreed liquidated damages for such default
or occurrence, which amount the Parties agree is not intended as a penalty.
Seller and Purchaser agree that the Earnest Money is a good faith estimate of
actual damages under the circumstances, as Seller's actual damages in such
circumstances would be difficult or impossible to ascertain.
(b) If Seller fails to perform any of Seller's obligations
hereunder for any reason other than (i) Purchaser's failure to tender
performance of Purchaser's obligations hereunder, or (ii) the prior permitted
termination hereof, then on or prior to the Closing Date, but not thereafter,
Purchaser, as its sole and exclusive remedies, shall elect to either (A)
terminate this Agreement by delivering a written termination notice to Seller;
or (B) enforce specific performance hereof. If Purchaser terminates this
Agreement, the Earnest Money shall be returned to Purchaser, and neither Party
shall have any further rights or obligations under this Agreement except as
otherwise specifically provided herein. In the event, pursuant to the terms of
this Agreement, Purchaser is entitled to enforce specific performance of
Seller's obligations under this Agreement, any lawsuit for specific performance
must be filed within two years after the Closing Date or Purchaser shall be
deemed to have irrevocably waived such remedy, this Agreement shall
automatically terminate and neither party shall have any further rights or
obligations under this Agreement except as expressly provided herein.
Section 13. Damage or Destruction prior to Closing.
(a) The risk of loss or damage to the Improvements and the
Personalty until the Closing will be borne as set forth in this Section 13.
Thereafter, Purchaser shall bear the risk of loss.
(b) Any loss, damage or destruction to the Improvements or the
Personalty after the Effective Date and prior to the Closing Date shall be a
"Casualty". A Casualty shall be deemed "substantial" if the cost of restoring,
replacing and/or repairing such Improvements and/or Personalty exceeds
$500,000.00. Seller shall notify Purchaser promptly of the occurrence of any
Casualty at the Property.
(c) In the event of a Casualty which is not "substantial", at
Seller's sole option and with prior written notice to Purchaser, Seller may (i)
before the Closing, repair the Casualty, in which event Seller shall cause the
Improvements and/or Personalty to be restored to substantially the condition in
which they existed immediately prior to the Casualty, and Seller shall be
entitled, but not obligated, in Seller's sole discretion, to postpone the
Closing Date for up to 30 days upon written notice of such postponement to
Purchaser, which notice shall specify a new Closing Date (and thereafter all
references in this Agreement to "Closing" and to "Closing Date" shall refer to
the date set forth in seller's notice to Purchaser); or (ii) without repairing
the Casualty, assign to Purchaser all hazard insurance proceeds payable with
respect to such Casualty provided such proceeds are sufficient to repair the
Property to substantially the condition in which it existed immediately prior
to the Casualty, with the Closing to occur as scheduled herein. In the event
that Seller chooses (i) above, and the restoration is not substantially
complete within such extended
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<PAGE> 14
closing period, Purchaser shall have, the right to terminate this Agreement and
receive a return of its Earnest Money.
(d) In the event of a Casualty which is "substantial", Purchaser,
on or before the earlier of the Closing Date or five business days of
notification by Seller, shall elect to either (i) terminate this Agreement, or
(ii) Purchase the Property on the Closing Date in its then current condition,
without any reduction in the Purchase Price and accept an assignment of all
hazard insurance proceeds payable with respect to such Casualty (up to the
amount of the Purchase Price). If Purchaser terminates this Agreement under this
Section, Purchaser shall receive the Earnest Money and neither Party shall have
any further rights or obligations under this Agreement except as otherwise
specifically provided in this Agreement
Section 14. Condemnation Prior to Closing.
In the event a proceeding is instituted prior to Closing affecting all
or any material portion of the Property, Purchaser shall elect to (a) terminate
this Agreement on or before the Closing Date, or (b) purchase the Property on
the Closing Date subject to such proceeding in its then current condition,
without any reduction in the Purchase Price, and accept an assignment in and to
all awards, damages and compensation payable to Seller on account of such
condemnation. Purchaser shall be deemed to have elected alternative (b) unless
Purchaser delivers to Seller a written termination notice by the earlier of ten
days after Seller gives Purchaser notice of the condemnation proceeding or the
Closing Date. If Purchaser terminates this Agreement under this Section,
neither Party shall have any further rights or obligations under this Agreement
except as otherwise specifically provided in this Agreement. In the event a
condemnation proceeding is instituted prior to Closing that does not affect a
material portion of the Property, the Closing shall occur as scheduled without a
reduction in the Purchase Price, but Purchaser may be entitled to receive the
condemnation proceeds at or after Closing.
Section 15. Indemnity by a Party.
When one Party agrees to indemnify the other Party in this Agreement,
at the sole cost and expense of the indemnifying Party, the indemnifying Party
agrees to indemnify, keep indemnified, defend and hold the indemnified Party
harmless from and against any and all claim, demands, actions, causes of action,
damages, losses, liabilities, fees (including attorneys' fees), costs (including
costs of court) and expenses in any way or manner whatsoever attributable to any
action, conduct, omission or failure to act by the indemnifying Party or any
employee, agent, attorney, officer, director, independent contractor, licensee,
invitee or any other person or entity whatsoever acting on behalf of the
indemnifying Party, with respect to the matter(s) being indemnified against.
The Party who is being indemnified shall provide prompt notice to the
indemnifying Party of any claim or occurrence that could be covered by the
indemnity, shall reasonably cooperate with the indemnifying Party in the defense
against such claim and shall not take any action that would adversely affect the
defense against such claim without the prior written consent of the indemnifying
Party.
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<PAGE> 15
Section 16. Entire Agreement.
This Agreement contains the entire agreement between the Parties
concerning the Property. This Agreement supersedes all prior and
contemporaneous oral and written representations, warranties, covenants and
agreements by or between the Parties with respect to the Property.
Section 17. Attorneys' Fees.
If either Party employs an attorney to enforce or protect such Party's
interests arising under this Agreement or any other document executed by such
Party in connection herewith, the non-prevailing Party in any such action, the
finality of which is not legally contestable, agrees to pay to the prevailing
Party all reasonable attorneys' fees incurred by the prevailing Party in
connection therewith.
Section 18. Time is of the Essence.
Time is of the essence in the performance of each Party's respective
obligations hereunder.
Section 19. Saturday, Sunday and Legal Holidays; Times.
If any date for the performance of any matter under this Agreement
(including the date for the giving of a Notice and the date on which any Notice
is deemed to have been received) falls on a Saturday, Sunday or legal holiday
observed by national banks in Seattle, Washington, then such date shall be
extended to the next calendar day that is not a Saturday, Sunday or such
national bank holiday. All references herein to a particular time on a
particular date refer to the local time (daylight or standard) in Pacific Time
Zone.
Section 20. Presumption Concerning Interpretation and Construction.
The Parties and their respective counsel have reviewed and participated
in the drafting of the final form of this Agreement. Accordingly, in the event
of any conflict or ambiguity in the provisions of this Agreement, there shall
be no presumption in favor of either Party with respect to the interpretation
or construction hereof.
Section 21. Section Headings.
The headings of the various Sections in this Agreement are for the
convenience of the Parties and do not alter, modify or limit the provisions
thereof and shall not be used in construing or interpreting the provisions
thereof.
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<PAGE> 16
Section 22. Severability.
If any provision in this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality
or unenforceability shall not affect any other provision hereof, and this
Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
Section 23. Waivers; Modifications.
No delay an the part of a Party in exercising any rights or remedies
hereunder shall operate as a waiver thereof nor shall any specific waiver by a
Party of any right or remedy hereunder operate or be construed as a waiver of
any other right or remedy hereunder nor shall any single or partial exercise of
any right or remedy hereunder preclude any other or further exercise thereof or
the exercise of any other right or remedy hereunder (unless the provisions of
this Agreement which establish any such right or remedy provide otherwise). No
waiver of any right or remedy hereunder shall be valid or enforceable unless in
writing and signed by the Party against whom such waiver is sought to be
enforced. No modification of this Agreement shall be effective unless in
writing and signed by the Parties.
Section 24. Governing Law.
THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED IN THE
STATE OF WASHINGTON, IS INTENDED TO BE PERFORMED WHOLLY IN THE STATE OF
WASHINGTON AND THE SUBSTANTIVE LAWS OF THE STATE OF WASHINGTON.
Section 25. Survival.
Notwithstanding the Closing of the transaction contemplated in this
Agreement or a termination of this Agreement, the provisions of Sections 6(a),
7, 15, 17, 29 and 32 hereof and all other provisions of this Agreement which are
described as surviving the Closing or a termination of this Agreement shall
survive the Closing or a termination of this Agreement.
Section 26. Relationship of Parties.
Nothing contained in this Agreement shall be deemed or construed as
creating any relationship of principal and agent, of partnership, of joint
venture or of any association whatsoever between the Parties. No provision of
this Agreement and no act or failure to act of the Parties shall be deemed to
create any relationship between the Parties other than the relationship of a
vendor and a vendee.
Section 27. Number and Gender of Words.
Whenever any number (singular or plural) is used herein, the same
includes and applies to any one or more thereof, and to each thereof, jointly
and severally, and words of any gender include each other gender.
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<PAGE> 17
Section 28. Counterparts.
This Agreement is executed in multiple counterparts, each of which is
an original, but all of which constitute but one and the same document. The
signatures of each of the Parties and the Title Company may appear on multiple
separate signature pages.
Section 29. Termination.
In the event of any permitted termination of this Agreement by
Purchaser, the Title Company shall deliver the Earnest Money to Purchaser, and
neither Party shall thereafter have any further rights or obligations under
this Agreement except as otherwise specifically provided herein.
Section 30. Representations and Covenants of Seller.
(a) As of the Effective Date, Seller represents to Purchaser as
follows:
(i) Seller is legally authorized and permitted to enter
into this Agreement and to carry out and perform all covenants to be
performed by it hereunder, and Seller's right to execute this Agreement
is not limited by any other agreements. The person signing this
Agreement has been authorized by Seller to do so.
(ii) Except for the Excluded Property, to the best of
Seller's knowledge, information and belief, the transaction contemplated
in this Agreement constitutes the sale of all assets owned by Seller
which are used by Seller in connection with the operation of the
Property.
(iii) To the best of Seller's knowledge, information and
belief, there are no pending or threatened condemnation or other similar
proceedings affecting the Property or any portion thereof, or any action
or litigation affecting the Property or any portion thereof.
(iv) To the best of Seller's knowledge, information and
belief, the Property, as presently operated, is adequately served with
all necessary utilities including sewer, water, gas, electricity,
telephone and cable.
(v) To the best of Seller's knowledge, information and
belief, there are not now and will not be on the Closing Date, any
tenants, property managers, employees or other parties in occupancy of
any space within the Property on the Closing Date other than a
transitory or temporary basis.
(vi) To the best of Seller's knowledge, information and
belief, Seller has not received a written notice from a governmental
authority of a violation of any law or code.
(vii) to the best of Seller's knowledge, information and
belief, Seller has not received a written notice from any governmental
authority that the Property contains any toxic or hazardous substances.
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<PAGE> 18
Purchaser may terminate this Agreement on the Closing Date and receive the
Earnest Money, as its Sole remedy, in the event any representation of Seller is
not true and correct on the Closing Date, in which event of termination,
neither Party shall have any rights or obligations under this Agreement except
as otherwise specifically provided in this Agreement. The representations
contained herein shall survive closing for a period of 120 days.
(b) From the Effective Date until the earlier of (x) the Closing
Date, or (y) the date on which either Party terminates this Agreement, Seller
covenants and agrees that Seller will:
(i) operate the Hotel in the usual and customary manner
in which the Hotel has been operated prior to the Effective Date;
(ii) take reasonable good faith efforts to preserve and
maintain the goodwill of the Property, including relationships with
suppliers and customers;
(iii) maintain commercially reasonable insurance on the
Property; and
(iv) notify Purchaser of any substantial change in the
truth or accuracy of the representations set forth in (a) above.
(c) At or prior to the Closing, Seller will terminate any existing
management agreement.
(d) If Seller fails to comply with any of Seller's covenants or
agreements set forth in Section 30(b) or (c) hereof, Purchaser shall notify
Seller of such failure, setting forth in reasonable detail the covenant or
agreement of Seller with which Seller has failed to comply, and if Seller's
failure to comply with such covenant or agreement continues for seven days
after such notice from Purchaser to Seller, then such failure shall constitute
a default by Seller under this Agreement.
Section 31. Cooperation.
Prior to the Closing, provided this Agreement has not been terminated,
Seller and Purchaser shall cooperate to effect a smooth transition from
management of the Hotel by the Seller or Seller's manager to management of the
Hotel by Purchaser or Purchaser's manager. To this end, Seller and Purchaser
shall use commercially reasonably efforts to prevent confusion, inconvenience
and the disruption of services to Hotel guests, both before and after the
Closing.
Section 32. Broker.
If, as and when this Agreement is closed, but not otherwise, Seller
shall pay, at Closing, out of the closing proceeds to Gregory Rice of Solid
Rock Advisors, Inc. a commission pursuant to a separate written agreement. No
commission shall be due or owing if this Contract is terminated or rescinded or
does not close for any reason. Each party represents and warrants to the other
that, except as provided in the immediately preceding sentence, no broker or
finders have been engaged by it, respectively, in connection with any of the
transactions contemplated by this Contract or, to
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<PAGE> 19
its knowledge, is in any way connected with any such transactions. In the
event of any such claim for broker's or finder's fees or commissions in
connection with the negotiation, execution or consummation of this Contract,
then each party shall indemnify, save and hold harmless and defend the other
party from and against such claim if it shall be based upon any statement or
representation or agreement made by or allegedly made by the indemnifying
party. This indemnity shall survive the Closing or termination of this
Contract
Section 33. Confidentiality
All information disclosed to Purchaser by the Seller relating to the
Property shall be deemed confidential and proprietary information
("CONFIDENTIAL INFORMATION"). All Confidential Information which is furnished
to or acquired by Purchaser from the Seller shall be held in confidence.
Unless specifically authorized in writing by the Seller, Confidential
Information shall not be copied, duplicated or disclosed,
Purchaser agrees for itself and its directors, officers, employees,
shareholders, subsidiaries, affiliates and agents, that each and all of them
shall be bound by this Section 33 and shall hold Confidential Information in
confidence and shall not participate in nor permit the unauthorized copying,
duplication, or disclosure of Confidential Information; provided, however, that
Confidential Information may be disclosed without the prior written consent of
the Seller (i) to Purchaser's directors, officers, partners, consultants and
advisors, attorneys and accountants for the sole purpose of allowing them to
evaluate Purchaser's Property, so long as the confidential nature of
Confidential Information is disclosed to and maintained by such person and such
person is subject to a duty of loyalty and confidentiality, or (ii) pursuant to
court order, subpoena, valid legal process, or otherwise as required by law.
Purchaser hereby acknowledges that the Seller, its principals and/or its
business may be irreparably damaged in the event that Purchaser violates any of
the terms of this provision. Accordingly, the Seller or its principals may
enforce this provision through any equitable or legal remedies, which remedies
shall be cumulative with and not exclusive of any other remedy available at law
or otherwise; including, without limitation, damages and injunctive relief as
determined by a court of competent jurisdiction.
This covenant shall survive the termination (but not Closing) of this
Agreement
Section 34. Franchise Agreement.
Notwithstanding anything herein to the contrary, Purchaser is aware of
the Core Modification Program required by franchisor, and Purchaser shall
assume and agrees to perform all obligations under the franchise or license
agreement in effect with respect to the Property and shall indemnify Seller for
such agreement at Closing. Purchaser's obligations herein are not conditional
upon the approval of the franchisor, and any costs associated with the
franchise agreement shall be paid by Purchaser.
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<PAGE> 20
Section 35. Exclusivity,
Provided Purchaser is not in default hereunder, Seller agrees that
during the term of this Agreement, it will not actively offer the Property,
actively entertain offers for the Property, actively negotiate for the sale or
lease of the Property to any other party.
Section 36. Board Approvals
The obligations of Purchaser under this Agreement is conditioned upon
the approval of the Board of Directors of Sunstone Hotel Investors, Inc., the
general partner of Purchaser. If such approval is not obtained by the end of
the Inspection Period, this Agreement shall terminate, the Earnest Money shall
be delivered to Purchaser, and neither Party shall have any further right or
obligations under this Contract except as otherwise specifically provided in
this Agreement Purchaser shall deliver to the Seller a copy of such Board of
Directors approval.
Section 37. Employees
All Hotel employees will be terminated by Seller as of the Closing
Date. Purchaser, at the Closing, may employ the existing employees at its
discretion. Seller shall be responsible for compliance with the advance
notice provisions of the WARN Act. This Section 37 shall survive the Closing.
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<PAGE> 21
EXECUTED in multiple original counterparts on the date written below
the respective signatures of the Parties.
SELLER
Renton Joint Venture,
a Washington joint venture
BY: [SIG]
------------------------------
Print:
------------------------------
Its:
------------------------------
Date: May 28, 1996
PURCHASER:
SUNSTONE HOTEL INVESTORS, L.P.,
a Delaware limited partnership
By: Sunstone Hotel Investors, Inc.,
a Maryland corporation, the sole
general partner
By: /s/ ROBERT A. ALTER
-------------------------------
Name: Robert A. Alter
-------------------------------
Title: President
-------------------------------
Date: May 24 1996
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<PAGE> 22
The Title Company hereby acknowledges receipt of three counterparts of
this Agreement, each of which counterparts has been executed by the Parties, and
$150,000, representing the Earnest Money required by Section 4(b) hereof. The
Title Company hereby agrees to hold and disburse the Earnest Money and all other
funds received by the Title Company in accordance with the provisions of this
Agreement. The Title Company further agrees to immediately deliver to Seller
and Purchaser original counterparts of this Agreement executed by the parties
and the Title Company.
FIDELITY NATIONAL TITLE INSURANCE
COMPANY
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Date: May__, 1996
EXHIBITS:
Exhibit "A": - Legal Description
Exhibit "B": Statutory Warranty Deed
Exhibit "C": Bill of Sale
Exhibit "D": Assignment and Assumption of Contracts
Exhibit "E": Items for Review
-21-
<PAGE> 23
EXHIBIT "A'
[Legal Description of Property]
A-1
<PAGE> 24
Fidelity National Title Company of Washington
ALTA Commitment. Page 2
Order No. 0170249
"SCHEDULE A"
4. The land referred to in this Commitment is situated in the County of
King, State of Washington, and is described as follows:
PARCEL A:
That portion of Blocks 13 and 14, C.D. HILLMANS EARLINGTON GARDEN
ADDITION DIVISION NO. 1, according to the Plat thereof recorded in
Volume 17 of Plats Page 74, records of King County, Washington;
TOGETHER WITH portions of vacated 9th Avenue South, vacated 9th Place
South, and the vacated alley between 9th Avenue South and 9th Place
South, all vacated under Ordinance 2051 of the City of Renton and that
portion of the Northeast quarter of Section 19, Township 23 North,
Range 5 East W.M., in King County, Washington, more particularly
described as follows:
Commencing at the Northeast corner of the Southwest quarter of said
Northeast quarter;
THENCE South 01 degrees 04'08" West along the East line of said
Southwest quarter, a distance of 250.02 feet;
THENCE North 89 degrees 44'02" West, a distance of 18.28 feet;
THENCE South 61 degrees 42'59" West, a distance of 258.92 feet;
THENCE South 00 degrees 02'16" East, a distance of 248.94 feet to the
Northerly margin of Primary State Highway No. 1, Jct. SSH No.
2-M to Jct. PSH No. 2 in Renton (also known as State Road 405) as
approved October 31, 1961 - the latest revision being November 7,
1986;
THENCE Westerly, Northwesterly and Northerly along said margin the
following courses:
North 89 degrees 49'09" West, a distance of 44.72 feet;
THENCE South 83 degrees 23'09" West, a distance of 82.06 feet;
THENCE North 89 degrees 54'45" West, a distance of 241.66 feet to a
point on a curve having a radius of 390.8 feet and having a radial
bearing of South 17 degrees 05'13" West;
THENCE Northwesterly along said curve through a central angle of 32
degrees 52'06", an arc distance of 224.19 feet;
THENCE North 40 degrees 02'41" West a distance of 150.00 feet;
THENCE along a tangent curve to the left with a radius of 288.8 feet
through a central angle of 16 degrees 15'36", an arc distance of 81.96
feet to the true point of beginning;
THENCE continuing along said Northerly margin, Westerly along
previously described curve through a central angle of 23 degrees
42'24", an arc distance of 119.49 feet;
THENCE North 80 degrees 00'41" West, a distance of 100.00 feet;
THENCE along a tangent curve of the right having a radius of 109.20
feet through a central angle of 81 degrees 34'00", an arc distance of
155.46 feet;
THENCE North 88 degrees 26'41" West, a distance of 6.00 feet;
THENCE North 01 degrees 33'19" East, a distance of 313.96 feet;
THENCE North 41 degrees 34'50" East, a distance of 90.78 feet to the
Southerly margin of South Grady Way (also known as Secondary State
Highway No. 1-L) being 100 feet in width as presently established;
<PAGE> 25
Fidelity National Title Company of Washington
ALTA Commitment, Page 3
Order No. 0170249
SCHEDULE A (continued):
PARCEL A (continued):
THENCE leaving Primary State Highway No. 1, Jct. No. 2-M to Jct. PSH
No. 2 in Renton and along the South margin of said South Grady Way N.
77 degrees 28'26" East, a distance of 415.16 feet;
THENCE leaving said Southerly margin and along the West line of land
described in lease to Standard Oil Company of California dated January
21, 1964, South 00 degrees 31'47" East, a distance of 150.00 feet to
the Southwest corner of said land;
THENCE leaving said West line, South 89 degrees 28'13" West, a
distance of 12.81 feet;
THENCE South 00 degrees 51'26" West a distance of 286.24 feet;
THENCE North 70 degrees 00'00" West, a distance of 98.00 feet;
THENCE South 14 degrees 17'27" West a distance of 248.85 feet to the
true point of beginning;
(ALSO KNOWN AS Parcel A, City of Renton Lot Line Adjustment No.
LLA-001-88 recorded under Recording Nos. 8911139006 and 9004099029).
Situate in the County of King, State of Washington.
PARCEL B:
An easement for ingress, egress and reciprocal parking as recorded
under Recording No. 8708210528, records of King County, Washington.
Situate in the County of King, State of Washington.
<PAGE> 26
EXHIBIT "B"
B-1
<PAGE> 27
EXHIBIT B
This Space Reserved For Recorder's Use
AFTER RECORDING MAIL TO:
- -------------------------
- -------------------------
- -------------------------
- -------------------------------------------------------------------------------
STATUTORY WARRANTY DEED
THE GRANTOR RENTON JOINT VENTURE, a Washington joint venture, for and
in consideration of Ten Dollars ($10.00) in hand paid, conveys and warrants to
SUNSTONE HOTEL INVESTORS, L.P., a ________________ limited partnership, the
real estate, situated in the County of King, State of Washington legally
described on Exhibit A attached hereto and made a part hereof.
SUBJECT TO any exceptions, restrictions, covenants and encumbrances shown on
Exhibit B attached hereto and incorporated herein by this reference.
RENTON JOINT VENTURE
By:
----------------------------------
Name:
--------------------------------
Its:
---------------------------------
<PAGE> 28
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that
________________, a venture of RENTON JOINT VENTURE, a Washington joint
venture, is the person who appeared before me, and said person acknowledged
that he signed this instrument on behalf of the joint venture, acknowledged it
to be the free and voluntary act of the joint venture for the uses and purposes
mentioned in this instrument, and on oath stated that he was authorized to
execute this instrument.
DATED: _________________________________ _________________________________
_________________________________
(PRINTED NAME)
NOTARY PUBLIC for the State of
Washington, residing at _________
My appointment expires:
_________________________________
RENTON JV SUNSTONE HOTEL
STATUTORY WARRANTY DEED 2
??????????????????????/ Date: May 15, 1996
<PAGE> 29
EXHIBIT A
TO STATUTORY WARRANTY DEED
3
<PAGE> 30
EXHIBIT B
TO STATUTORY WARRANTY DEED
Matters of Title approved by Purchaser.
4
<PAGE> 31
EXHIBIT "C"
C-1
<PAGE> 32
EXHIBIT "C"
BILL OF SALE
The undersigned seller, in consideration of the sum of Ten Dollars
($10.00) and other good and valuable consideration, the receipt of which is
acknowledged, hereby grants and conveys to SUNSTONE HOTEL INVESTORS, L.P., a
________________ limited partnership, all right, title, and interest that
seller has or may have in or to the following described personal property:
DATED as of ________________, 1996.
RENTON JOINT VENTURE
By: ______________________________
Name: ______________________________
Its: ______________________________
<PAGE> 33
EXHIBIT "D"
[To be added prior to expiration of Inspection period]
D-1
<PAGE> 34
EXHIBIT "E"
ITEMS TO BE PROVIDED OR MADE AVAILABLE BY SELLER PER SECTION 5
1. Annual Statements of Operations respecting the Property for fiscal year
1994 and 1995 and current year's budgets and preliminary statements of
operations for all of 1996 to date. If the financial statements of Seller for
the Property have been audited from 1993 to the present time, Seller will
provide the complete audited financials for such year. Seller will authorize
its accountants to make available to the accountants of Purchaser such financial
information as Purchaser's accountants require for investigation of the
financial history of the operations of the property since 1994,
2. A list and copies of all franchise agreements, permits, management
agreements, employment contracts, service contracts, leases, and other
contracts, permits, licenses and agreements relating to the Property, including
all amendments and modifications thereto, which may survive the closing date,
including copies of the existing Franchiser's franchise and most recent QAR or
PIP.
3. A current ALTA extended from preliminary title insurance commitment
(the "Title Commitment") in form acceptable to Purchaser and Bank One, Arizona,
NA issued by the Title Company, together with copies of all instruments
constituting exceptions to title listed therein and copies of recorded deeds to
current owners of all adjoining lands. Such Title Commitment shall commit to
delete standard printed exceptions upon review of the Survey, and include
endorsements required by Purchaser, including for contiguity with adjoining
public, roads, affirmatively insuring roadway access to public streets and any
appurtenant easements to the Land, and absence of zoning violations.
4. A new ALTA/ASCM Land Title Survey (the "Survey") of the Hotel and the
Land, to be ordered and paid for by Purchaser, to be conveyed, together with any
easements benefiting the Hotel, prepared by a registered surveyor acceptable to
Purchaser and directed to Seller, Purchaser, Bank One, Arizona, NA and the Title
Company, showing the physical location of the Hotel and all property
improvements, all utility lines, parking areas, easements of record or in
existence, and encroachments, and certifying such matters as are required for
ALTA/ASCM minimum and optional standards for urban surveys,
5. A physical inspection report of the Property, to be ordered and paid
for by Purchaser by a property evaluation firm acceptable to Purchaser, and such
other inspections that Purchaser deems appropriate.
6. A new ASTM Phase I Environmental Site Assessment on the Property, to
be paid for by Purchaser, prepared by a firm acceptable to Purchaser and
directed to Purchaser and Bank One, Arizona, N.A., and if such Phase I
Environmental Site Assessment evidences any adverse environmental matter in the
Land, then a further Phase II Environmental Site Assessment including
appropriate physical sampling at and adjacent to the Land, paid for by
Purchaser.
E-1
<PAGE> 35
Seller shall provide to Purchaser as soon as possible after the Contract is
executed copies of any Environmental Reports on the Property in the possession
of Seller and its agents.
7. A list of all current Hotel employees and therein wages and benefits.
8. All architectural and construction plans, as-built documents, and
existing title insurance policies of the Property in the Seller's possession.
9. Copies of the most recent two property tax bills on the Property and
any recent assessment, and utility billings to the Property for the last 12
months.
10. A UCC secured transactions search from the Secretary of State's office
in the name of Seller. any predecessor of Seller within the past 5 years and
such other names as Purchaser directs.
11. A list of reservations of guests (advance deposits) for periods of time
up to closing.
12. A descriptive summary of all pending or threatened litigation which
does or may affect the Property, to the "best of knowledge" of responsible
individuals.
13. After the end of the Inspection Period and the deposit becomes
non-refundable, written pay-off statements from all lienors and mortgagees, with
per-diems. By May 29, 1996, Seller will provide of list of all lienors and
mortgagees, with the amount outstanding for each, to Purchasers.
14. Such other items of examination and approval as are agreeable to by
the Seller and Purchaser.
E-2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-11 of
our report dated March 28, 1996 on our audit of the consolidated balance sheets
of Sunstone Hotel Investors, Inc., the combined balance sheet of Sunstone
Initial Hotels and the related consolidated and combined statements of
operations, equity and cash flows, including the accompanying financial
statement schedule, our report dated March 22, 1996 on our audit of the
financial statements of Sunstone Hotel Properties, Inc., our report dated June
7, 1996 on our audit of the financial statements of Renton Joint Venture and our
report dated July 2, 1996 on our audit of the combined financial statements of
Bay City Hospitality, Inc. and Price Hospitality, Inc. We also consent to the
reference to our firm in this Registration Statement under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Newport Beach, California
July 3, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-11 of
our report dated December 4, 1995 on our audit of the balance sheets of Bay City
Hospitality, Inc., a California Corporation as of October 31, 1994 and 1993 and
the related financial statements for the year ended October 31, 1994 and the
period from February 5, 1993 (inception) through October 31, 1993. We also
consent to the inclusion in the above referenced document of our report dated
July 2, 1996 on our audit of the balance sheet of Price Hospitality, Inc., a
Utah Corporation, as of October 31, 1994 and related financial statements for
the period from the inception of operations, December 28, 1993 to October 31,
1994. We also consent to the reference to our firm under the caption "Experts."
GRIFFING & COMPANY, P.C.
Houston, Texas
July 2, 1996
