<PAGE>
As Filed with the Securities and Exchange Commission on December 1, 1995
Registration No.33-60011
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3 - FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HOST FUNDING, INC.
(Exact name of registrant as specified in its charter)
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MARYLAND 7012 52-1907962
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(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
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(Address, including ZIP Code, and telephone number,
including area code, of registrant's principal executive offices)
7825 FAY AVENUE, SUITE 250
LA JOLLA, CA 92037
(619) 456-6070
(Name, address, including ZIP Code, and telephone number,
including area code, of agent for service)
MICHAEL MCNULTY, PRESIDENT
7825 FAY AVENUE, SUITE 250
LA JOLLA, CA 92037
(619) 456-6070
Copies to:
Peter G. Aylward, Esq.
Law Office of Peter G. Aylward, APC
3250 Vista Diego Road
Jamul, CA 91935
(619) 669-4800
(619) 669-4844 (telecopier)
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. /_/
===============================================================================
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL 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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HOST FUNDING, INC.
CROSS-REFERENCE SHEET
(Pursuant to Item 501(b) of Regulation S-K)
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Location in
Prospectus/Consent
Page Solicitation Statement
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1. Forepart of Registration Statement and Outside Front Cover
Page of Prospectus.................................................. Facing Page;
Cross Reference
Sheet; Outside Front
Cover Page
of Prospectus/Consent
Solicitation Statement
2. Inside Front and Outside Back Cover Pages of Prospectus............. Table of Contents;
Available Information
3. Risk Factors, Ratio of Earnings to Fixed Charges, and Other
Information......................................................... Summary
4. Terms of the Transaction............................................. Summary
5. PRO FORMA Financial Information...................................... Unaudited PRO FORMA
Condensed Combined
Financial Statements
6. Material Contracts with the Company Being Acquired................... Background
7. Additional Information Required for Reoffering by Persons
and Parties Deemed to be Underwriters........................... Not Applicable
8. Interests of Named Experts and Counsel............................... Legal Matters
9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities...................................... Not Applicable
10. Information with Respect to S-3 Registrants.......................... Not Applicable
11. Incorporation of Certain Information by Reference..................... Not Applicable
12. Information with Respect to S-2 or S-3 Registrants.................... Not Applicable
13. Incorporation of Certain Information by Reference..................... Not Applicable
14. Information with Respect to Registrants Other than S-3
or S-2 Registrants.................................................... Summary; Risk
Factors;The Company
in General; Formation
Transactions
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15. Information with Respect to S-3 Companies............................. Not Applicable
16. Information with Respect to S-2 or S-3 Companies....................... Prospectus/Consent
Solicitation
Statement; Summary;
Risk; Business and
Properties; Voting
Procedures
17. Information with Respect to Companies Other than S-2
or S-3 Companies....................................................... Not Applicable
18. Information if Proxies, Consents or Authorizations Are to be
Solicited.............................................................. Outside Front Cover
Page of
Prospectus/Consent
Solicitation
Statement; Summary
19. Information if Proxies, Consents or Authorizations Are Not to
be Solicited, or in an Exchange Offer.................................. Not Applicable
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<PAGE>
GHG HOSPITALITY, INC.
3145 SPORTS ARENA BOULEVARD
SAN DIEGO, CALIFORNIA 92110
November __, 1995
Dear Limited Partner of Mission Bay Super 8, Ltd.:
We are pleased to report that we have recently completed the
negotiations whereby Host Funding, Inc., a Maryland corporation (the
"REIT"), will acquire the Mission Bay Super 8 Motel from Mission Bay
Super 8, Ltd., a California limited partnership (the "Partnership"), in
a transaction described as the "Mission Bay Acquisition". However,
before the Mission Bay Acquisition can be consummated, certain voting
requirements must be met so that the transaction complies with the
Federal Roll-up Rules which require at least 67% approval for such
transactions. The following is a brief explanation of the various
transactions which have occurred or which will occur involving the REIT
and/or its affiliates (the "Formation Transactions") and a discussion
of the voting requirements needed to approve the Mission Bay
Acquisition.
In April of 1995, the REIT acquired a note receivable in an approximate
principal amount of $1.8 million and four Super 8 hotels (the "Initial Hotels")
as a result of the transfer of certain assets from All American Group, Ltd., a
Delaware limited partnership ("AAG") to the REIT. The Initial Hotels are
located in Miner, Missouri; Poplar Bluff, Missouri; Rock Falls, Illinois; and
Somerset, Kentucky, respectively. Pursuant to the "Contribution and Assumption
Agreement", partners of AAG received 100 shares of Common Stock of the REIT upon
the consummation of the Contribution and Assumption Agreement effective
April 1, 1995.
A brief description of the Formation Transactions follows. Concurrent
with the issuance of Common Stock of the REIT for the Acquisition Hotel, the
REIT will issue its Class A Common Stock in a public offering (the "Public
Offering") with a required gross cash offering proceeds of $5 million. The
Public Offering, in its present form, is conditioned upon the closing of the
Mission Bay Acquisition. Upon issuance, the REIT Class A Common Stock will
be listed on either the American Stock Exchange or the NASDAQ National
Market since the listing of the Class A Common Stock on either the Amex or
the NASDAQ National Market is also a condition to the closing of the
Formation Transactions. Further, the REIT will enter into an Advisory
Agreement with Host Funding Advisors, Inc., a Delaware corporation (the
"Advisor") upon the closing of the Public Offering. The Advisor will provide
information, advice, assistance and facilities to the REIT with regards to
the investment decisions, day-to-day operations and management of the REIT.
In exchange for such services, the REIT will pay the
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Advisor a base annual fee and a percentage fee. Also upon the closing of the
Public Offering, the REIT will enter into a Post-Formation Acquisition Agreement
with Host Acquisition Group, LLC, a Delaware limited liability company (the
"Acquisition Co."). The Acquisition Co. will actively seek to acquire
additional hotel properties that meet the investment criteria of the REIT.
Finally, in order for the REIT to qualify as a REIT, the REIT cannot operate
hotels directly. Therefore, the REIT will lease the Hotels to Crossroads
Hospitality Tenant Company, LLC, a Delaware limited liability company (the
"Lessee") for a term of fifteen years pursuant to the Percentage Leases.
There are several disadvantages to the Formation Transactions to the
Mission Bay Limited Partners. First, several of the agreements that the REIT
will enter into have not been negotiated at arms-length. Further, several
principal persons will either own substantial amounts of the stock of the
REIT or will have substantial control over the various entities. The
influence and decisions of these persons could have a significant effect on
the performance of the REIT. Approving limited partners will forego the
opportunity to receive a cash liquidating distribution as was originally
anticipated when the Partnership was formed. Finally, there is no assurance
that the common stock received by the approving limited partners will have a
value equal to their value of the limited partnership interest exchanged in the
Mission Bay Acquisition.
The Mission Bay Acquisition Agreement must be approved by limited
partners holding more than 50% of the limited partnership interests, but if
1.25% or more of the limited partner interests dissent, then the Mission Bay
Acquisition must be approved by at least 67% of the limited partner
interests. The Limited Partners have the option to vote "for", "against", or
"abstain" with respect to the Mission Bay Acquisition. Management of the
REIT has insured that a minimum of 1.25% of the limited partners will dissent.
Therefore, effectively the approval required for the Mission Bay Acquisition
is at least 67% of the limited partnership interests. In addition, if more
than 5% of the limited partners perfect their dissenters rights (even if at
least 67% of the limited partners vote in favor of the Mission Bay
Acquisition) the Company has no obligation to close the Mission Bay
Acquisition. However, the Company may waive this condition and elect to
close the Mission Bay Acquisition even if more than 5% of the limited partner
units dissent. The Mission Bay Acquisition is conditioned upon the closing
of the Formation Transactions which are completely described in the enclosed
Prospectus/Consent Solicitation Statement. The Limited Partners that
disapprove of the Mission Bay Acquisition and perfect their dissenters rights
(the "Dissenting Limited Partners") will receive cash in exchange for their
limited partnership interests. The Mission Bay Agreement of Limited
Partnership provides that where a matter which the General Partner recommends
approval is to be voted upon without a meeting (as is the case here), the
Limited Partners whose votes are not received by the end of the Solicitation
Period shall be deemed to have voted all of their shares in favor of the
General Partner's recommendation. Notwithstanding this "deemed positive"
provision of the Mission Bay Agreement of Limited Partnership, the dissenters
condition described above requires that at least 67% of the Mission Bay
limited partnership interests actually approve of the Mission Bay Acquisition.
Thus, the "deemed positive" votes of the Mission Bay limited partners whose
votes are not received within the Solicitaion Period will not be counted
toward the 67% approval requirement. Further, any "abstain" votes will not be
counted toward the 67% approval requirement and limited partners who vote to
"abstain" will not be able to perfect their dissenters' rights and thus, cannot
become Dissenting Partners.
Pursuant to Section 15.4 of the Mission Bay Super 8 Limited Partnership
Agreement, the General Partner does hereby call for a vote without a meeting
as to whether the Limited Partners approve or disapprove of the Mission Bay
Acquisition, the details of which are set forth in the Proxy
Statement/Prospectus. I highly recommend approval of the Mission Bay
Acquisition Agreement for numerous reasons, several of which are the
following:
- Upon approval, the Limited Partners will receive common stock in an
externally advised REIT.
- The REIT Common Stock issued to you upon the completion of the Mission
Bay acquisition will be a liquid investment -- unlike your
investment in the limited partnership interest you now hold you can
choose to sell the REIT stock whenever you wish.
- The Mission Bay Acquisition, on a PRO FORMA basis, increases cash
available for distribution to former Limited Partners.
- The Mission Bay Acquisition may lead to operating synergies and
additional savings, thereby increasing the REIT's cash available for
distribution.
- The Limited Partners can diversify their investment since the REIT
owns four other Super 8 Motels throughout the United States, and has
an acquisition strategy in place for additional hotel properties.
The Mission Bay Acquisition effectively requires the affirmative vote of
Mission Bay Limited Partners owning at least 67% of the limited partnership
interests in the Mission Bay Limited Partnership. Accordingly, please
complete, sign and date the accompanying proxy card and return it in the
enclosed prepaid envelope. Consents given by Limited Partners in the form of
the consent form accompanying this Prospectus and Proxy Statement will, when
executed and delivered to the General Partner, be revocable by written notice
to the General Partner until such time as unrevoked consents are received
from Limited Partners holding more than 50% of the outstanding Mission Bay
Limited Partnership interests. Accordingly, the right of revocation
automatically will terminate, upon receipt of unrevoked consents from Mission
Bay Limited Partners holding more than 50% of the outstanding Mission Bay
Limited Partnership interests. Your prompt cooperation will be greatly
appreciated.
Sincerely,
J. Mark Grosvenor, President
GHG Hospitality, Inc.
General Partner of
Mission Bay Super 8 Limited Partnership
<PAGE>
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>
SUBJECT TO COMPLETION, DATED DECEMBER 1, 1995
PROSPECTUS/CONSENT SOLICITATION STATEMENT
277,487 SHARES OF CLASS A COMMON STOCK
HOST FUNDING, INC.
Host Funding, Inc., a recently organized Maryland corporation (the
"Company"), is proposing the acquisition (the "Mission Bay Acquisition") of
the Mission Bay Super 8 hotel (the "Acquisition Hotel") from Mission Bay
Super 8, Ltd., a California Limited Partnership ("Mission Bay"), subject to
the approval of at least 67% of the limited partners of Mission Bay (the
"Limited Partners"). In exchange for the Acquisition Hotel, the Company will
issue 277,487 shares of its Class A common stock ("Class A Common Stock") to
those of the Limited Partners that vote in favor of the Mission Bay
Acquisition. The Company currently owns four Super 8 hotels (the "Initial
Hotels") which were acquired by the Company from All American Group, Ltd., a
Delaware limited partnership ("AAG") effective April 1, 1995. The Initial
Hotels and the Acquisition Hotel collectively are referred to as the "Hotels".
Concurrently with the closing of the Mission Bay Acquisition, the
Company will issue 500,000 shares of Class A Common Stock in a public
offering for a gross consideration of $5 million (the "Public Offering").
The Mission Bay Acquisition is specifically conditioned upon the Company's
closing of the Public Offering for a gross consideration of $5 million. The
Mission Bay Acquisition, the Public Offering, the consummation of various
agreements (described in the body of this Prospectus), and the Company's
issuance of its Common Stock to its existing Shareholders in exchange for
their existing common shares, are collectively referred to as the "Formation
Transactions".
THIS OFFERING INVOLVES MATERIAL DETRIMENTS AND RISKS, INCLUDING:
- - The Limited Partners who do not become Dissenting Partners will receive
the Company's Class A Common Stock in lieu of the liquidating cash
distribution originally contemplated by Mission Bay.
- - Base Rent due under the Percentage Leases is insufficient to enable the
Company to make distributions to Shareholders at the Pro Forma Distribution
rate of $0.895 per share for 1996 and such distribution represents 97.7% of
the Company's cash available for distribution.
- - If the Company fails to qualify as a REIT, it would be taxed as a
corporation which could reduce the cash available for distribution and
distributions to Shareholders.
- - The shares of Class A Common Stock issued in the Offering will experience
substantial dilution of approximately $6.44 per share from the $10.00
Exchange Value as a result of the Formation Transactions.
- - Upon consummation of the Formation Transactions, the Hatfield Affiliates
will receive 410,000 shares of Class A Common Stock, 140,000 shares of
Class B Common Stock, and 140,000 shares of Class C Common Stock in exchange
for the Initial Shares, which will constitute nearly a majority of voting
rights as the Hatfield Affiliates will own 46.1% of all Common Stock and
33.7% of the Class A Common Stock.
- - Mr. Ian Gardner-Smith owns 100% of the Advisor and 99% of the Acquisition
Co. and the Acquisition Co. will receive a 6% placement fee on completion
of any subsequent acquisition and the Advisor will receive a base fee of
$30,000 annually plus a percentage fee of 1.25% of the total market value
of all real property owned by the Company when the real property owned by the
Company exceeds $35 million.
- - The value of the Class A Common Stock received by Limited Partners may not
reflect the value of their pro rata share of the Mission Bay assets.
- - A default on the Hatfield Note could cause a substantial loss to the
Company and substantially reduce cash available for distribution.
- - All of the Hotels will be leased to and managed by the Lessee and the Company
is depending on the Lessee to generate cash sufficient to make distributions
to the Shareholders.
- - Both the Initial Hotels and the Acquisition Hotel have incurred operating
losses from 1992 and thereafter.
See "RISK FACTORS".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Company expects to qualify as a real estate investment trust (a
"REIT") and elect REIT status for its taxable year beginning January 1, 1996.
The shares of Class A Common Stock when issued, will be listed on the AMEX or
the NASDAQ National Market since the listing of the Class A Common Stock on
either the AMEX or the NASDAQ National Market is a condition to the closing
of the Formation Transaction.
<PAGE>
The Formation Transactions will include several conflicts of interest.
The Hatfield Affliates have conflicts of interest with respect to the
Formation Transactions because they will receive a substantial amount of
Common Stock in exchange for their Initial Shares. Messrs. Gardner-Smith,
McNulty and other Affiliates of the Advisor and the Acquisition Co. will have
conflicts of interest with respect to the Formation Transactions and the
operation and growth of the Company and they will continue to have
significant influence over the affairs of the Company by reason of their
management and control of the Advisor and the Acquisition Co. Messrs.
Gardner-Smith and McNulty will substantially control the day-to-day
operations of the Company as well as the acquisition strategy. See
"Conflicts of Interest".
Host Funding Advisors, Inc., a Delaware corporation (the "Advisor") will
advise the Company. The Advisor will provide information, advice, assistance
and facilities to the Company with regards to the investment decisions,
day-to-day operations and management of the Company. As part of the Formation
Transactions, the Company will own and operate the Hotels pursuant to lease
agreements (the "Percentage Leases") which will be entered into upon the
closing of the Public Offering by and between the Company and Crossroads
Hospitality Tenant Company, LLC, a Delaware limited liability company (the
"Lessee"). The Company will enter into the Post-Formation Acquisition
Agreement with Host Acquisition Group, LLC, a Delaware limited liability
company (the "Acquisition Co.") whereby the Acquisition Co. will acquire
additional hotel properties for the Company based on the investment criterion
of the Company.
This Prospectus/Consent Solicitation Statement relates solely
to the solicitation of consents to Mission Bay's approval of the Mission Bay
Acquisition from the Mission Bay Limited Partners. The Mission Bay
Acquisition must be approved by at least 50% of the limited partnership
interests, but if 1.25% or more of the limited partnership interests dissent,
perfect their dissenters' rights, and become Dissenting Partners, then the
Mission Bay Acquisition must be actually approved by at least 67% of the limited
partnership interests. Since more than 1.25% will dissent, the effective
approval required is 67%.
UNTIL NOVEMBER __, 199_, ALL SECURITIES DEALERS EFFECTING TRANSACTIONS IN
THE COMPANY'S SHARES, WHETHER OR NOT PARTICIPATING IN THE FORMATION
TRANSACTIONS, MAY BE REQUIRED TO DELIVER TO INVESTORS A PROSPECTUS/CONSENT
SOLICITATION STATEMENT. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED IN
THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT IN CONNECTION WITH THE MATTERS
REFERRED TO HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN SO AUTHORIZED BY THE COMPANY, THE
FOUNDER, THE LESSEE, OR THE ADVISOR. THE DELIVERY OF THIS PROSPECTUS/CONSENT
SOLICITATION STATEMENT SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
AVAILABLE INFORMATION
The Company has filed with the California Department of Corporations (the
"Department") Application for Qualification of Securities (the "Application")
under the California Corporate Securities Law of 1968, as amended, with
respect to the Class A Common Stock to be issued to the Mission Bay Limited
Partners in the Formation Transactions. This Prospectus/Consent Solicitation
Statement does not contain all the information set forth in the Application.
Copies of the exhibits and schedules attached to the Application may be examined
at the Department of Corporations, 3700 Wilshire Boulevard, Los Angeles, CA.
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering the shares of Host Funding Common Stock to be issued
to the Mission Bay Limited Partners in connection with the Formation
Transactions. As permitted by the rules and regulations of the Commission, this
Prospectus/Consent Solicitation Statement omits certain information, exhibits
and undertakings contained in the Registration Statement. For further
information pertaining to the securities offered hereby, reference is made to
the Registration Statement, including the exhibits filed as part thereof.
Mission Bay is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information
with the Commission. Reports, proxy statements and other information filed by
Mission Bay can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549; and at its Regional Offices located at Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661; and Seven World Trade Center, New York, New
York 10048. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
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TABLE OF CONTENTS
PAGE
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SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Sale of Mission Bay's Assets . . . . . . . . . . . . . . . . . . . . 1
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Conditions to Closing the Mission Bay Acquisition. . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Hotel Industry and the Hotels. . . . . . . . . . . . . . . . . . . . 7
Management Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Growth Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Formation Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 11
The Company's Related Parties. . . . . . . . . . . . . . . . . . . . . . 15
Distribution Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Conflicts of Interest. . . . . . . . . . . . . . . . . . . . . . . . . . 17
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Summary Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . 19
Voting Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Compliance with and Approval from Federal and State Authorities. . . . . 22
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Non-Dissenting Limited Partners to Receive Securities in Lieu of
Liquidating Distribution . . . . . . . . . . . . . . . . . . . . . . 23
Insufficient Cash Available for Pro Forma Distribution . . . . . . . . . 23
Tax Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Failure to Qualify as a REIT . . . . . . . . . . . . . . . . . . . . 23
REIT Minimum Distribution Requirements . . . . . . . . . . . . . . . 24
Adverse Tax Consequences to Shareholders of the Company from a
Sale of Any of the Hotels . . . . . . . . . . . . . . . . . . . . 24
Substantial Dilution of Shares . . . . . . . . . . . . . . . . . . . . . 24
Substantial Control of Company by Hatfield Affiliates
Due to Near Majority Stock Ownership . . . . . . . . . . . . . . . . . 24
Substantial Benefits to Hatfield Affiliates. . . . . . . . . . . . . . . 25
Benefits to Mr. Gardner-Smith . . . . . . . . . . . . . . . . . . . . . 25
Class A Common Stock Received May Not Reflect Value of Mission Bay
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Default on Hatfield Note Could Substantially Reduce Cash
Available for Distribution . . . . . . . . . . . . . . . . . . . . . . 25
Dependence on Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Historical Operating Losses . . . . . . . . . . . . . . . . . . . . . . 26
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . 26
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Continuing Hotel Operation, Development and Investment by
Hatfield Affiliates . . . . . . . . . . . . . . . . . . . . . . . 26
New and Continuing REIT Organizational Efforts by Advisor
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Conflicting Demands for Management Time. . . . . . . . . . . . . . . 27
Consequences of Cumulative Conflicts . . . . . . . . . . . . . . . . 27
Newly Organized Entities; Limited Assets and Operating History . . . . . 27
Dependence on Key Personnel and Advisor . . . . . . . . . . . . . . . . 27
Risks of Leverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Dependence on Single Brand Name. . . . . . . . . . . . . . . . . . . . . 28
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
i
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Inability to Operate the Hotel Properties . . . . . . . . . . . . . . . 29
No Prior Market for Common Stock . . . . . . . . . . . . . . . . . . . . 29
Exemptions for Mr. Hatfield from the Maryland Business Combination Law . 29
Franchise Agreement Risks . . . . . . . . . . . . . . . . . . . . . . . 30
Value of Hotels and Terms of Formation Transactions . . . . . . . . . . 31
Future Sale of Common Stock . . . . . . . . . . . . . . . . . . . . . . 32
Reliance on Board of Directors . . . . . . . . . . . . . . . . . . . . . 32
Anti-takeover Effect of Ownership Limit. . . . . . . . . . . . . . . . . 32
Power to Issue Additional Stock . . . . . . . . . . . . . . . . . . . . 33
Effect of Market Interest Rates on Price of Common Stock and Cost
of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Hotel Industry Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Operating Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Investment Concentration in a Single Industry. . . . . . . . . . . . 34
Seasonality of Hotel Business. . . . . . . . . . . . . . . . . . . . 34
Limited Number of Hotels; Emphasis on Limited Service
Hotel Market . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Renewal of Leases and Reletting of Hotels. . . . . . . . . . . . . . 34
Real Estate Investment Risks . . . . . . . . . . . . . . . . . . . . . . 35
Illiquidity of Real Estate . . . . . . . . . . . . . . . . . . . . . 35
Uninsured and Underinsured Losses. . . . . . . . . . . . . . . . . . 35
Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . 35
Compliance with Americans Disabilities Act . . . . . . . . . . . . . 36
Increase in Property Taxes . . . . . . . . . . . . . . . . . . . . . 36
Acquisition and Development Risks. . . . . . . . . . . . . . . . . . 37
Changes in Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
THE COMPANY IN GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Growth Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Acquisition Strategy . . . . . . . . . . . . . . . . . . . . . . . . . 39
Internal Growth Strategy . . . . . . . . . . . . . . . . . . . . . . . 39
Possible Refinancing Strategy. . . . . . . . . . . . . . . . . . . . . 40
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
DISTRIBUTION POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
PRO FORMA CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . 44
Substantial Dilution of Shares . . . . . . . . . . . . . . . . . . . . . 45
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . 46
FINANCIAL CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 55
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 64
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . . 67
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
The Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
ii
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Page
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Seasonality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
BUSINESS AND PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . 69
The Hotel Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
The Initial Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
The Miner Super 8. . . . . . . . . . . . . . . . . . . . . . . . . . . 70
The Poplar Bluff Super 8 . . . . . . . . . . . . . . . . . . . . . . . 70
The Rock Falls Super 8 . . . . . . . . . . . . . . . . . . . . . . . . 71
The Somerset Super 8 . . . . . . . . . . . . . . . . . . . . . . . . . 71
Current Debt on Initial Hotels . . . . . . . . . . . . . . . . . . . . 72
The Mission Bay Partnership and Its Hotel . . . . . . . . . . . . . . . 72
Limited Service Hotels . . . . . . . . . . . . . . . . . . . . . . . . . 73
Appraisals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
The Cost Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . 73
The Sales Comparison Approach. . . . . . . . . . . . . . . . . . . . . 74
The Income Capitalization Approach . . . . . . . . . . . . . . . . . . 74
Results of Appraisals. . . . . . . . . . . . . . . . . . . . . . . . . 75
The Percentage Leases . . . . . . . . . . . . . . . . . . . . . . . . . 75
In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Percentage Lease Terms . . . . . . . . . . . . . . . . . . . . . . . 76
Amounts Payable Under the Percentage Leases. . . . . . . . . . . . . 76
Maintenance and Modifications. . . . . . . . . . . . . . . . . . . . 77
Insurance and Property Taxes . . . . . . . . . . . . . . . . . . . . 78
Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Assignment and Subleasing. . . . . . . . . . . . . . . . . . . . . . 78
Damage to Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Condemnation of Hotel. . . . . . . . . . . . . . . . . . . . . . . . 79
Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . 79
Termination of Percentage Leases on Disposition. . . . . . . . . . . 80
Franchise License. . . . . . . . . . . . . . . . . . . . . . . . . . 80
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Master Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Franchise Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 82
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Americans With Disabilities Act. . . . . . . . . . . . . . . . . . . 84
FORMATION TRANSACTIONS AND OTHER RELATED TRANSACTIONS. . . . . . . . . . . 85
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
AAG Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
iii
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PAGE
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Mission Bay Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . 85
Public Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
The Advisor and The Advisory Agreement . . . . . . . . . . . . . . . . . 86
The Acquisition Co. and The Post-Formation Acquisition Agreement . . . . 86
The Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
The Hatfield Note. . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Benefits to Hatfield Affiliates. . . . . . . . . . . . . . . . . . . . . 88
Benefits to Mission Bay Limited Partners and Affiliates. . . . . . . . . 88
Advantages and Disadvantages of the Formation Transactions . . . . . . . 88
ALLOCATION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Exchange Value of Class A Common Stock . . . . . . . . . . . . . . . . . 89
Appraised Value Basis of Exchange Value. . . . . . . . . . . . . . . . . 89
Per Share Price of Public Offering . . . . . . . . . . . . . . . . . . . 89
VOTING PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Distribution of Solicitation Materials . . . . . . . . . . . . . . . . . 90
No Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Required Vote. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Voting Procedures and Consents . . . . . . . . . . . . . . . . . . . . . 91
Completion Instructions. . . . . . . . . . . . . . . . . . . . . . . . . 92
Withdrawal or Change of Vote . . . . . . . . . . . . . . . . . . . . . . 92
Final Cash Distribution by Mission Bay . . . . . . . . . . . . . . . . . 92
Solicitation and Tabulation of Consents by Information Agent . . . . . . 92
Special Requirements for Certain Partners. . . . . . . . . . . . . . . . 92
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Compliance with and Approval from Federal and State Authorities. . . . . 93
COMPARISON OF OWNERSHIP OF MISSION BAY INTERESTS AND SHARES . . . . . . . 94
Form of Organization and Purpose . . . . . . . . . . . . . . . . . . . . 94
Length of Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Properties and Diversification . . . . . . . . . . . . . . . . . . . . . 95
Permitted Investments. . . . . . . . . . . . . . . . . . . . . . . . . . 95
Additional Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Borrowing Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Other Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . 96
Management Control . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . .. . . . . . 97
Management Liability and Indemnification . . . . . . . . . . . . . . . . 97
Anti-takeover Provisions . . . . . . . . . . . . . . . . . . . . . . . . 98
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Vote Required to Amend the Mission Bay Partnership Agreement
or the Charter . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Vote Required to Dissolve the Mission Bay Partnership or
the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Vote Required to Sell Assets . . . . . . . . . . . . . . . . . . . . 99
Vote Required to Merge . . . . . . . . . . . . . . . . . . . . . . . 100
Compensation, Fees and Distributions . . . . . . . . . . . . . . . . . . 100
Liability of Investors . . . . . . . . . . . . . . . . . . . . . . . . . 100
Nature of Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 100
iv
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PAGE
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Potential Dilution of Payment Rights . . . . . . . . . . . . . . . . . . 101
Liquidity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Passive vs. Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . 102
Benefits from Depreciation . . . . . . . . . . . . . . . . . . . . . . . 102
Reporting Procedures and State Taxation. . . . . . . . . . . . . . . . . 102
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES . . . . . . . . 103
Overview of Policies and Objectives. . . . . . . . . . . . . . . . . . . 103
Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Investment in Real Estate or Interests in Real Estate . . . . . . . 103
Investment in Other Entities . . . . . . . . . . . . . . . . . . . . 103
Financing Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Conflict of Interest Policies. . . . . . . . . . . . . . . . . . . . . . 104
Limitation of Liability and Indemnification. . . . . . . . . . . . . . . 105
Policies with Respect to Other Activities. . . . . . . . . . . . . . . . 106
Working Capital Reserves . . . . . . . . . . . . . . . . . . . . . . . . 106
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . 107
Management of the Advisor. . . . . . . . . . . . . . . . . . . . . . . . 108
Audit Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . . . 109
Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . 109
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 110
THE COMPANY'S CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . 111
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . 111
In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Excess Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Power to Issue Additional Shares of Common Stock . . . . . . . . . . . . 112
Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . 112
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . 114
Certain Provisions of Maryland Law and of the Company's Charter
and Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Classification of the Board of Directors . . . . . . . . . . . . . . 114
Removal of the Directors . . . . . . . . . . . . . . . . . . . . . . 114
Business Combinations. . . . . . . . . . . . . . . . . . . . . . . . 114
Control Share Acquisitions . . . . . . . . . . . . . . . . . . . . . 115
Amendment to the Charter . . . . . . . . . . . . . . . . . . . . . . 116
Dissolution of the Company . . . . . . . . . . . . . . . . . . . . . 116
Advance Notice of Director Nominations and New Business. . . . . . . 116
Anti-takeover Effect of Certain Provisions of Maryland Law and of
the Charter and Bylaws113 . . . . . . . . . . . . . . . . . . . . 116
Shares Available for Future Sale . . . . . . . . . . . . . . . . . . 116
FEDERAL INCOME TAX CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . 118
v
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PAGE
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General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Tax Treatment of the Formation Transactions. . . . . . . . . . . . . . . 118
Taxation of the Company. . . . . . . . . . . . . . . . . . . . . . . . . 118
Requirements for Qualification . . . . . . . . . . . . . . . . . . . . . 119
REIT Qualifications . . . . . . . . . . . . . . . . . . . . . . . . 119
Income Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Asset Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Distribution Requirements. . . . . . . . . . . . . . . . . . . . . . 125
Partnership Anti-Abuse Rule. . . . . . . . . . . . . . . . . . . . . 126
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Failure to Qualify . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Taxation of Taxable U.S. Shareholders. . . . . . . . . . . . . . . . . . 127
Taxation of Shareholders on the Disposition of Common Stock. . . . . . . 128
Information Reporting Requirements and Backup Withholding. . . . . . . . 128
Taxation of Tax-Exempt Shareholders. . . . . . . . . . . . . . . . . . . 128
Capital Gain and Losses. . . . . . . . . . . . . . . . . . . . . . . . . 129
Taxation of Foreign Shareholders . . . . . . . . . . . . . . . . . . . . 129
Sale of the Company's Property . . . . . . . . . . . . . . . . . . . . . 131
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
REPORTS TO SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . 133
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . 133
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-1
Appendix A Consent Form . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B Mission Bay Acquisition Agreement . . . . . . . . . . . . . . . B-1
vi
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT (THE "PROSPECTUS"). SEE
"GLOSSARY" FOR THE DEFINITION OF CERTAIN TERMS USED IN THIS PROSPECTUS. THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT IS ADDRESSED TO THE LIMITED
PARTNERS (THE "LIMITED PARTNERS") OF MISSION BAY SUPER 8, LTD., A CALIFORNIA
LIMITED PARTNERSHIP ("MISSION BAY") IN CONJUNCTION WITH THE OFFERING OF
277,487 SHARES OF CLASS A COMMON STOCK OF THE COMPANY TO THE LIMITED PARTNERS
(THE "MISSION BAY OFFERING") IN EXCHANGE FOR THE CONTRIBUTION BY MISSION BAY
OF THE MISSION BAY SUPER 8 HOTEL LOCATED IN SAN DIEGO, CALIFORNIA (THE
"ACQUISITION HOTEL") TO THE COMPANY PURSUANT TO THE MISSION BAY ACQUISITION
AGREEMENT. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS
PROSPECTUS ASSUMES THAT (I) THE INITIAL PRICE PER SHARE OF THE CLASS A COMMON
STOCK IN THE MISSION BAY OFFERING WILL BE $10.00, AND (II) WITH RESPECT TO
THE OWNERSHIP OF THE HOTELS, THE TRANSACTIONS RELATING TO THE FORMATION OF
THE COMPANY AND THE OFFERING DESCRIBED ELSEWHERE IN THIS PROSPECTUS (THE
"FORMATION TRANSACTIONS") SHALL HAVE OCCURRED. REFERENCES IN THIS PROSPECTUS
TO THE "COMPANY" SHALL MEAN HOST FUNDING, INC., A MARYLAND CORPORATION,
REFERENCES TO THE "INITIAL HOTELS" SHALL MEAN THE FOUR (4) HOTEL PROPERTIES
ACQUIRED BY THE COMPANY EFFECTIVE APRIL 1, 1995, REFERENCES IN THIS
PROSPECTUS TO THE OFFERING" SHALL MEAN COLLECTIVELY (I) THE MISSION BAY
OFFERING, (II) THE PUBLIC OFFERING, AND (III) THE EXCHANGE OF THE INITIAL
SHARES BY THE HATFIELD AFFILIATES FOR THE COMPANY'S COMMON STOCK. REFERENCES
TO THE "NET PROCEEDS OF THE OFFERING" SHALL INCLUDE THE NET PROCEEDS OF THE
CONCURRENT PUBLIC OFFERING. SEE "GLOSSARY" FOR THE DEFINITIONS OF CERTAIN
TERMS USED IN THIS PROSPECTUS.
ALL INFORMATION CONCERNING THE EXPECTED OFFERING PRICE AT $10.00 PER
SHARE OF THE COMPANY'S CLASS A COMMON STOCK IN THE PUBLIC OFFERING REFERRED TO
HEREIN IS BASED ON MARKET CONDITIONS AS OF THE DATE OF SUCH OFFERING. THE
INFORMATION INCLUDED HEREIN ASSUMES THAT 500,000 SHARES OF CLASS A COMMON STOCK
ARE ACTUALLY SOLD BY THE COMPANY IN THE PUBLIC OFFERING AT $10.00 PER SHARE.
THE SALE OF MISSION BAY'S ASSETS
This Prospectus/Consent Solicitation Statement solicits the approval of
the Mission Bay Limited Partners for the sale of all of the assets of Mission
Bay to Host Funding, Inc., a Maryland corporation (the "Company") in exchange
for 277,487 shares of the Company's Class A common stock (the "Class A Common
Stock"). The Class A Common Stock would be distributed to the Limited
Partners in a final liquidating distribution. Pursuant to this
Prospectus/Consent Solicitation Statement, Grosvenor Hospitality Group, Inc.
("GHG") the General Partner of Mission Bay is soliciting the consents of the
Limited Partners to the Mission Bay Acquisition, and providing disclosure
regarding the securities which the Limited Partners ultimately will hold if
the Formation Transactions are consummated.
THE COMPANY
The Company intends to qualify as a real estate investment trust
("REIT"). Assuming that Mission Bay receives the consent of the Limited
Partners solicited hereby and certain other conditions are met, the Company
will acquire the Acquisition Hotel having 117 rooms. See "Conditions to
Closing". The Company will be governed by a five-person Board of Directors.
The Company will apply for a listing of its shares of Class A Common Stock on
the American Stock Exchange although such shares have not yet been accepted
for listing on the exchange. If the shares when issued are not listed on the
AMEX they will be listed on the NASDAQ National Market. The listing of the
Class A Common Stock on either the AMEX or the NASDAQ National Market is a
condition to the closing of the Formations Transactions.
In 1995, the Company acquired a note receivable secured by real property
in an approximate principal amount of $1.8 million (the "Hatfield Note") and
four Super 8 hotels (the "Initial Hotels") as a result of the transfer of
certain assets from All American Group, Ltd., a Delaware limited partnership
("AAG") to the Company. The Initial Hotels are located in Miner, Missouri;
Poplar Bluff, Missouri; Rock Falls, Illinois; and Somerset, Kentucky,
respectively. Pursuant to the "Contribution and Assumption Agreement",
partners of AAG (the "AAG Partners") received 100 shares of Common Stock of
the Company (the "Initial Shares" of Common Stock) effective April 1, 1995.
Currently, Inn Fund, LLC, a Delaware limited liability company ("Inn Fund")
leases the Initial Hotels from the Company and All American Group, Inc., a
Delaware corporation, manages the Initial Hotels. The Acquisition Hotel is
currently owned by Mission Bay Super 8, Ltd., a California limited
partnership ("Mission Bay"). The Company and Mission Bay have executed an
<PAGE>
asset acquisition agreement ("Mission Bay Acquisition Agreement") pursuant to
which the Company will acquire the Acquisition Hotel. The closing is
scheduled to occur on completion of the Formation Transactions. Following
the closing, GHG will no longer manage the Acquisition Hotel. Instead, after
the acquisition, the Acquisition Hotel and the Initial Hotels will be managed
by Crossroads Hospitality Tenant Company, LLC, a Delaware limited liability
company ("Lessee"). Upon the consummation of the acquisition of the
Acquisition Hotel, the Company will own five (5) Super 8 Hotels (the
"Hotels"). In order to acquire additional hotel properties, the Company may
incur additional indebtedness. The Company will hold the Hotels for
investment. In addition, the Company will seek to acquire additional hotel
properties which meet its investment criteria. The Company will be
externally advised by Host Funding Advisors, Inc., a Delaware corporation
(the "Advisor"), which is wholly owned by Mr. Ian Gardner-Smith, an affiliate
of the Company. In addition, Host Acquisition Group, LLC, a Delaware limited
liability company (the "Acquisition Co.") will provide acquisition and
financing services to the Company. Mr. Gardner-Smith owns 99% of the
Acquisition Co.
CONDITIONS TO CLOSING THE MISSION BAY ACQUISITION
The Mission Bay Acquisition must be approved by limited partners
holding more than 50% of the limited partnership interests, but if 1.25% or
more of the limited partner interests dissent, perfect their dissenters'
rights, and become dissenting partners ("Dissenting Partners"), then the
Mission Bay Acquisition must be actually approved by at least 67% of the
limited partnership interests. GHG believes that at least 1.25% of the
limited partnership interests will elect to exercise their dissenters'
rights, as it has been informed by Mr. Guy E. Hatfield, who holds in the
aggregate 1.3% of the limited partnership interests that he will dissent as
to at least 1.25% of the interests, if necessary, to cause the 67% approval
requirement to be effective. Therefore, the General Partner (GHG) believes
that the actual approval of at least 67% of the limited partnership interests
will be required. In addition, the transaction is also conditioned on not
more than 5% of the limited partnership interests exercising their
dissenters' rights. The Company may, however, waive this condition, in which
case the Company will transfer to Mission Bay fewer shares of its Class A
Common Stock and more cash than would have been utilized had the percentage
of Dissenting Partners been 5% or less. In addition, in order to insure that
the transaction qualifies for a statutory exemption from the Federal roll-up
rules the Underwriter has conditioned the closing of the Public Offering upon
the actual approval of the Mission Bay Acquisition by at least 67% of the
limited partnership interests of Mission Bay. Accordingly, the Company cannot
and will not close the Mission Bay Acquisition if less than 67% of the
limited partnership interests of Mission Bay actually approve of the Mission
Bay Acquisition. Because the Company will pay cash to the Dissenting
Partners, if more than 5% of the limited partnership interests perfect their
dissenters' rights and the Company waives the dissenters' condition and
closes the Mission Bay Acquisition, then all of the intended use of proceeds
for the Public Offering will not be met. The Mission Bay Acquisition is
also conditioned upon the raising of $5.0 million in cash by the Company in
the Public Offering.
RISK FACTORS
AN INVESTMENT IN THE COMPANY'S COMMON STOCK INVOLVES VARIOUS RISKS, AND
INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK
FACTORS," INCLUDING THE FOLLOWING:
- NON-DISSENTING LIMITED PARTNERS TO RECEIVE SECURITIES IN LIEU OF
LIQUIDATING DISTRIBUTION. The "purposes" clause of the Mission Bay
Agreement of Limited Partnership anticipated that the Acquisition Hotel
and all of its furniture, fixtures and equipment would be liquidated in
late 1996 or early 1997 and the Limited Partners were to receive a cash
distribution upon the completion of such liquidation. Instead of
receiving a liquidating cash distribution in exchange for their limited
partnership interests, should the Limited Partners vote in favor of the
Mission Bay Acquisition they will instead receive shares of Class A
Common Stock in the Company representing a continued ownership in the
Acquisition Hotel and new ownership in the Initial Hotels.
- INSUFFICIENT CASH AVAILABLE FOR PRO FORMA DISTRIBUTIONS.
Base Rent due under the Percentage Leases is, by itself,
insufficient to enable the Company to make distributions to
holders of Common Stock at the Pro Forma Distribution rate of $0.895 for
1996 and such distribution represents 97.7% of the Company's cash
available for distribution.
- ADVERSE TAX CONSEQUENCES IF COMPANY FAILS TO QUALIFY AS A REIT. To
maintain its status as a REIT, the Company must distribute annually at
least 95% of its taxable net income and, as a consequence, may be
required to borrow funds to make additional investments or
distributions. If the Company fails to qualify as a REIT, it would
be taxed as a corporation which could reduce the cash available for
distribution and distributions to Shareholders.
2
<PAGE>
- SUBSTANTIAL DILUTION OF SHARES. The holders of the shares of
Class A Common Stock issued in the Offering will experience
dilution of approximately $6.44 per share from the $10.00
Exchange Value as a result of the Formation Transactions. Also, when
the 140,000 shares of Class C Common Stock convert to Class A
Common Stock in January 1997, the dividends payable to the
holders of the Class A Common Stock acquired in the Offering
will be diluted. Finally, holders of the Class A Common Stock may
experience dilution in the future if the market value of the Company's
shares of Common Stock falls below the Exchange Value of $10
per share and the Company issues new shares of Common Stock at
such lower price.
- SUBSTANTIAL CONTROL OF COMPANY BY HATFIELD AFFILIATES DUE TO NEAR
MAJORITY STOCK OWNERSHIP. Assuming the Company sells all of the shares
offered in the Public Offering and issues 277,487 shares of Class A
Common Stock (assuming 1.25% Dissenting Partners) to the Mission Bay
Limited Partners in the Mission Bay Offering, upon consummation of
the Formation Transactions, the Hatfield Affiliates will own 46.1% of
all the Common Stock and 33.7% of the Class A Common Stock. Thus the
future sale by Mr. Hatfield and his Affiliates of a significant
number of shares of Class A Common Stock may have an adverse effect
upon the market price of the Class A Common Stock. Further, the
Hatfield Affiliates will have the ability to substantially control
the corporate actions of the Company. The Hatfield Affiliates will
heavily influence any Shareholder vote to (i) elect directors, (ii)
approve the sale of substantially all the assets, (iii) approve a
merger or an acquisition, or (iv) take various other corporate actions.
- SUBSTANTIAL BENEFITS TO HATFIELD AFFILIATES. The Hatfield Affiliates
will receive 410,000 shares of Class A Common Stock, 140,000 shares of
Class B Common Stock, and 140,000 shares of Class C Common Stock in
exchange for the Initial Shares. The shares of Common Stock received
by the Hatfield Affiliates will be more liquid than their prior
equity interests in the Company. As a result, the Hatfield
Affiliates will realize a Contribution Gain of approximately
$9,012,000. Further, Guy and Dorothy Hatfield will be relieved of
$3,804,000 of personal guarantees when the Company pays off certain
indebtedness which they have guaranteed with a portion of the
proceeds of the Public Offering.
- BENEFITS TO MR. GARDNER-SMITH. Mr. Ian Gardner-Smith owns
100% of the Advisor and 99% of the Acquisition Co. Although
neither the Advisor nor the Acquisition Co. will receive any
fees or compensation pursuant to the Formation Transactions, the
Acquisition Co. will receive a 6% placement fee on completion of any
subsequent acquisition, and the Advisor will receive a base
fee of $30,000 annually plus a percentage fee of 1.25% of the
total market value of all real property owned by the Company when
the real property owned by the Company exceeds $35 million.
- CLASS A COMMON STOCK RECEIVED MAY NOT REFLECT VALUE OF MISSION
BAY ASSETS. Since there has been no prior market for the
Company's Common Stock there can be no assurance that the
value of the shares of Class A Common Stock to be received by the
Limited Partners pursuant to the Mission Bay Acquisition will reflect
the value of the assets contributed by Mission Bay. Consequently,
the Limited Partners could experience dilution in their
investment and/or a substantial decrease in value upon the consummation
of the Mission Bay Acquisition.
3
<PAGE>
- DEFAULT ON HATFIELD NOTE COULD SUBSTANTIALLY REDUCE CASH AVAILABLE
FOR DISTRIBUTION. A default on the Hatfield Note
could cause a substantial loss to the Company. Pursuant to
the Pledge Agreement, the Company could reacquire the Class B
Common Stock and Class C Common Stock which now secures the Hatfield
Note, and therefore the amount of any resulting loss to the Company
would be a function of the then current value and distribution
yield of the Class B Common Stock and Class C Common Stock
which the Company would reacquire. However, the distributions on the
shares of Class B Common Stock and Class C Common Stock are
subordinated to a distribution on the Class A Common Stock of $0.91 per
share. Additionally, there can be no assurance that the then-current
value of the Shares of Class B and Class C Common Stock will be
equivalent to the balance then owed on the Hatfield Note. Thus, the
Company could incur a significant loss in the event there is a default
on the Hatfield Note and such significant loss could substantially
reduce cash available for distribution to the Shareholders.
- DEPENDENCE ON LESSEE. Upon the closing of the Formation
Transactions, all the Hotels will be leased to and managed by
the Lessee. In order to generate cash sufficient to make distributions
to shareholders, the Company will rely on timely receipt of rent
payments from the Lessee. The failure or delay by the Lessee to make
rental payments under the Percentage Leases could adversely affect the
ability of the Company to make distributions to shareholders. The
failure of the Lessee to generate sufficient cash flow from the Hotels
to make lease payments under the Percentage Leases could adversely
affect (i) the ability of the Company to make anticipated distributions
to Shareholders, (ii) the Company's ability to meet its operating
expenses, and (iii) the Company's operating results . The Lessee is a
limited purpose entity which has been recently organized to lease and
operate the Hotels. See "The Company in General -- The Lessee."
- HISTORICAL OPERATING LOSSES OF THE HOTELS. Both the Initial
Hotels and the Acquisition Hotel have incurred operating
losses from 1992 and thereafter. Specifically, the operating
losses of the Initial Hotels are as follows: (i) the Rock Falls Super 8
operated at a $34,000 loss in 1992; (ii) the Poplar Bluff
Super 8 operated at a $36,000 loss in 1992; (iii) the Somerset Super 8
operated at a $36,000 loss in 1992 and approximately $32,000
in 1993; and (iv) the Miner Super 8 did not incur a loss in 1992 or
1993. In addition, in 1994 the Acquisition Hotel incurred a net loss
of approximately $1,381,000 after a writedown of approximately
$1,535,000. Accordingly, there can be no assurances that the Hotels
will generate profits.
- CONFLICTS OF INTEREST. Conflicts of interest exist between
the Company and certain of its Affiliates, including the
Advisor and the Acquisition Co. The Hatfield Affiliates have
conflicts of interest with respect to the Formation Transactions.
Messrs. Gardner-Smith, McNulty and other Affiliates of the Advisor and
the Acquisition Co. will have conflicts of interest with respect to the
Formation Transactions and the operation and growth of the Company and
they will continue to have significant influence over the affairs of
the Company by reason of their management and control of the Advisor
and the Acquisition Co. Messrs. Gardner-Smith and McNulty will
substantially control the day-to-day operations of the Company as well
as the development and implementation of the acquisition strategy.
Although Messrs. Gardner-Smith and McNulty owe a fiduciary duty to all
Shareholders, there is no assurance that the strategies and decisions
they implement will be successful. The economic consequence to the
Mission Bay Limited Partners who receive shares of the Company's
Class A Common Stock in the Mission Bay Acquisition is that these
conflicts could result in a substantial decline in the value of their
shares or even a total loss of their investment. See "Risk Factors --
Conflicts of Interest", "The Company in General -- Substantial
Dilution of Shares", and "Formation Transactions and Other Related
Transactions."
- NEWLY ORGANIZED ENTITIES; LIMITED ASSETS AND OPERATING
HISTORY. The Company has only a limited operating history and, as of
the completion of the Offering, will have had no experience operating
as an independent company.
- DEPENDENCE ON KEY PERSONNEL AND ADVISOR. The Company is an externally
advised REIT and will be highly dependent on the efforts of the Advisor
and the Company's officers, whom have experience investing in
4
<PAGE>
hotel properties but only limited experience in operating a REIT. The
future success of the Company and its acquisition program is dependent
on the active participation of Messrs. Gardner-Smith and McNulty. The
loss of the services of either of these individuals could have a
material adverse effect on the Company. See "Management and Various
Policies and Objectives -- Directors and Executive Officers."
- RISKS OF LEVERAGE. The Company's Charter does not limit the
level of debt the Company may incur. The Company could become
highly leveraged, which could adversely affect the ability of
the Company to make distributions to shareholders and increase the risk
of default under its indebtedness.
- DEPENDENCE ON SINGLE BRAND NAME. Each of the Hotels is a Super 8 hotel.
The Super 8 brand name is owned by Super 8 Motels, Inc. Any degradation
or adverse market developments relating to the Super 8 brand name could
adversely affect the results of operations of the Hotels and the
ability of the Lessee to make rent payments.
- UNDERWRITING. The Company is relying heavily on the ability
of its Underwriter to effect a successful all or none underwriting of
the 500,000 shares of Class A Common Stock to be issued in the Public
Offering for gross proceeds of $5,000,000.
- INABILITY TO OPERATE THE HOTELS. As a REIT, the Company is restricted
in its ability to operate the Hotels and hotel properties owned or
acquired by the Company in the future. The Company will rely on the
Lessee to operate the Hotels and could rely on other lessees to operate
any additional hotel properties it acquires. No assurances can be given
that the Lessee or the other lessees will operate the Hotels or
additional hotel properties in a manner to generate sufficient funds to
pay base rent and maximize percentage rent.
- NO PRIOR MARKET FOR COMMON STOCK. The market price of the Common Stock
may be adversely affected if no active trading market for the Common
Stock develops or if interest rates increase.
- EXEMPTIONS FOR MR. HATFIELD FROM MARYLAND BUSINESS COMBINATION
LAW. Pursuant to the Maryland Business Combination Law, the
Company has exempted any business combination involving Mr. Hatfield
and, consequently, the statute's five-year prohibition and the
super-majority vote requirements will not apply to a business
combination between Mr. Hatfield and the Company. Given the foregoing
exemptions from the Maryland Business Combination Law and Mr.
Hatfield's ownership and ability to control the activities of the
Company, Mr. Hatfield may be able to enter into business combinations
with the Company, which may not be in the best interest of the
Shareholders, without compliance by the Company with the super-majority
vote requirements and other provisions of the statute. See "The
Company's Capital Stock -- Business Combinations."
- FRANCHISE AGREEMENT RISKS. The effect of any adverse developments in
the business or prospects of any of the franchisors of the Hotels that
would impact the Company's Hotels. Super 8 Motels, Inc., a South Dakota
corporation (the "Franchisor") and the Company have reached an informal
agreement whereby the Franchisor has consented to the transfer of the
franchise licenses on the five Hotels to the Lessee. As of the date of
this Prospectus, the Company and the Franchisor are currently
negotiating a waiver of various franchise transfer fees.
- VALUE OF HOTELS AND TERMS OF FORMATION TRANSACTIONS. The value at which
the Hotels were contributed to the Company and the terms of certain of
the Formation Transactions were primarily established through recent
(i.e., December 1, 1994) independently prepared real estate appraisals
performed by Arthur Andersen, LLP, a national consulting and accounting
firm. Although such appraisals may have been accurate, they may not
reflect current fair market values. As a result, purchasers of the
Class A Common Stock of the Company could experience dilution in their
investment on consummation of the Formation Transactions. The
value of the Initial Shares received by the Hatfield Affiliates
exceeded the net asset value of the assets contributed
5
<PAGE>
to the Company by approximately $9,012,000. The terms of the Percentage
Leases were negotiated on an arms-length basis, and based on industry
practice, the Company believes that the terms of such agreements are
fair to the Company. However, the Advisory Agreement and the
Post-Formation Acquisition Agreement were not negotiated on an
arms-length basis and there can be no assurance that the Advisory
Agreement and Post-Formation Acquisition Agreement were negotiated in
the best interests of the Shareholders. See "Risk Factors -- Value of
Hotels and Terms of Formation Transactions."
- FUTURE SALE OF COMMON STOCK. The Hatfield Affiliates will have certain
registration and piggyback rights to register for resale their shares
of Common Stock. In addition, the Company may adopt stock option
plans. Such future sales of Common Stock could adversely affect the
market price of the Common Stock, from time to time, or the Company's
ability to sell additional shares of Common Stock in the future.
- RELIANCE ON BOARD OF DIRECTORS. Subject to the fiduciary duty
the Board of Directors owes to the shareholders, the Board of
Directors has the ability to change the policies of the Company,
including its investment, financing and distribution policies, without
a vote of Shareholders, which could result in policies that do not
reflect the interests of all Shareholders.
- ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT. The Company's Charter
provides that no person (other than Mr. Hatfield) may own more than
9.9% of the Company's Common Stock. This restriction on ownership
of Common Stock is intended to help assure compliance with certain
requirements related to continued qualification of the Company as a
REIT, and certain other provisions in the Company's Charter and Bylaws.
This Provision may have the effect of inhibiting a change of control of
the Company even though such change of control could be beneficial to
the Company's Shareholders.
- POWER TO ISSUE ADDITIONAL STOCK. The Company's Charter authorizes the
Board of Directors to cause the Company to issue additional authorized
but unissued shares of Common Stock or Preferred Stock and to classify
or reclassify any unissued shares of Common Stock or Preferred Stock
and to set the preferences, rights and other terms of such classified
or unclassified shares. Although the Board of Directors has no such
intention at the present time, it could establish a series of Preferred
Stock that could, depending on the terms of such series, delay, defer
or prevent a transaction or a change of control of the Company that
might involve a premium price for the Common Stock or otherwise be in
the best interest of the Shareholders.
- EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK AND
COSTS OF FUNDS. One of the factors that may influence the price of the
Common Stock in public trading markets will be the annual yield from
distributions by the Company on the Common Stock as compared to yields
on other financial instruments. Thus, an increase in market interest
rates will result in higher yields on other financial instruments,
which could adversely affect the market price of the shares of Common
Stock. Increases in market interest rates could also increase the
Company's cost of funds borrowed.
- HOTEL INDUSTRY RISKS. Risks affecting the hotel industry generally,
and the Company's Hotels specifically, that may adversely affect the
Company's revenue and the amounts available for distribution to
Shareholders, including:
- General: Investments in the hotel industry involve certain risks,
such as potential losses of franchises, changes in demand for
hospitality services, the need for capital replacements and
improvements, the cyclical and seasonal nature of the industry and the
dependence of the industry on general economic conditions;
- Economic Conditions: Economic conditions which may adversely affect
hotel investments generally and, more particularly, the demand for
hospitality services, revenues of the Hotels and the Lessee's ability
to make lease payments from cash generated by the operation of the
Hotels;
- Competition: Intense competition, geographic concentration in the
California, Illinois, Kentucky, and Missouri markets and specifically
within the San Diego, California market, and the past and possible
future over-building of hotel properties in general;
- Overhead Costs: The effect of increases in labor costs, utilities,
employee health insurance and other
6
<PAGE>
expenses on the Lessee's ability to make lease payments from cash
generated by the operation of the Hotels;
- Future Capital Investments: The need for future capital expenditures
to preserve competitiveness and/or franchise licenses and the potential
loss of such licenses.
- REAL ESTATE INVESTMENT RISKS. Risks affecting the real estate industry
generally that may adversely affect the value of the Hotels and the
market price of the Common Stock, including: (i) relative illiquidity
of real estate, (ii) potential uninsured or underinsured losses, (iii)
potential lability for unknown or future environmental liabilities, and
(iv) increases in assessed values or property tax rates.
THE HOTEL INDUSTRY AND THE HOTELS
THE HOTEL INDUSTRY
The United States hotel industry is experiencing consistently steady
growth. Since 1990, the hotel industry has experienced improved fundamentals
as the annual rates of growth in demand for hotel rooms have exceeded the
annual rates of growth in supply and annual average daily room rates ("ADR")
have increased each year. According to Smith Travel Research, total U.S.
room demand (average daily rooms rented for the year) in 1993 increased by
3.6% over 1992 while total U.S. room supply (average daily rooms available
for the year) in 1993 increased by only 1.0% over 1992. During each of the
past ten quarters through June 30, 1994, the industry average occupancy, ADR
and revenue per available room or suite ("REVPAR") for all U.S. hotels have
increased, versus the comparable prior year period. Occupancy, ADR and
REVPAR are the cost significant indicators of a hotel's revenue performance.
The table set forth below contains information with respect to average
occupancy, ADR and REVPAR for the United States hotel industry for the last
five years:
<TABLE>
<CAPTION>
TABLE 1 Years Ended December 31
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average hotel occupancy 61.8% 60.2% 61.9% 63.3% 65.2%
Annual % growth in room supply 3.4% 2.5% 1.3% 1.0% 1.4%
Annual % growth in room demand 2.1% 0.0% 3.2% 3.6% 4.5%
ADR $58.49 $58.83 $59.65 $61.14 $63.77
REVPAR $36.15 $35.42 $36.92 $38.70 $41.58
% Change in REVPAR 1.9% (2.0)% 4.2% 4.8% 7.4%
</TABLE>
THE HOTELS
The four Initial Hotels and the Acquisition Hotel constitute the five
Hotels. The four Initial Hotels and the Hatfield Note were acquired from AAG
by the Company effective April 1, 1995, at an Exchange Value of $6.9 million
for 100 shares of Common Stock ("Initial Shares"). These 100 Initial Shares
of Common Stock will, upon the closing of the Public Offering, be converted
into 410,000 shares of Class A Common Stock, 140,000 shares of Class B Common
Stock, and 140,000 shares of Class C Common Stock of the Company. The
distributions on the shares of both the Class B Common Stock and the Class C
Common Stock will be subordinated to a distribution of $0.91 on the Class A
Common Stock. However, the 140,000 shares of Class C Common Stock will be
freely and unconditionally convertible into Class A Common Stock on January
1, 1997.
As part of the Formation Transactions, in late-1995 or
early 1996, the Company will acquire the Acquisition Hotel from Mission Bay
and in exchange will offer 277,487 shares of Class A Common Stock in the
Company (with an Exchange Value of $2,774,870) to the Mission Bay Limited
Partners pursuant to the Mission Bay Acquisition Agreement. (The number of
shares will decrease proportionately by reason of the Dissenting Partners.)
7
<PAGE>
The following tables set forth certain information with respect to the
five Hotels:
<TABLE>
<CAPTION>
TABLE 2
Twelve Months Ended December 31, 1994
-------------------------------------
(Unaudited)
($ in 000) Number Pro
of Rooms Forma Revenue
at Pro Forma Lessee Average Per
Year December Pro Forma Lease Net Daily Average Available
Location Opened 1994 Revenue Payment(1) Income(2) Rate Occupancy Room (3)
- -------- ------ ---- ------- ---------- --------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Hotels
- --------------
Rock Falls, IL 1985 63 $708 $ 237 $ 78 $36.37 79.4% $28.90
Miner, MO 1985 63 846 330 46 $36.73 96.2% $35.31
Poplar Bluff, MO 1985 63 619 224 43 $35.32 72.2% $25.69
Somerset, KY 1985 63 561 160 51 $34.62 67.6% $23.63
--- ----- ------ ---- ------ ----- ------
Subtotal 252 2,734 953 219 $36.00 78.8% $28.38
--- ----- ------ ---- ------ ----- ------
Acquisition Hotel
- -----------------
Mission Bay, CA 1987 117 $1,005 $ 251 27 $42.20 54.9% $23.18
--- ----- ------ ---- ------ ----- ------
Consolidated Totals 369 $3,789 $1,204 $246
--- ----- ------ ----
--- ----- ------ ----
Weighted Averages $37.52 71.3% $26.73
------ ----- ------
------ ----- ------
</TABLE>
<TABLE>
<CAPTION>
TABLE 2
Nine Months Ended September 30, 1994
------------------------------------
(Unaudited)
($ in 000) Number Pro
of Rooms Forma Revenue
at Pro Forma Lessee Average Per
Year Sept. 30, Pro Forma Lease Net Daily Average Available
Location Opened 1994 Revenue Payment(1) Income(2) Rate Occupancy Room (3)
- -------- ------ ---- ------- ---------- --------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Hotels
- --------------
Rock Falls, IL 1985 63 $553 $ 184 $ 64 $36.28 83.6% $30.43
Miner, MO 1985 63 640 250 35 $36.28 98.3% $35.79
Poplar Bluff, MO 1985 63 468 169 34 $35.55 73.1% $26.09
Somerset, KY 1985 63 428 123 40 $35.18 68.5% $24.19
--- ----- ------ ---- ------ ----- ------
Subtotal 252 2,089 726 173 $36.02 80.9% $29.12
--- ----- ------ ---- ------ ----- ------
Acquisition Hotel
- -----------------
Mission Bay 1987 117 $849 $ 206 54 $42.72 58.6% $25.11
--- ----- ------ ---- ------ ----- ------
Consolidated Totals 369 $2,938 $ 932 $ 228
--- ----- ------ ----
--- ----- ------ ----
Weighted Averages $37.74 73.8% $27.85
------ ----- ------
------ ----- ------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
Nine Months Ended September 30, 1995
------------------------------------
(Unaudited)
($s in 000) Number Pro
of Rooms Forma Revenue
at Pro Forma Lessee Average Per
Year Sept. 30, Pro Forma Lease Net Daily Average Available
Location Opened 1995 Revenue Payment(1) Income(2) Rate Occupancy Room (3)
- -------- ------ ---- ------- ---------- --------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Hotels
- --------------
Rock Falls, IL 1985 63 $536 $ 179 $ 65 $37.42 78.8% $29.61
Miner, MO 1985 63 626 245 43 $38.89 90.1% $35.15
Poplar Bluff, MO 1985 63 496 181 37 $36.19 76.0% $27.62
Somerset, KY 1985 63 422 121 53 $34.29 69.4% $23.88
--- ----- ------ ---- ------ ----- ------
Subtotal 252 2,079 726 198 $36.99 78.6% $29.06
--- ----- ------ ---- ------ ----- ------
Acquisition Hotel
- -----------------
Mission Bay, CA 1987 117 $ 930 $ 258 67 $44.49 61.5% $27.45
--- ----- ------ ---- ------ ----- ------
Consolidated Totals 369 $3,010 $ 983 $265
--- ----- ------ ----
--- ----- ------ ----
Weighted Averages $39.03 73.1% $28.55
------ ----- ------
------ ----- ------
</TABLE>
(1) Represents lease payments from the Lessee to the Company calculated on a
pro forma basis by applying the rent provisions of the Percentage Leases
to the pro forma revenues of the Initial Hotels and Acquisition Hotel
for each respective period as if January 1, 1994, January 1, 1994 and
January 1, 1995 respectively, each were the beginning of the lease year.
(2) Represents Lessee pro forma net income which includes a reduction for
pro forma lease payments from the Lessee to the Company pursuant to the
Percentage Leases. See "The Hotels and Lessee-Pro Forma Combined
Statements of Operations". Includes a deduction for a replacement
reserve at $125 per room per quarter which the lessee must set aside for
capital improvements.
(3) Determined by dividing room revenue by the number of available rooms.
_________
MANAGEMENT STRATEGY
The Company believes that the economic trends affecting the hotel
industry will be the major factor in any future growth in Percentage Lease
revenue from the Hotels and in the hotel properties that may be acquired by
the Company. Additionally, the Company believes that if the Lessee operates
and manages the Hotels in an efficient manner, such operation and management
could have a positive effect on any future growth in Percentage Lease revenue
from the Hotels and in the hotel properties that may be acquired by the
Company. The Hotels will be, and any hotel properties which may be acquired
by the Company for operation, may be managed by the Lessee. Based upon
information provided by AAG, the Initial Hotels had average occupancy, ADR
and REVPAR of 78.8%, $36.00, and $28.38, respectively, for 1994. The Company
expects that, since January 1, 1995 and prior to the closing of the Offering,
between 1% and 4% of room revenues of the Initial Hotels for such period will
have been spent on upgrades and improvement of the Initial Hotels. Such
capital improvements have been made to maintain and increase the quality
standards at the Initial Hotels, respectively.
Combined REVPAR for the Initial Hotels has increased from $24.45 for
1992 to $28.38 for 1994 and to $28.34 for the twelve months ended September 30,
1995. Management of the Company believes the growth in REVPAR at the
Initial Hotels reflects the impact that can result from improved economic
trends, improved management, capital improvements, and stronger demand in the
market area. See "Business and Properties -- The Initial Hotels."
9
<PAGE>
GROWTH STRATEGY
GENERAL
The Company's growth strategy is to increase cash flow and enhance
Shareholder value by acquiring additional existing hotels that meet the
Company's investment criteria and by participating, through the Percentage
Leases, in any growth in revenue at its Hotels and subsequently acquired
hotels.
SELECTION OF HOTELS
The Company's selection of the Hotels for acquisition was principally
based on competitive position of each Initial Hotel in its market and the
prospects for growth in revenues and property values of such hotel
properties. In selecting the Hotels, the Company considered a range of
factors with respect to each Initial Hotel, including (i) the historical and
projected cash flows, (ii) the estimated replacement cost and proposed
acquisition price of each Initial Hotel, (iii) the availability of qualified
lessees, (iv) the physical condition and potential for repositioning
(including changing the franchise) or expansion or other physical
improvements, (v) the price segment, (vi) the growth potential of the market,
and (vii) the strength of the particular affiliated national hotel
organization, if any.
PERCENTAGE LEASES/ INTERNAL GROWTH
The Percentage Leases are designed to allow the Company to participate
in any growth in revenues at the Hotels, which the Company's management
believes can be achieved through increases in both occupancy rates and ADR.
During the term of each Percentage Lease, the Lessee will be obligated to pay
(i) the Base Rent (as set forth below) (ii) Percentage Rent (as set forth
below), (iii) all taxes other than the property taxes on the Hotels (the
Company will pay such property taxes), assessments, ground rents, water,
sewer or other rents and charges, excises, tax inspection, authorization or
similar fees and all other governmental charges (the "Impositions"), and (iv)
every fine, penalty, interest and cost for non-payment or late payment of
Base Rent, Percentage Rent, or the Impositions (the "Additional Charges").
10
<PAGE>
A summary of the Percentage Leases with respect to the Hotels is set
forth below.
<TABLE>
<CAPTION>
TABLE 3
Pro Forma
Gross Revenue Percentage Rent
for the 12 for the 12
Annual Percentage Months Ended Annual Base Months Ended
Rent Formula December 31, 1994 Rent 12/ 31/94
------------ ----------------- ------------ ----------
<C> <S> <C> <C> <C>
Hotels:
MINER 35% YTD REVENUES OVER INITIAL BREAK-EVEN THRESHOLD OF $660,000*
ON FIRST $200,000 OVER BREAK-EVEN THRESHOLD, AND 40% THEREAFTER, $846,109 $265,300 $65,107
LESS PERCENTAGE RENT PREVIOUSLY PAID YTD
POPLAR BLUFF 35% YTD REVENUES OVER INITIAL BREAK-EVEN THRESHOLD OF $555,000*
ON FIRST $100,000 OVER BREAK-EVEN THRESHOLD, AND 37% THEREAFTER, $618,862 $202,000 $22,352
LESS PERCENTAGE RENT PREVIOUSLY PAID YTD
ROCK FALLS 28.75% YTD REVENUES OVER INITIAL BREAK-EVEN THRESHOLD OF $580,000**
ON FIRST $200,000 OVER BREAK-EVEN THRESHOLD, AND 35% THEREAFTER, $708,125 $200,500 $36,836
LESS PERCENTAGE RENT PREVIOUSLY PAID YTD
SOMERSET 32% YTD REVENUES OVER INITIAL BREAK-EVEN THRESHOLD OF $410,000***
ON FIRST $200,000 OVER BREAK-EVEN THRESHOLD, AND 35% THEREAFTER, $561,459 $112,000 $48,467
LESS PERCENTAGE RENT PREVIOUSLY PAID YTD
MISSION BAY 30% YTD REVENUES OVER INITIAL BREAK-EVEN THRESHOLD OF $1,050,000**
ON FIRST $100,000 OVER BREAK-EVEN THRESHOLD, AND 40% THEREAFTER, $1,054,819 $250,000 $1,445
LESS PERCENTAGE RENT PREVIOUSLY PAID YTD ---------- ------
Consolidated
Total for
Hotels $3,789,374 $1,029,800 $174,207
---------- ---------- --------
---------- ---------- --------
</TABLE>
- --------------------------------------------------------------------------------
* Break-Even Threshold increases by 2% per year
** Break-Even Threshold increases by 3% per year
*** Break-Even Threshold remains constant
ACQUISITION STRATEGY/EXTERNAL GROWTH
The Acquisition Co. will utilize its management's extensive experience
in the hotel industry to identify for acquisition additional existing hotel
properties that meet the Company's investment criteria. The Company intends
to place particular emphasis on the acquisition of additional high quality,
limited service hotels throughout the United States. Management of the
Acquisition Co. plans, as part of its short-term strategic plan, to acquire
additional existing hotels at attractive prices because of the adverse impact
of high leverage on the profitability and operations of many hotel
properties, past over-building of hotel properties and the effects of the
recent economic recession. Additional investments by the Company may be
financed, in whole or in part, from borrowings, subsequent issuances of
Common Stock or other securities, or cash flow; however, because the Company
must distribute annually at least 95% of its taxable net income to maintain
its REIT status, cash flow available for investment may be limited.
FORMATION TRANSACTIONS
Pursuant to the Contribution and Assumption Agreement, the AAG Partners
received the Initial Shares upon the consummation of the Contribution and
Assumption Agreement in exchange for the Initial Hotels and the Hatfield
11
<PAGE>
Note. The fair market value of the Initial Shares received by the Hatfield
Affiliates was $6.9 million. The historical carrying value of the net assets
contributed to the Company by AAG was approximately ($2,112,000).
Accordingly, the difference between the fair market value of the Company's
Initial Shares received by the Hatfield Affiliates and the net asset deficit
of the Company resulting from the contribution of assets to the Company was
approximately $9,012,000. This $9,012,000 will be referred to as the
"Hatfield Affiliates' Contribution Gain". The Formation Transactions (See
generally "Formation Transactions and Other Related Transactions.") will be
as follows:
- The Acquisition Hotel is currently owned by Mission Bay. Assuming that
Mission Bay receives the required approval of its Limited Partners
(i.e. 67%) pursuant to this Prospectus/Consent Solicitation Statement
and certain other conditions are met, the Company will acquire the
Acquisition Hotel from Mission Bay pursuant to the Mission Bay
Acquisition Agreement. The Company will acquire the hotel assets of
Mission Bay in exchange for shares of Class A Common Stock of the
Company issued in the Mission Bay Offering after which the Common Stock
of the Company will be distributed to the Mission Bay Limited Partners
in a final liquidating distribution of Mission Bay. Even if the Mission
Bay Limited Partners approve the Mission Bay Acquisition, an additional
condition to the Mission Bay Acquisition is the Company's concurrent
closing at its Public Offering described below.
- In order to adopt the Mission Bay Acquisition Agreement, Mission Bay
must secure the actual approval of (i) GHG; and (ii) the Limited Partners
holding at least 67% of the outstanding limited partner interests of
Mission Bay. In addition, the Company's acquisition of Mission Bay is
conditioned upon not more than 5% of the Mission Bay Partners exercising
their rights to become "Dissenting Partners". The Company may in its
discretion, waive the 5% limitation in which case the Company will
transfer to Mission Bay fewer of its Class A Common Stock and more cash
than would have been utilized had the percentage of Dissenting Partners
been 5% or less. A consequence of the Company using more cash to fund
the Mission Bay Dissenting Partners is that the Company will not be able
to meet its intended uses of funds. See "Use of Proceeds." The
acquisition of the Acquisition Hotel by the Company has also been
structured to comply with the other protections afforded by the
Thompson-Killea Act.
- In addition, concurrent with the issuance of Common Stock of
the Company for the Acquisition Hotel, the Company will issue its Class
A Common Stock in a public offering (the "Public Offering") with a
required gross cash offering proceeds of $5 million. The Public Offering,
in its present form, is conditioned upon the closing of the Mission Bay
Acquisition. However, the Company anticipates that, in the event
either (i) the Mission Bay Acquisition receives a less than 67%
approval, and/or (ii) more than 5% of the Mission Bay Limited Partners
dissent and the Company does not waive the 5% limitation, then the
management of the Company may amend the Registration Statement for the
Public Offering by deleting any and all references to the Mission Bay
Acquisition and the Company may go forward with the Public Offering, as
amended, covering only the Initial Hotels.
- The Company will enter into an Advisory Agreement with the
Advisor upon the closing of the Offering. The Advisor is an affiliate
of the Company. The Advisor will provide information, advice,
assistance and facilities to the Company with regards to the investment
decisions, day-to-day operations and management of the Company. In
exchange for such services, the Company will generally pay the Advisor a
base annual fee of $30,000 payable quarterly and a percentage fee of
1.25% of the total market value of all real property owned by the Company
when the real property of the Company exceeds $35 million. See "The
Advisor -- The Advisory Agreement." The Company shall also reimburse the
Advisor for any third party professional fees incurred in its role as
Advisor.
- The Company will enter into a Post-Formation Acquisition
Agreement with Acquisition Co. upon the closing of the Offering. The
Acquisition Co. is an affiliate of the Company. The Acquisition Co. will
actively seek to acquire additional hotel properties that meet the
investment criteria of the Company. The Acquisition Co. will perform all
action necessary for the acquisition of additional hotels. In exchange,
the Company will pay
12
<PAGE>
the Acquisition Co. a 6% placement fee payable in Common Stock of the
Company (valued at its then current trading value) for such services.
- In order for the Company to qualify as a REIT, the Company
cannot operate hotels directly. Therefore, the Company will lease the
Hotels to the Lessee for a term of fifteen years pursuant to the
Percentage Leases.
- The Hatfield Note will be amended effective upon the closing
of the Formation Transactions so that the interest rate will increase
from 10% to 12%. Pursuant to the Pledge Agreement effective upon the
closing of the Formation Transactions, the 140,000 shares of Class B
Common Stock and 140,000 shares of Class C Common Stock of the Company
which the Hatfield Affiliates will receive in exchange for a portion of
their Initial Shares will be substituted for the 26.2 Initial Shares
presently pledged by the Hatfield Affiliates in favor of the Company as
security for the Hatfield Note. See "Formation Transactions -- The
Hatfield Note."
OWNERSHIP OF AAG
The Hatfield Affiliates own 100% of the partnership interests of AAG.
All American Group, Inc., a Delaware corporation, is the general partner of
AAG. The limited partners of AAG are Guy and Dorothy Hatfield as Trustees of
Trust dated May 24, 1978 and Amended August 12, 1987, Scott Jeffrey Hatfield,
and Julia Hatfield King. The ownership interests in AAG are the following:
Guy and Dorothy Hatfield as Trustees of Trust dated May 24, 1978 and Amended
August 12, 1987 own 86.8% of AAG, Scott Jeffrey Hatfield owns 6%, Julia
Hatfield King owns 6%, and All American Group, Inc. owns 1.2%.
FRANCHISE AGREEMENTS
The Lessee will be the licensee under the franchise licenses on the
Hotels. See "Business and Properties - Various Franchise Agreements."
13
<PAGE>
Following consummation of the Formation Transactions, the structure
and relationships among the Company, the Hotels, Advisor, the Acquisition
Co., and the Lessee, will be as follows:
<TABLE>
<CAPTION>
REIT Shareholders
------------------
<S> <C> <C> <C>
- --------------- --------------- ------------------- ---------------------
Former Public
Mission Bay Hatfield Offering Directors
Partners Affiliates Purchasers
- --------------- --------------- ------------------- ---------------------
277,487 Shares of Class A 410,000 Shares of Class A 500,000 Shares of Class A 30,000 Shares of Class A
Common Stock in Mission Common Stock Common Stock Common Stock
Bay Offering (assuming ----------- ------------ -------------
1.25% Dissenting Partners)
- --------------------------
266,950 minimum number 140,000 Shares of Class B --------------
of shares of Class A Common Stock HOST FUNDING
Common Stock to Mission ------------ ADVISORS, INC.
Bay Limited Partners 140,000 Shares of Class C (the "Advisor")
if Company does not Common Stock Ian Gardner-Smith 100%
waive the 5% dissenters' ------------ ----------------------
condition
Advisory Agreement
--------------------------------------------------------------------------------------
REIT
HOST FUNDING, INC.
(the "Company")
Class A Class B Class C TOTALS
------- ------- ------- -------
Hatfield Affiliates 27.4% 9.3% 9.3% 46.1%
Public Offering Purchasers 33.4% 33.4%
Mission Bay Limited Partners 18.5% 18.5%
Directors 2.0% 2.0%
----- ---- ---- -----
81.3% 9.3% 9.3% 100%
--------------------------------------------------------------------------------------
Percentage Leases
Post-Formation
----------------------------------------------------------------- Acquisition
Agreement
CROSSROADS HOSPITALITY TENANT COMPANY, LLC
(the "Lessee")
-----------------------------------------------------------------
- ------------------------------------ ------------------------
Crossroads Hospitality Company, LLC IHC Member Corporation
- ------------------------------------ ------------------------
75% of voting interests 25% of voting interests ----------------------------------------------------
99% of profits & losses 1% of profits & losses HOST ACQUISITION GROUP, LLC
- ------------------------------------ ------------------------ (the "Acquisition Company")
- ------------------------------------ ------------------------ Ian Gardner-Smith 99%
Interstate Hotels Corporation HC Member Corporation Paul K. Richey 1%
------------------------------ ------------------------
75% of voting interests 25% of voting interests ----------------------------------------------------
99% of profits & losses 1% of profits & losses
- ------------------------------------ ------------------------
</TABLE>
14
<PAGE>
As a result of the Formation Transactions, the Mission Bay Limited
Partners and Affiliates of Mission Bay will receive the following benefits,
among others:
- the Common Stock of the Company received by Mission Bay
Limited Partners pursuant to the Mission Bay Acquisition Agreement will
be more liquid than their prior equity interests in Mission Bay;
Management of the Company believes the Formation Transactions will have
various beneficial effects on the operation of the Hotels and the lease
revenue of the Company after the closing of the Offering, including:
- access to the public capital markets and other financing
alternatives, including the ability to issue additional equity or debt
securities, will enhance the Company's ability to fund future investments
in hotel properties.
THE COMPANY'S RELATED PARTIES -- THE ADVISOR, THE ACQUISITION CO., AND THE
LESSEE
THE COMPANY: HOST FUNDING, INC.
The Company will be governed by a five person Board of Directors. The
three Independent Directors will be Don W. Cockroft, William Birdsall, and
Charles R. Dunn. The two non-Independent Directors will be Michael S.
McNulty and Guy E. Hatfield. Mr. McNulty will be the President and Treasurer
of the Company. Michael P. Fedynyshyn will be the Vice President and
Secretary of the Company.
THE ADVISOR: HOST FUNDING ADVISOR, INC.
The Advisor is a newly-formed Delaware corporation. Mr. Gardner-Smith
will be the Vice President and Secretary of the Advisor and Mr. McNulty will
serve as the Advisor's President and Treasurer. All of the stock of the
Advisor is owned by Ian Gardner-Smith. Mr. Gardner-Smith has no relationship
with the Company or Mission Bay. Upon closing of the Offering, the Company
will enter into an Advisory Agreement with the Advisor pursuant to which the
Advisor will provide its management and strategic business services to the
Company. The Company shall pay to the Advisor an annual base fee of $30,000
payable quarterly and a percentage fee of 1.25% of the total market value of
all real property owned by the Company when the real property owned by the
Company exceeds $35 million. See "Formation Transactions and Other Related
Transactions -- The Advisor and The Advisory Agreement." The Company shall
reimburse the Advisor for all third party professional expenses incurred in
its role as Advisor. The Advisory Agreement may be canceled by the Company
or the Advisor on ninety (90) days notice.
THE ACQUISITION CO.: HOST ACQUISITION GROUP, LLC
Host Acquisition Group, LLC, a Delaware limited liability company, is
the acquisition company (the "Acquisition Co."). Ian Gardner-Smith is
President and Treasurer of the Acquisition Co. and Michael McNulty will serve
as the Vice President and Secretary. Ian Gardner-Smith owns 99% of the
membership interest in the Acquisition Co. and Paul K. Richey owns 1% of the
membership interest in the Acquisition Co. Mr. Gardner-Smith is Manager of
Acquisition Co. Upon closing of the Offering, the Company will enter into a
Post-Formation Acquisition Agreement with the Acquisition Co. pursuant to
which the Acquisition Co. will be paid up to a 6% placement fee payable in
Common Stock of the Company for services in connection with the acquisition
of additional (new and incremental) hotel properties and/or for structuring
cash private placements of the Company's Common Stock. No fees will be paid
to the Acquisition Co. with respect to any aspect of the Formation
Transactions. See "Formation Transactions and Other Related Transactions --
The Acquisition Co. and The Placement Agreement."
THE LESSEE: CROSSROADS HOSPITALITY TENANT COMPANY, LLC
The Lessee is a newly formed Delaware limited liability company.
Crossroads Hospitality Company, a Delaware limited liability company,
("Crossroads Parent") is the Manager of the Lessee and owns 75% of the voting
interests and a 99% interest in the profits, losses and distributions of the
Lessee. IHC Member Corporation, a Delaware
15
<PAGE>
corporation, ("IHCM") owns 25% of
the voting interests and a 1% interest in the profits, losses and
distributions of the Lessee. Interstate Hotels Corporation, a Pennsylvania
corporation, ("Interstate") owns 75% of the voting interests and a 99%
interest in the profits, losses, and distributions of Crossroads Parent.
IHCM owns 25% of the voting interests and a 1% interest in the profits,
losses, and distributions of Crossroads Parent. The Lessee has no present
relationship with the Company or Mission Bay.
Milton Fine is Chairman of the Board and Chief Executive Officer of
Interstate and IHCM. W. Thomas Parrington, Jr. is President and Chief
Operating Officer of Interstate and IHCM. Robert L. Froman is Executive
Vice-President of Interstate and IHCM. J. William Richardson is Executive
Vice-President and Chief Financial Officer of Interstate and IHCM. Marvin
Droz is Senior Vice-President, General Counsel, and Secretary of Interstate
and IHCM. Timothy Q. Hudak is Assistant Secretary of Interstate and IHCM.
100% of Interstate and IHCM is owned by Milton Fine and his Affiliates.
Interstate manages more than 95 upscale hotels and 35 resorts
nationwide, including numerous Marriott hotels and resorts. Crossroads
Parent is an affiliate of Interstate Hotels and manages over 50 hotels
nationwide. The Lessee will operate the Hotels pursuant to the Percentage
Leases. See "The Percentage Leases." Accordingly, Lessee will not operate or
manage any hotels other than those owned by the Company.
DISTRIBUTION POLICY
If the Company's earnings and cash available for distribution in the
calendar year 1996 are equal to the earnings and cash available for
distribution for the twelve month period ending September 30, 1995, at a
97.7% distribution of cash available for distribution, the distribution per
share would be $0.895 per share for 1996. The $0.895 distribution is
referred to as the Pro Forma Distribution.
Approximately 33.7% of the distributions by the Company initially will
be received (directly or indirectly) by the Hatfield Affiliates. For the
period from the closing of the Offering to December 31, 1995, it is expected
that there will be no distribution. Since the Company will elect REIT status
for its taxable year beginning January 1, 1996, the lack of any distributions
to shareholders from the close of the Formation Transactions through December
31, 1995 will have no effect on the Company's ability to elect REIT status
for the 1996 tax year. The Company estimates that approximately 22% of the
assumed initial 12 month Pro Forma Distribution per share will represent a
return of capital for federal income tax purposes. The Company established
the initial Pro Forma Distribution based upon estimated cash available for
distribution and the pro forma condensed statement of operations for the
twelve month period ended, September 30, 1995. See "The Company in General --
Distribution Policy" for information regarding the basis for determining the
initial distribution rate and " -- Selected Financial Information" for
information regarding cash flows provided by operating, investing and
financing activities. The Company believes that such historical financial
information, with pro forma adjustments, provides a reasonable basis for
setting the initial Pro Forma Distribution. However, no assurance can be
given that this level of estimated adjusted cash available for distribution
will be achieved in the future, and actual distributions may be significantly
different from expected distributions. The foregoing notwithstanding,
distributions by the Company will be at the discretion of the Board of
Directors and will depend on a number of factors, including the Company's
actual cash available for distribution, the Company's financial condition,
the Company's capital requirements, and the federal income tax requirement
that in general a REIT must distribute annually at least 95% of its net
taxable income and such other factors as the Company's Board of Directors
deems relevant.
TAX STATUS
The sale of the Acquisition Hotel by Mission Bay in exchange for the
Company's Common Stock will be a taxable transaction which will generate a
taxable loss to Mission Bay. The extent to which a Mission Bay Limited
Partner may utilize its distributive share of the partnership loss (and the
character of such loss as a capital loss or an
16
<PAGE>
ordinary loss) will depend on various factors, including the adjusted
basis of the partnership interest to such Mission Bay Limited Partner,
whether such Mission Bay Limited Partner is an individual, a pension plan or
an individual retirement account.
MISSION BAY LIMITED PARTNERS SHOULD CONSULT WITH THEIR TAX ADVISORS TO
DETERMINE THE PRECISE TAX TREATMENT TO THEM RESULTING FROM THIS TRANSACTION.
The Company intends to make an election to be taxed as a REIT under
Sections 856-860 of the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its taxable year beginning January 1, 1996. If the
Company qualifies for taxation as a REIT, the Company (subject to certain
exceptions) will not be subject to federal income taxation, at the corporate
level, on its taxable income that is distributed to the Shareholders of the
Company. A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute at least
95% of its taxable income. Failure to qualify as a REIT would render the
Company subject to tax (including any applicable minimum tax) on its taxable
income at regular corporate rates and distributions to the Shareholders in
any such year would not be deductible by the Company. Although the Company
does not intend to request a ruling from the Internal Revenue Service (the
"IRS") as to its REIT status, the Company has obtained the opinion of its
legal counsel that it will qualify for REIT status, which opinion is based on
certain assumptions and representations and is not binding on the IRS or any
court. Even if the Company qualifies for taxation as a REIT, the Company may
be subject to certain state and local taxes on its income and property. In
connection with the Company's election to be taxed as a REIT, the Company's
Charter imposes restrictions on the transfer of shares of Common Stock. The
Company intends to adopt the calendar year as its taxable year. See "Risk
Factors -- Tax Risks", " -- Anti-takeover Effect of Ownership Limit",
"Federal Income Tax Considerations -- Taxation of the Company", "The
Company's Capital Stock -- Description of Securities", and " -- Certain
Provisions of Maryland Law and of the Company's Charter and Bylaws."
CONFLICTS OF INTEREST
Because of the ownership interests of Messrs. Hatfield, Gardner-Smith,
and McNulty in, and their positions with, the Company, the Advisor, the
Acquisition Co., the entities from which the Initial Hotels were acquired,
and the entities from which the Acquisition Hotel will be acquired there are
inherent conflicts of interests in the Formation Transactions, and the
interests of the Company's Shareholders may not have been, and in the future
may not be, solely reflected in all decisions made or actions taken by
officers and Directors of the Company. See "Formation Transactions and Other
Related Transactions -- Options and Rights of First Refusal" and "Management
and Various Policies and Objectives -- Conflict of Interest Policies." The
Hatfield Affiliates may (i) continue to own, develop and operate their
respective existing interests in the various other hotels they own, primarily
known as Hatfield Inns, (ii) modify, dispose of or add to such existing
interests or properties, and (iii) acquire new or additional interests in any
hotel development. Pursuant to the Non-Competition Agreement, except for
their existing Hatfield Inn located in Sikeston, Missouri, the Hatfield
Affiliates have agreed not to develop, own or operate any additional hotel
properties located within five miles of any hotel property owned by the
Company. See "Policies and Objectives with Respect to Certain Activities --
Conflict of Interest Policies."
17
<PAGE>
THE OFFERING
Common Stock offered by the Company in the Offering is as follows:
Class A Common Stock:
- ---------------------
For Acquisition Hotel 277,487 Shares of Class A Common Stock
(Assuming 1.25% Dissenting Partners)
For Cash in Public Offering 500,000 Shares of Class A Common Stock
(Issued to Public Offering purchasers)
For Directors 30,000 Shares of Class A Common Stock
(10,000 Shares of Class A Common Stock
per Independent Director)
Total Class A Common Stock to be Issued 807,487 Shares of Class A Common Stock
in the Offering -------
Total Class A Common Stock Outstanding 1,217,487 Shares*
after the Offering ---------
---------
Total Common Stock Outstanding after the Offering. . . . . . 1,497,487 Shares**
- ------------------------------------
Use of Cash Proceeds . . . . . . . . . . . . . . . . . . . . . . . . $5,000,000
Sales Commission on Offering $500,000
Total Costs of Formation Transactions 400,000
Mortgage Payoffs/Pay Down:
Miner - pay off 1,101,000
Somerset - pay off 1,160,000
Poplar Bluff - pay off 893,000
Rock Falls - pay down (Partial) 561,000
Poplar Bluff/Rock Falls - pay off 89,000
---------
Total Payoffs 3,804,000
Loan Refinance Fees 15,000
Mission Bay Dissenters' (1.25% x $2,810,000) 35,130***
Working Capital Reserve 245,870
---------
Total $5,000,000
----------
----------
* Includes an additional 410,000 shares of Class A Common Stock to be issued
to the Hatfield Affiliates in exchange for a portion of their existing 100
Initial Shares in the Company. See "Formation Transactions and Other Related
Transactions -- Principal Shareholders."
** Includes 140,000 shares of Class B Common Stock and 140,000 shares of
Class C Common Stock to be issued to the Hatfield Affiliates in exchange for
a portion of their existing 100 Initial Shares in the Company.
*** In the event in excess of 1.25% of the Mission Bay partners perfect their
dissenters' rights and the Company waives its dissenters' condition and
closes the Mission Bay Acquisition, the Company will have less cash available
to meet the above uses. For example, if 6.25% Mission Bay Partners dissent,
the extra cash required by the Company to pay out those dissenting partners
would be $140,500 beyond the scheduled $35,130. A payment by the Company of
such an amount would decrease the cash available for mortgage loan
payoff/pay downs.
18
<PAGE>
SUMMARY FINANCIAL DATA
The following tables set forth unaudited summary pro forma financial
information for the Company and unaudited summary pro forma financial
information for the Hotels and Lessee and summary combined historical
financial information for the Hotels. Such data should be read in
conjunction with the financial statements and the Notes thereto which are
contained elsewhere in this Prospectus. The pro forma operating information
for the Company and for the Hotels and Lessee is presented as if the
consummation of the Formation Transactions had occurred on January 1, 1994. The
pro forma balance sheet data is presented as if the consummation of the
Formation Transactions had occurred on September 30, 1995.
<TABLE>
<CAPTION>
TABLE 4 HOST FUNDING, INC.
Summary Pro Forma Financial Data (1)(7)(12)
(in thousands, except for per share data)
(unaudited)
Twelve Months Ended Nine Months Ended
------------------- -----------------
12/31/94 9/30/95 9/30/94 9/30/95
<S> <C> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenues:
Lease revenue (2) $1,204 $1,226 $932 $983
Interest income (3) 238 238 173 173
------ ------ ----- -----
Total revenues 1,442 $1,464 1,111 1,162
------ ------ ----- -----
Expenses:
Interest expense 41 41 30 30
Depreciation and amortization 184 184 138 138
Advisory fee (4) 30 30 23 23
General and administrative (5) 150 150 113 113
Amortization of unearned directors compensation (6) 54 54 41 41
Property taxes (12) 114 112 86 85
------ ------ ---- ----
Total expenses 572 571 430 429
------ ------ ---- ----
Net income applicable to
common shareholders (7) $870 $893 $680 $733
------ ------ ---- ----
------ ------ ---- ----
Per share information:
Net income per common share $0.58 $0.60 $0.45 $0.49
------ ------ ---- ----
------ ------ ---- ----
Weighted average number of
common shares outstanding 1,497 1,497 1,497 1,497
------ ------ ---- ----
------ ------ ---- ----
As of
9/30/95
-------
PRO FORMA BALANCE SHEET DATA:
Investment in hotel properties, at cost $5,482
Total assets 6,242
Total debt 462
Shareholders' Equity 5,338
Twelve Months Ended Nine Months Ended
------------------- -----------------
12/31/94 9/30/95 9/30/94 9/30/95
Pro Forma Other Data:
Net cash provided by operating activities (8) $1,108 $1,131 $859 $912
Cash available for distribution (9) $1,091 $1,115 $847 $899
Net cash used in investing activities (10) ------ ------ ---- ----
Net cash used in financing activities (11) $1,106 $1,106 $553 $553
Weighted average number of common
shares outstanding 1,497 1,497 1,497 1,497
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
TABLE 4 (PAGE 2) Initial Hotels, Acquisition Hotel and Lessee
Summary Pro Forma Financial Data (1)(7)(12)
(in thousands)
(unaudited)
Twelve Months Ended Nine Months Ended
------------------- -----------------
12/31/94 9/30/95 9/30/94 9/30/95
<S> <C> <C> <C> <C>
Pro Forma Statement of
Operations Data:
Revenues:
Room revenue $3,600 $3,671 $2,795 $2,866
Other revenue 189 190 143 144
------ ------ ------ ------
Total revenue 3,789 3,860 2,938 3,010
------ ------ ------ -- ----
Expenses:
Hotel operating expenses (12) 2,155 $2,138 1,640 1,623
Percentage Lease payment 1,204 1,226 932 983
Replacement Reserve (10) 185 185 138 138
------ ------ ------ -----
Total expenses 3,543 3,549 2,711 2,745
------ ------ ------ -----
Lessee net income (7) $246 $312 $228 $265
------ ------ ------ -----
------ ------ ------ ----
</TABLE>
Notes to Pro Forma Financial Data
(Unaudited)
(1) The pro forma information does not purport to represent what the
Company's or the Lessee's financial position or results of operations
would actually have been if the consummation of the Possible Formation
Transactions had, in fact, occurred on such dates, or to project the
Company's or the Lessee's financial position or results of operations at
any future date or for any future period.
(2) Represents lease payments from the Lessee to the Company calculated on a
pro forma basis by applying the rent provisions in the Percentage
Leases to the pro forma room revenues. See "Initial Hotels, Acquisition
Hotel and Lessee - Pro Forma Combined States of Operations."
(3) Represents interest income on mortgage note receivable-related party and
on unsecured directors compensation notes.
(4) Represents initial fee due under advisory agreement.
(5) Estimated at $150,000 annually for legal and audit and other expenses.
(6) Represents annual amortization of unearned directors compensation
(30,000 shares at $1.80 per share).
(7) Assumes Company is qualified as a REIT and no federal income taxes are
due. Assumes Lessee is a limited liability corporation and no federal
income taxes are due.
(8) Net cash provided by operating activities represents the Company's Net
Income plus depreciation and amortization and amortization of unearned
directors compensation.
(9) Pro forma cash available for distribution represents pro forma net cash
provided by operating activities reduced by pro forma payments made for
debt service.
(10) Lessee is responsible for improvements and additions to the hotel
properties. Expenses include a deduction for a replacement reserve at
$125 per room per quarter which the lessee must set aside for capital
improvements.
(11) Represents pro forma initial dividends to be paid based on cash flow
available for distribution of $0.895 per share of Class A Common Stock with
nothing paid to shareholders of Class B Common Stock and nothing paid to
shareholders of Class C Stock (1,217,487 Class A shares and 140,000 Class B
shares and 140,00 Class C shares outstanding) plus pro forma principal
payments on the Rock Falls, Illinois debt of $15,904.
(12) Pro forma amounts as if (i) the Lessor recorded and paid real and
personal property taxes and Lessee property insurance as contemplated by
the Percentage Leases and (ii) the Possible Formation Transactions
occurred on January 1, 1994.
- -------------------
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VOTING PROCEDURES
This Prospectus, together with the accompanying Transmittal Letter, and
the Partner Consent, (the Transmittal Letter and the Partner Consent are
referred to collectively as the "Consent Form," forms of which are attached
hereto at Appendix A), constitute the Solicitation Materials being
distributed to the Partners to obtain their votes "for" or "against" Mission
Bay's approval of the Mission Bay Acquisition.
In order to approve the Mission Bay Acquisition, (i) limited partners of
Mission Bay holding at least 67% of the outstanding limited partner interests
and the general partner of Mission Bay must actually approve of the Mission Bay
Acquisition. The Limited Partners have the option to vote "for", "against",
or "abstain" with respect to the Mission Bay Acquisition. Each Limited
Partner, therefore, should complete and return the Consent Form before the
expiration of the Solicitation Period. When the Limited Partners holding a
majority of the limited partnership interests have cast affirmative votes in
favor of the Mission Bay Acquisition all consents previously received will be
irrevocable. Until such time, however, all consents will be revocable. The
Solicitation Period is the time period during which the Partners may vote
"for" or "against" the Mission Bay Acquisition. The Solicitation Period will
commence upon the delivery of the Solicitation Materials to the Partners (ON
OR ABOUT _________, 1995) and will continue until the later of (a) _________,
1995 (a date not less than 30 calendar days from the initial delivery of the
Solicitation Materials) or (b) such later date as may be selected by the
Company and as to which notice is given to the Partners. At its discretion,
Mission Bay may elect to extend the Solicitation Period. Under no
circumstances will the Solicitation Period be extended beyond January 31,
1995. Any Consent Form received by the information agent (the "Information
Agent") prior to 11:59 p. m. Pacific time on the last day of the Solicitation
Period will be effective provided that such Consent Form has been properly
completed and signed.
The Mission Bay Agreement of Limited Partnership provides that where a
matter which the General Partner recommends approval is to be voted upon without
a meeting (as is the case here), the Limited Partners whose votes are not
received by the end of the Solicitation Period shall be deemed to have voted
all of their shares in favor of the General Partner's recommendation.
Notwithstanding this "deemed positive" provision of the Mission Bay Agreement
of Limited Partnership, the dissenters condition described above requires
that at least 67% of the Mission Bay limited partnership interests actually
approve of the Mission Bay Acquisition. Thus, the "deemed positive" votes of
the Mission Bay limited partners whose votes are not received within the
Solicitation Period will not be counted toward the 67% approval requirement.
Further, any "abstain" votes will not be counted toward the 67% approval
requirement and limited partners who vote to "abstain" will not be able to
perfect their dissenters' rights and thus, cannot become Dissenting Partners.
DISSENTERS' RIGHTS
The Mission Bay Acquisition has been structured to afford Dissenting
Partners the dissenters' rights contained the recently enacted California
legislation which is known as the Thompson-Killea Limited Partnership
Protection Act of 1992 (the "Thompson-Killea Act"). The Thompson-Killea Act
requires that the Dissenting Partners receive the appraised value of their
Interest in Mission Bay in the form of cash, freely tradeable securities or
secured or unsecured debt instruments satisfying certain statutory
requirements. A limited partner who votes to "abstain" cannot become a
Dissenting Partner. The Company is satisfying this requirement by offering
Dissenting Partners the right to receive the appraised value of their
interests in Mission Bay (adjusted for outstanding indebtedness) (the
"Adjusted Appraised Value") in the form of cash (up to an aggregate of
$140,500, subject to increase by the Company in its sole discretion). The
actual cash distribution to a Dissenting Partner will be equal to what a
Participating receives, except the Dissenting Partner will receive $10 cash
in lieu of each share of Class A Common Stock. The Mission Bay Acquisition
has also been structured to comply with the other protections afforded in the
Thompson-Killea Act.
In the event a Partner of Mission Bay elects to exercise his or her
right to dissent, such Partner must do the following to perfect his or her
rights as a Dissenting Partner:
- The Dissenting Partner must file a written request with the
Company at 7825 Fay Avenue, Suite 250, La Jolla, California 92037,
attention: Michael S. McNulty, Dissenters' Rights, prior to the earlier
of (i) the date such Dissenting Partner's completed Consent Form is
received by the Company, and (ii) the expiration of the Solicitation
Period. The request must state the interests owned in Mission Bay for
which the Dissenting Partner is requesting dissenters' rights. Only
persons who vote against the Mission Bay Acquisition with
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respect to their interests can be Dissenting Partners. NEITHER THE
DELIVERY OF A CONSENT FORM DIRECTING A VOTE AGAINST THE MISSION BAY
ACQUISITION NOR A FAILURE TO VOTE FOR THE MISSION BAY ACQUISITION
CONSTITUTES A WRITTEN REQUEST FOR DISSENTERS' RIGHTS.
If Mission Bay approves the Mission Bay Acquisition, and the other
conditions of the Formation Transactions are satisfied so that the Mission
Bay Acquisition closes, then a Dissenting Partner who requests dissenters'
rights will be sent a check within 30 days following the closing of the
Mission Bay Acquisition for his or her interests in the amount as determined
above.
COMPLIANCE WITH AND APPROVAL FROM FEDERAL AND STATE AUTHORITIES
The Mission Bay Acquisition will not be completed if any moratorium on
transactions of its type are imposed by federal, state or regulatory
authorities or if any state blue sky or securities authority imposes any
restriction upon or prohibits any aspect of the transactions contemplated by
the Formation Transactions, which in the judgment of the Company, renders the
Formation Transactions undesirable or impractical.
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RISK FACTORS
Prospective investors (i.e. the Mission Bay Limited Partners) should
carefully consider the following information in conjunction with the other
information contained in this Prospectus before acquiring Class A Common
Stock of the Company's in the Mission Bay Offering.
NON-DISSENTING LIMITED PARTNERS TO RECEIVE SECURITIES IN LIEU OF LIQUIDATING
DISTRIBUTION
The "purposes" clause of the Mission Bay Agreement of Limited
Partnership anticipated a complete liquidation of the assets of the
partnership. Mission Bay's assets consist only of the Acquisition Hotel and
all of its furniture, fixtures and equipment. The assets were to be
liquidated in late 1996 or early 1997 and, in exchange for their limited
partnership units, the Limited Partners were each to receive a liquidating
cash distribution in proportion to their percentage of limited partnership
ownership upon the completion of such liquidation. Instead of receiving a
liquidating cash distribution in exchange for their limited partnerhip units,
the non-dissenting limited partners of Mission Bay will receive shares of
Class A Common Stock in the Company representing a continued ownership in the
Acquisition Hotel and new ownership in the Initial Hotels. The Company can
make no assurance that the shares of Class A Common Stock received by the
Limited Partners in exchange for their respective limited partnership units
will be equal in value to the value of such limited partnership units. There
is a risk that the shares received will be worth substantially less than the
limited partnership units formerly held by approving limited partners.
INSUFFICIENT CASH AVAILABLE FOR PRO FORMA DISTRIBUTIONS
The Base Rent due under the Percentage Leases is, by itself,
insufficient to enable the Company to make distributions to holders of Common
Stock at the Pro Forma Distribution rate. Accordingly, the Company will be
dependent upon the generation of Percentage Rent with respect to the Hotels
to make such Pro Forma Distributions. The Company's financial plan for 1996
and thereafter contemplates increases in revenue and therefore, increases in
Percentage Rent. However, if the revenue generated by the Hotels decreases
the Percentage Rent will decrease and thus the Company may have insufficient
funds to enable it to make distributions to holders of the Class A Common
Stock at the Pro Forma Distribution rate of $0.895 per share for 1996. The
Pro Forma Distribution of $0.895 represents 97.7% of the Company's cash
available for distribution.
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. Although the Company has not requested, and does not
expect to request, a ruling from the IRS that it qualifies as a REIT, it has
received an opinion of its counsel that, based on certain assumptions and
representations, it will so qualify. Investors should be aware, however,
that opinions of counsel are not binding on the IRS or any court. The REIT
qualification opinion only represents the view of counsel to the Company
based on counsel's review and analysis of existing law, which includes no
controlling precedent. Furthermore, both the validity of the opinion and the
continued qualification of the Company as a REIT will depend on the Company's
continuing ability to meet various requirements concerning, among other
things, the ownership of its outstanding stock, the nature of its assets, the
sources of its income, and the amount of its distributions to the
Shareholders of the Company. See "Federal Income Tax Considerations --
Taxation of the Company."
If the Company were to fail to qualify as a REIT in any taxable year,
the Company would not be allowed a deduction for distributions to
Shareholders 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, the funds available for distribution to the Shareholders
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 a majority of the
Shareholders, to revoke the REIT election. See "Federal Income Tax
Considerations."
REIT MINIMUM DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company generally will be required
each year to distribute to its Shareholders at least 95% of its net taxable
income (excluding any net capital gain). In addition, the Company will be
subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less
than the sum of 85% of its ordinary income plus 95% of its capital gain net
income for that year.
The Company intends to make distributions to its Shareholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise
tax. The Company's income will consist primarily of its income from
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the Percentage Leases and the Company's cash available for distribution will
likewise consist primarily of its cash receipts from the Percentage Leases.
Differences in timing between taxable income and cash available for
distribution and seasonality of the hospitality industry could require the
Company to borrow funds on a short-term basis to meet the 95% distribution
requirement and to avoid the nondeductible excise tax. For federal income
tax purposes, distributions paid to Shareholders may consist of ordinary
income, capital gains, nontaxable return of capital, or a combination
thereof. The Company will provide its Shareholders with an annual statement
as to its designation of the taxability of distributions.
Distributions by the Company will be determined by the Company's Board
of Directors and will be dependent on a number of factors, including the
amount of the Company's cash available for distribution, the Company's
financial condition, any decision by the Board of Directors to reinvest funds
rather than to distribute such funds, the Company'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."
ADVERSE TAX CONSEQUENCES TO SHAREHOLDERS OF THE COMPANY FROM A SALE OF
ANY OF THE HOTELS
The AAG Partners have unrealized gain in their investments in the
Initial Hotels transferred to the Company. Accordingly, a subsequent sale of
the Initial Hotels by the Company will cause adverse tax consequences to the
Shareholders of the Company. Therefore, the interests of the Company and
certain of its Affiliates, including the Hatfield Affiliates, could be
different in connection with the disposition of the Initial Hotels. However,
decisions with respect to the disposition of all hotel properties in which
the Company invests will be made by a majority of the Board of Directors,
which majority must include a majority of the Independent Directors when the
disposition involves the Initial Hotels.
SUBSTANTIAL DILUTION OF SHARES
The Shareholders of Class A Common Stock who acquire stock in the
Offering will suffer a dilution in book value of $6.44 per share. Further,
the 140,000 shares of Class C Common Stock, when converted to Class A Common
Stock in 1997, will dilute the dividends payable to the shares of Class A
Common Stock. Finally, holders of the Class A Common Stock may experience
dilution in the future if the market value of the Company's shares of Common
Stock falls below the Exchange Value of $10 per share and the Company issues
new shares of Common Stock at such lower price.
SUBSTANTIAL CONTROL OF COMPANY BY HATFIELD AFFILIATES DUE TO NEAR MAJORITY
STOCK OWNERSHIP
The Hatfield Affiliates will own 33.7% of the Class A Common Stock and
46.1% of the Common Stock of the Company upon closing of the Formation
Transactions. Mr. Hatfield will have substantial control over the affairs of
the Company and the Company will be highly dependent on the judgment and
influence of Mr. Hatfield. Although Mr. Hatfield has over twenty years of
experience in operating hotel properties, there can be no assurances that he
will use his influence to make decisions, implement policies, or take actions
that are beneficial to the Company or the Shareholders. Further, the
Hatfield affiliates will have the ability to substantially any Shareholder
vote to (i) elect directors, (ii) approve the sale of substantially all the
assets, (iii) approve a merger or an acquisition, or (iv) take various other
corporate actions.
SUBSTANTIAL BENEFITS TO HATFIELD AFFILIATES
Upon consummation of the Formation Transactions, the Hatfield Affiliates
will receive 410,000 shares of Class A Common Stock, 140,000 shares of Class
B Common Stock, and 140,000 shares of Class C Common Stock in exchange for
the Initial Shares, which will constitute nearly a majority of the Company's
voting rights (46.1%). The shares of Common Stock received by the Hatfield
Affiliates will be more liquid than their prior equity interests in the
Company. As a result, the Hatfield Affiliates will realize a Contribution
Gain of approximately $9,012,000. Further, Guy and Dorothy Hatfield will be
relieved of $3,804,000 of personal guarantees when the Company pays off
certain indebtedness which they have guaranteed with a portion of the
proceeds of the Public Offering.
BENEFITS TO MR. GARDNER-SMITH
Mr. Ian Gardner-Smith owns 100% of the Advisor and 99% of the
Acquisition Co. Although neither the
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Advisor nor the Acquisition Co. will receive any fees or compensation
pursuant to the Formation Transactions, the Acquisition Co. will receive a 6%
placement fee on completion of any subsequent acquisition, and the Advisor
will receive a base fee of $30,000 annually plus a percentage fee of 1.25% of
the total market value of all real property owned by the Company when the
real property owned by the Company exceeds $35 million. Since Mr.
Gardner-Smith owns 100% of the Advisor and 99% of the Acquisition Co., he
will receive nearly all of the aforementioned fees in exchange for the
services he performs on behalf of the Advisor and Acquisition Co.,
respectively.
CLASS A COMMON STOCK RECEIVED MAY NOT REFLECT VALUE OF MISSION BAY ASSETS
Since there has been no prior market for the Company's Common Stock
there can be no assurance that the value of the shares of Class A Common
Stock to be received by the Limited Partners pursuant to the Mission Bay
Acquisition will reflect the value of the assets contributed by Mission Bay.
Consequently, the Limited Partners could experience dilution in their
investment and/or a substantial decrease in the value of their investment
upon the consummation of the Mission Bay Acquisition.
DEFAULT ON HATFIELD NOTE COULD SUBSTANTIALLY REDUCE CASH AVAILABLE FOR
DISTRIBUTION
Should there be a default on the Hatfield Note, the Company's interest
income would decrease by a significant amount per year. The Company, however,
in the event of a default could reacquire its 140,000 shares of Class B
Common Stock and its 140,000 shares of Class C Common Stock which will be
held as collateral for the Hatfield Note pursuant to a pledge agreement
entered into by and between the Hatfield Affiliates (as "pledgor"), the
Company (as "pledgee"), and Hotel Mortgage Resources, a Delaware corporation,
(as "pledgeholder") effective April 1, 1995 (the "Pledge Agreement"). Hotel
Mortgage Resources is not affiliated in any way with the Company or Mr.
Hatfield. See "Formation Transactions -- The Hatfield Note." The
distributions on all of these shares of Class B Common Stock and Class C
Common Stock are subordinated to on the Class A Common Stock of $0.91 per
share. Accordingly, the loss that the Company would suffer on a default of
the Hatfield
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Note would be a function of the per share value and the then-current
distribution policy applicable to the subordinated shares of Class B Common
Stock and Class C Common Stock. However, there can be no assurance that the
then-current value of the shares of Class B and Class C Common Stock will be
equivalent to the balance then owed on the Hatfield Note. Depending on such
amounts, the loss to the Company as a result of a default on the Hatfield
Note could be substantial and cash available for distribution to the
Shareholders could be substantially reduced.
DEPENDENCE ON LESSEE
In order to generate revenues to enable it to make distributions to
Shareholders, the Company will rely on the ability of the Lessee to make rent
payments under the Percentage Leases for the hotel properties (which will be
dependent, in part, upon the Lessee's ability to generate sufficient revenues
from the operation of the hotel properties). Reductions in revenues at the
hotel properties or in the net operating income of the Lessee may adversely
affect the financial condition of the Lessee and their ability to make rent
payments under such Percentage Leases. The failure or delay of the Lessee to
make rent payments with respect to a significant number of hotel properties
could have a material adverse effect on the financial condition and results
of operations of the Company and consequently the Company's ability to make
distributions to Shareholders.
Failure on the part of a Lessee to materially comply with the terms of a
Percentage Lease for a hotel property could give the Company the right
terminate such Percentage Lease, repossess the applicable hotel property and
enforce the payment obligations under such Percentage Lease. Under certain
conditions, a default by the Lessee on one of the Percentage Leases could
result in a default on all of the existing Percentage Leases. Such failure,
however, could have a material adverse effect on the Company's ability to
make distributions to its Shareholders or the value of the applicable hotel
property, or both.
HISTORICAL OPERATING LOSSES
During 1992, the Initial Hotels experienced combined net losses of
approximately $50,000. In 1992, the Rock Falls Super 8 incurred an operating
loss of approximately $34,000; the Somerset Super 8 incurred an operating
loss of approximately $36,000; the Poplar Bluff Super 8 incurred an operating
loss of approximately $36,000; and the Miner Super 8 did not incur an
operating loss. The Initial Hotels, since that time, have generated combined
net income of approximately $288,000 during 1993 and $606,000 during 1994.
However, notwithstanding such combined net income, in 1993 Somerset incurred
an operating loss of approximately $32,000. In 1994 and thereafter none of
the Initial Hotels experienced operating losses.
During 1994, the Acquisition Hotel experienced an approximate net loss
of $1,381,000 after reflecting an approximate $1,535,000 expense for an
unrealized loss due to a decline in value of the Acquisition Hotel. However,
net cash provided by operating activities was approximately $250,000 in 1994
and $161,000 in 1993. Other than the above described 1994 operating loss,
the Acquisition Hotel has not experienced an operating loss from 1992 and
thereafter.
CONFLICTS OF INTEREST
GENERAL
Because of the direct and indirect ownership interests of Messrs.
Hatfield, Gardner-Smith, and McNulty in, and their positions with, the
Company, the Advisor, the Acquisition Co., the entities from which the
Initial Hotels were acquired, and the entities from which the Acquisition
Hotel will be acquired there are inherent conflicts of interests in the
Formation Transactions, and the interests of the Company's Shareholders may
not have been, and in the future may not be, solely reflected in all
decisions made or actions taken by officers and Directors of the Company.
See "Formation Transactions and Other Related Transactions -- Options and
Rights of First Refusal" and "Management and Various Policies and Objectives
- -- Conflict of Interest Policies."
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CONTINUING HOTEL OPERATION, DEVELOPMENT AND INVESTMENT BY HATFIELD
AFFILIATES
The Hatfield Affiliates may (i) continue to own, develop and operate
their respective existing interests in the various other hotels they continue
to own, primarily known as Hatfield Inns, (ii) modify, dispose of or add to
such existing interests or properties, and (iii) acquire new or additional
interests in any hotel development. Pursuant to a non-competition agreement
entered into by and between the Company and Guy and Dorothy Hatfield dated
September 30, 1995 (the "Non-Competition Agreement"), except for their
existing Hatfield Inn located in Sikeston, Missouri, the Hatfield Affiliates
have agreed not to develop, own or operate any additional hotel properties
located within five miles of a hotel property owned by the Company.
NEW AND CONTINUING REIT ORGANIZATIONAL EFFORTS BY ADVISOR AFFILIATES
Certain Affiliates of the Advisor are currently considering the
formation and organization of additional equity and/or debt REITs focusing on
hotel ownership as well as additional equity REITs involving non-hotel real
estate ownership. In addition, these Affiliates of the Advisor are also
considering the formation of a mortgage or hybrid REIT. Accordingly, should
any of these additional REITs be organized by Affiliates of the Advisor, the
Affiliates of the Advisor could have a significant conflict of interest
vis-a-vis the Company.
CONFLICTING DEMANDS FOR MANAGEMENT TIME
Messrs. Gardner-Smith and McNulty will be actively involved in the
ownership and management of the Advisor, and the Acquisition Company. Mr.
McNulty will also serve as an officer and Director of the Company. However,
in addition to these services, they will be involved in other activities,
such activities will include, without limitation, the ownership and
management of their interests in their other business pursuits. Therefore,
officers and employees of the Company, some of whom are also officers or
employees of the Advisor and the Acquisition Company will be subject to
competing demands on their time. See "Management and Various Policies and
Objectives -- Executive Compensation."
CONSEQUENCES OF CUMULATIVE CONFLICTS
The economic consequences to the Mission Bay Limited Partners who
receive shares of the Company's Class A Common Stock in the Mission Bay
Acquisition is that the above described inherent conflicts could result in a
substantial decline in the value of their shares or even a total loss of
their investment.
NEWLY ORGANIZED ENTITIES; LIMITED ASSETS AND OPERATING HISTORY
The Company, the Advisor, the Lessee, and the Acquisition Co. have been
recently organized and have no operating history. Although the management of
the Company, the Advisor, the Lessee, and the Acquisition Co. have experience
in developing, financing and operating hotel properties, they have no
experience in operating or managing a REIT. The Company must rely on the
Lessee to generate sufficient cash flow from the operation of the Hotels to
enable the Lessee to meet the rent obligations under the Percentage Leases.
The Hotels will be managed by the Lessee, which is a newly formed entity with
no operating history. See "Formation Transactions and Other Related
Transactions -- The Lessee."
DEPENDENCE ON KEY PERSONNEL AND ADVISOR
Shareholders have no right or power to take part in the management of
the Company except through the exercise of voting rights on certain specified
matters. Although the Board of Directors will actively function as the
governing body of the Company, the Advisor will manage and oversee the daily
operations of the Company. The Board of Directors will rely heavily upon the
services and expertise of the Advisor and its management pursuant to the
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Advisory Agreement for strategic business direction.
The Company's future success, including particularly the implementation
of the Company's acquisition growth strategy, is dependent on the active
participation of Messrs. Gardner-Smith and McNulty. The loss of the services
of either of these individuals could have a material adverse effect on the
Company. See "Management and Various Policies and Objectives -- Directors
and Executive Officers."
RISKS OF LEVERAGE
The Company initially will have outstanding debt equal to approximately
5% of its gross assets; however, since the Company must distribute annually
at least 95% of its taxable net income to maintain its REIT status, it may be
required to borrow funds to make additional investments or distributions.
The Board of Directors has the discretion to permit the Company to incur debt
in any amount of the Company's investment in hotel properties. The
Acquisition Hotel will not be encumbered by any debt upon the close of the
Offering. The four Initial Hotels were encumbered by $4,266,000 of debt on
September 30, 1995. As specified in "Use of Proceeds" below, the cash
proceeds of the Public Offering will be used to pay off the approximately
$1,101,000 of debt on the Miner, Missouri Super 8, to pay off the
approximately $893,000 of debt on the Poplar Bluff, Missouri Super 8, to pay
off approximately $561,000 of the $1,022,000 of debt on the Rock Falls,
Illinois Super 8, to pay off approximately $89,000 of the Poplar Bluff/Rock
Falls second mortgage, and to pay of the approximately $1,160,000 of debt on
the Somerset, Kentucky Super 8. Accordingly, after the Offering, the Rock
Falls, Illinois Super 8 will be encumbered by approximately $462,000 of debt.
The loan on the Rock Falls Super 8 hotel is all due and payable on February
4, 1998. The Company may have to refinance this loan expects to incur
approximately $15,000 in pro forma loan fee expenses in connection with such
refinancing. In addition, the Company may seek a new line of credit after
the Offering to provide, as necessary, funds for investments in additional
hotel properties, working capital and cash to make distributions. At the
closing of the Offering, the Company will commence actual negotiations with
various financial institutions to secure a line of credit to be used in the
acquisition of additional hotel properties. Subject to the limitations
described above, 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 properties owned by the Company. See "Management and Various Policies and
Objectives -- Financing."
There can be no assurance that the Company, after incurring additional
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 the Hotels, to foreclosure. Adverse economic conditions could
result in higher interest rates which could increase debt service
requirements on floating rate debt and could reduce the amounts available for
distribution to Shareholders. The Company may obtain one or more forms of
interest rate protection (swap agreements, collars, etc.) to hedge against
the possible adverse effects of interest rate fluctuations. Adverse economic
conditions could cause the terms on which borrowings become available to be
unfavorable. In such circumstances, if the Company is in need of capital to
repay indebtedness in accordance with its terms or otherwise, it could be
required to liquidate one or more investments in hotel properties at times
which may not permit realization of the maximum return on such investments.
DEPENDENCE ON SINGLE BRAND NAME
Each of the Hotels is marketed as a Super 8 hotel. The Super 8 brand
name is owned by Super 8 Motels, Inc., a South Dakota corporation, and as of
September 1, 1995 there were 1,320 Super 8 hotels (including the Hotels)
located throughout the United States and 30 Super 8 hotels located throughout
Canada. Although the Company intends to seek diversification of its lodging
properties, any degradation or adverse market developments relating to the
Super 8 brand name could adversely affect the results of operations of the
Company's Hotels and the ability of the Lessee to make rent payments.
UNDERWRITING
The Company has entered into an agreement dated August 22, 1995 (the
"Underwriting Agreement"), with
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La Jolla Securities Corporation, a California
corporation (the "Underwriter"), whereby the Company has retained the
Underwriter to serve as it investment banker and underwriter in connection
with the distribution and underwriting of the 500,000 shares of Class A
Common Stock to be issued in the Public Offering. The Underwriting Agreement
provides for an "all or none" transaction and the obligations of the
Underwriter are expressly conditioned upon the prior receipt of an opinion
from the Company's counsel stating that the Mission Bay Acquisition will be
statutorily exempt from the Federal Roll-up Rules. If the Underwriter cannot
sell all of the 500,000 shares of Class A Common Stock in the Public Offering
for a gross consideration of $5,000,000, then the Public Offering will
terminate and the Company will not consummate the Formation Transactions,
including the Mission Bay Acquisition. Should the Company be successful with
the completion of the Public Offering, the Underwriter will be issued a
warrant to purchase a minimum of 50,000 and a maximum of 75,000 shares of
Common Stock at a price of $13.00 per share, which warrant is exercisable
over a five year term from the date of issuance. See "Underwriting."
INABILITY TO OPERATE THE HOTEL PROPERTIES
Consistent with its status as a REIT, the Company will not be able to
operate the hotel properties. As a result, the Company will be unable to
implement strategic business plans with respect to the hotel properties
(unless the Lessee were to agree), such as plans with respect to the
repositioning of the franchise or license of a hotel property, even if such
decisions were in the best interests of the hotel property. In addition, the
Company's interest in the hotel properties as a lessor is clearly not as
marketable and valuable as a fee interest in the hotels. Although the
Company intends to consult with the Lessee of the hotel properties with
respect to such matters, the Lessee will be under no obligation to implement
any recommendations of the Company with respect to such matters.
Accordingly, there can be no assurance that the Lessee will operate the hotel
properties in a manner that is in the best interests of the Company. In
addition, if there is a default under a Percentage Lease for a hotel property
which results in the termination of such Percentage Lease, the Company would
likely not be able to operate the affected hotel property for a period in
excess of 90 days following such termination without resulting in failure to
qualify as a REIT for federal income tax purposes. This restriction might
cause the Company to enter into an operating lease with a new lessee on terms
and conditions which are less favorable to it than if the Company were not
subject to this restriction.
NO PRIOR MARKET FOR COMMON STOCK
Prior to the Offering, there was no public market for the shares of the
Company's Common Stock. The Company will apply for a listing of its Class A
Common Stock on the American Stock Exchange. See "Miscellaneous --
Underwriting/Listing of Common Stock." The initial Exchange Value price of
$10 per share may not be indicative of the market price for the Class A
Common Stock after the Offering, and there can be no assurance that an active
public market for the shares of Class A Common Stock will develop or continue
after the Offering. See "Miscellaneous -- Underwriting/Listing of Common
Stock." The Company will use the $10.00 per share exchange value to exchange
the Company's 100 Initial Shares. If the Company's Class A Common Stock is
not accepted for listing on the American Stock Exchange, the Company's Class
A Common Stock will be listed and traded on the NASDAQ National Market. The
listing of the Class A Common Stock on either the AMEX or the NASDAQ National
Market is a condition to the closing of the Formation Transactions.
EXEMPTIONS FOR MR. HATFIELD FROM THE MARYLAND BUSINESS COMBINATION LAW
Under the Maryland General Corporation Law, as amended ("MGCL"), certain
"business combinations" (including certain issuances of equity securities)
between a Maryland corporation and any person who beneficially owns ten
percent or more of the voting power of the corporation's shares (an
"Interested Stockholder") or an affiliate thereof are prohibited for five
years after the most recent date on which the Interested Stockholder becomes
an Interested Stockholder. Thereafter, any such business combination must be
approved by two super-majority stockholder votes unless, among other
conditions, the corporation's common 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 common shares. Mr. Hatfield beneficially will own more than 10% of the
Company's voting shares of Class A Common Stock upon the consummation of the
transaction contemplated in the Formation Transactions and would, therefore,
be subject to the business combination provisions of the MGCL. However,
pursuant to the statute,
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the Company has exempted any business combination
involving Mr. Hatfield and, consequently, the five-year prohibition and the
super-majority vote requirements described above will not apply to a business
combination between Mr. Hatfield and the Company. As a result, Mr. Hatfield
may be able to enter into business combinations with the Company, which may
not be in the best interest of the Shareholders, without compliance by the
Company with the super-majority vote requirements and other provisions of the
statute. See "The Company's Capital Stock -- Business Combinations."
FRANCHISE AGREEMENT RISKS
Upon completion of the Offering, all of the Hotels will be operated
pursuant to existing franchise or license agreements (the "Franchise
Agreements") between the Lessee or its affiliates and the Franchisor. The
Company and the Franchisor have reached an informal agreement whereby the
Franchisor has consented to the transfer of the franchise licenses on the
five Hotels to the Lessee. As of the date of this Prospectus, the Company and
the Franchisor are currently negotiating a waiver of various franchise
transfer fees. In addition, the Company anticipates that the majority of any
additional hotel properties will be operated under franchise agreements. In
connection with the acquisition of the Hotels, the Company may propose a
change in the franchise at one or more Hotels. Franchise agreements generally
contain specific standards for, and restrictions and limitations on, the
operation and maintenance of a hotel property in order to maintain uniformity
in the system created by the franchisor. Such standards are often subject to
change over time, in some cases, at the discretion of the franchisor, and may
restrict a franchisee's ability to make improvements or modifications to a
hotel property without the consent of the franchisor. In addition,
compliance with such standards could require a franchisee to incur
significant expenses or capital expenditures. See "Business and Properties
- -- Various Franchise Agreements." To the best of the Company's knowledge,
the Franchisor will not require the Company to complete any significant
additional capital improvements with respect to the Hotels as a condition to
the transfer to the Lessee of the franchise license. No assurance can be
provided that the Company will not be required to fund significant additional
improvements to the Hotels in the future to maintain such franchise licenses.
The Lessee may determine that required capital improvements are too expensive
or otherwise unwarranted in light of general economic conditions, the
prospects for an applicable hotel property or other factors. Failure by a
Lessee to make required capital improvements or to comply with any other
material terms of a franchise agreement could result in cancellation of the
franchise license. There can be no assurance that the Lessee will comply with
the terms of the franchise agreements relating to the hotel properties
operated by it. If a franchise agreement relating to a hotel property is
terminated, the resulting loss of franchise could have a material adverse
effect on the operations or the value of the applicable hotel property, or
both. Upon any such termination, the Company could also be required to incur
significant capital expenditures and other expenses which it may not be able
to pass on to subsequent Lessees of the applicable hotel property. In
addition, the Company may desire to operate hotel properties acquired by it
under franchise licenses from or another franchisor, and such franchisors
may require that significant capital expenditures be made to such acquired
hotels as a condition of granting such franchise licenses.
The continuation of the various franchise licenses is subject to the
maintenance of specified operating standards and other terms and conditions.
Franchisors periodically inspect their licensed properties to confirm
adherence to its maintenance and operating standards. Under each Percentage
Lease, the Lessee will be obligated, among other things, to pay the costs of
maintaining the structural elements of each hotel and to make deposits into
the Capital Expenditure Reserve Account. The revenues from the Hotels will
fund such deposits. These deposits are designed, among other things, to
help ensure the compliance by the Lessee with the terms of the Franchise
Agreements. See "The Percentage Leases." However, there can be no assurance
that such deposits will be sufficient to cover the cost of necessary repairs
and maintenance at the Hotels.
The Company may be obligated or deem it advisable to make additional
capital investments in the Hotels. Should the Company be required or elect
to do so, such investments may necessitate the use of borrowed funds or the
reduction of distributions. The Lessee will be responsible for routine
maintenance and repair expenditures with respect to the Hotels. The failure
to maintain the standards or adhere to the other terms and conditions of the
other franchise license agreements could result in the loss or cancellation
of such franchise licenses. It is possible that a franchisor could
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condition the continuation of a franchise license on the completion of
substantial capital improvements, which the Board of Directors may determine
to be too expensive or otherwise unwarranted in light of general economic
conditions or the operating results or prospects of the affected hotel. In
that event, the Board of Directors may elect to allow the franchise license
to lapse, in which event the Company will be obligated to indemnify the
Lessee against any loss or liability incurred by it as a consequence of such
decision. In any case, if a franchise is terminated, the Company and the
Lessee may seek to obtain a suitable replacement franchise, or to operate the
affected hotel independent of a franchise license. The loss of any franchise
license could have a material adverse effect upon the operations or the
underlying value of the hotel covered by such license because of the loss of
associated name recognition, marketing support and centralized reservation
systems provided by the franchisor. The loss of a franchise license for one
or more of the Hotels could have a material adverse effect on the Company's
revenues under the Percentage Leases and the Company's cash available for
distribution to its Shareholders.
Certain of the Franchise Agreements covering the Hotels expire or
terminate, without specified renewal rights, at various times. The terms of
the Franchise Agreements are also not coextensive with the terms of the
underlying Percentage Leases. As a condition to renewal, the Franchise
Agreements frequently contemplate a renewal application process, which may
require substantial capital improvements to be made to the Initial Hotel.
Any such required capital improvements would in general, be the
responsibility of the Lessee. The Company, however, might agree with a
Lessee to make such capital expenditures if it believed it could recover the
amount of the expenditures through increases in rent payments. In addition,
no assurance can be given that upon termination of any Franchise Agreement,
the Lessee will determine to renew the applicable Franchise Agreement. In
addition, upon termination of any Percentage Lease for a hotel property,
there can be no assurance that the franchisor would permit a new tenant to
continue under the then existing franchise agreement.
VALUE OF HOTELS AND TERMS OF FORMATION TRANSACTIONS
Pursuant to the Contribution and Assumption Agreement the Company has
previously acquired the Initial Hotels for its Common Stock. The Company
will also acquire the Acquisition Hotel for shares of Class A Common Stock.
At the close of the Offering, the existing Company Shareholders will receive
Class A Common Stock, Class B Common Stock, and Class C Common Stock of the
Company reflecting an aggregate value of $6.9 million. This $6.9 million
value reflects the appraised value of the Initial Hotels and the unpaid
principal balance of the Hatfield Note. Although the valuation of the Initial
Hotels was based upon individual appraisals performed by Arthur Andersen LLP,
the acquisition of the Initial Hotels was not the result of arm's length
negotiations. For example, the Company recorded the assets transferred to it
in the contribution transaction at a net asset value of approximately
($2,112,000). Thus, the Hatfield Affiliates realized a gain of $9,012,000
representing the difference between the fair value of their Initial Shares
and the net asset values contributed by them pursuant to the Contribution and
Assumption Agreement. Accordingly, the terms of the Contribution and
Assumption Agreement may not be in the best interest of all the Shareholders.
The Advisory Agreement and the Post-Formation Acquisition Agreement were
not negotiated on an arms-length basis. Mr. Gardner-Smith owns 100% of the
Advisor and 99% of the Acquisition Co. and has had prior business dealings
with Messrs. Hatfield and McNulty. Mr. Gardner-Smith has no present
relationship with the Company or Mission Bay. Although Messrs. Hatfield and
McNulty owe a fiduciary duty of good faith and loyalty to the Shareholders,
there can be no assurance that the Advisory Agreement and Post-Formation
Acquisition Agreement were negotiated in the best interests of the Shareholders.
Management also believes that the compensation arrangements for officers
and Directors of the Company will provide incentives to seek to maximize
shareholder value, by tying incentive compensation to increases in the market
value of the Common Stock. However, these compensation arrangements have
also not been negotiated at arm's length and therefore may not be in the best
interest of the Company's Shareholders.
The terms of the Percentage Leases were negotiated on an arms-length
basis, and based on industry practice, the Company believes, however, that
the terms of such agreements are fair to the Company. The lease payments
under the Percentage Leases for each of the Hotels were calculated with
reference to historical financial data and projected
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operating and financial performance of the Hotels. Based on its research and
analysis of transactions substantially similar to the lease agreements
implemented in such transactions, management of the Company believes that the
terms of the Percentage Leases are typical of provisions found in such other
leases.
While as described above the bulk of the Company's operating
arrangements were not negotiated at arm's length, the Contribution and
Assumption Agreement pursuant to which the Company acquired the Initial
Hotels, the Mission Bay Acquisition Agreement pursuant to which the Company
will acquire the Acquisition Hotel, the Percentage Leases, the Advisory
Agreement, the Post-Formation Acquisition Agreement and the employee
compensation plans have been approved by the Independent Directors. See
"Business and Properties -- The Percentage Leases" and "Management and
Various Policies and Objectives -- Conflict of Interest Policies." The
Company will not own any interest in the Advisor, the Lessee, or the
Acquisition Co.
FUTURE SALE OF COMMON STOCK
Upon completion of the Offering, the Company will have issued (i)
500,000 shares of Class A Common Stock in the Public Offering, (ii) 277,487
shares of Class A Common Stock to the Mission Bay Limited Partners in the
Mission Bay Offering (assuming 1.25% Dissenting Partners), (iii) 30,000
shares of Class A Common Stock issued to the Independent Directors as
compensation for services performed, and (iv) the Hatfield Affiliates will
also receive 410,000 shares of Class A Common Stock, 140,000 shares of Class
B Common Stock, and 140,000 shares of Class C Common Stock in exchange for
their 100 Initial Shares. The 140,000 shares of Class C Common Stock will
convert into Class A Common Stock on January 1, 1997. See "The Company's
Capital Stock." The Hatfield Affiliates will have certain direct
registration rights as well as piggyback rights to register for resale shares
of Class A Common Stock received by them in the Offering. The Underwriter
will also acquire a warrant to purchase shares of Class A Common Stock in the
future. See "Underwriting". In addition, the Company may adopt stock option
plans. No prediction can be made as to the effect, if any, that future sales
of such shares of Class A Common Stock, the availability thereof for future
sale, or the existence of such registration rights and/or options may have
upon the market price of the shares of Class A Common Stock, from time to
time, or upon the Company's ability to sell additional shares of Class A
Common Stock in the future.
RELIANCE ON BOARD OF DIRECTORS
The major policies of the Company, including its policies with respect
to acquisitions, financing, growth, operations, debt capitalization and
distributions, will be determined by its Board of Directors. The Board of
Directors may amend or revise these and other policies from time to time
without a vote of the Shareholders of the Company.
ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT
For the Company to maintain its qualification as a REIT under the
Internal Revenue Code of 1986 (the "Code"), not more than 50% in value of the
outstanding shares of stock of the Company may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of the Company's taxable
year (other than the first taxable year for which the election to be treated
as a REIT has been made).
To ensure that the Company will not fail to qualify as a REIT under this
and other tests under the Code, the charter, subject to certain exceptions,
authorizes the Directors to take such actions as are necessary and desirable
to preserve its qualification as a REIT and to limit any person, other than
Mr. Hatfield, to direct or indirect ownership of no more than the lesser of
9.9% (the "Ownership Limit") of the number or value of the outstanding shares
of stock of the Company. The Company's Board of Directors, upon receipt of a
ruling from the IRS, an opinion of counsel or other evidence satisfactory to
the Board of Directors and upon such other conditions as the Board of
Directors may establish, may exempt a proposed transferee from the Ownership
Limit. However, the Board may not grant an exemption from the Ownership
Limit to any proposed transferee whose ownership, direct or indirect, of in
excess of 9.9% of the number or value of the outstanding shares of stock of
the Company would result in the termination of the Company's status as
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a REIT. See "The Company's Capital Stock -- Description of Securities" and
"-- Restrictions on Transfer." The Ownership Limit does not apply to the
Common Stock owned, directly or indirectly, by the Hatfield Affiliates.
These restrictions on transferability and ownership will not apply if the
Board of Directors determines that it is no longer in the best interests of
the Company to attempt to qualify, or to continue to qualify, as a REIT.
The Ownership Limit may delay or impede a transaction or a change of
control of the Company that might involve a premium price for the Common
Stock or otherwise be in the best interest of the Shareholders. See "The
Company's Capital Stock -- Description of Securities" and " -- Restrictions
on Transfer."
POWER TO ISSUE ADDITIONAL STOCK
The Company's Charter authorizes the Board of Directors to cause the
Company to issue additional authorized but unissued shares of Common Stock or
Preferred Stock and to classify or reclassify any unissued shares of Common
Stock or Preferred Stock and to set the preferences, rights and other terms
of such classified or unclassified shares. See "The Company's Capital Stock
- --Description of Securities", " -- Common Stock" and " -- Preferred Stock."
Although the Board of Directors has no such intention at the present time, it
could establish a series of Preferred Stock that could, depending on the
terms of such series, delay, defer or prevent a transaction or a change of
control of the Company that might involve a premium price for the Common
Stock or otherwise be in the best interest of the Shareholders. The Charter
and Bylaws of the Company also contain other provisions that may delay, defer
or prevent a transaction or a change of control of the Company that might
involve a premium price for the Common Stock or otherwise be in the best
interest of the Shareholders. See "The Company's Capital Stock -- Certain
Provisions of Maryland Law and of the Company's Charter and Bylaws -- Removal
of Directors", " -- Control Share Acquisitions" and " -- Advance Notice of
Director Nominations and New Business."
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK AND COSTS OF FUNDS
One of the factors that may influence the price of the Common Stock in
public trading markets will be the annual yield from distributions by the
Company on the Common Stock as compared to yields on other financial
instruments. Thus, an increase in market interest rates will result in
higher yields on other financial instruments, which could adversely affect
the market price of the shares of Common Stock. Increases in market interest
rates could also increase the Company's cost of funds borrowed.
HOTEL INDUSTRY RISKS
OPERATING RISKS
The Hotels are subject to all operating risks common to the hotel
industry. These risks include, among other things, intense competition from
other hotels; over-building in the hotel industry which has adversely
affected occupancy, ADR and REVPAR in recent years; increases in operating
costs due to inflation and other factors, which increases have not in recent
years been, and may not necessarily in the future be, offset by increased
room rates; dependence on business and commercial travelers and tourism;
increases in energy costs and other expenses of travel; and adverse effects
of general and local economic conditions. Such factors could adversely
affect the Lessees' ability to make lease payments and, consequently, the
Company's ability to make distributions to Shareholders. Further, a decrease
in room revenues, would result in decreased revenues to the Company under the
Percentage Leases on the Hotels and decreased amounts available for
distribution to the Company's Shareholders. See "Business and Properties --
The Hotel Industry" and "--the Percentage Leases."
COMPETITION
(i) Competition for Guests. The hotel industry is highly competitive.
Each of the Hotels experiences competition primarily from other similarly
priced hotels in its immediate vicinity, but each also competes with other
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hotel properties in its geographic market. Some of the competitors of the
Hotels have substantially greater marketing and financial resources than the
Company and the Lessee. Additional competitive hotels are in development or
could be developed in a relatively short period of time. Such hotel
properties could have an adverse effect on the revenues of the Company's
nearby hotels. See "Business and Properties -- Competition."
(ii) Competition for Acquisitions. When the Company seeks to acquire
hotel properties, the Company will be competing for investment opportunities
with entities which have substantially greater financial resources than the
Company. 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. Further, the Company
believes that competition from entities organized for purposes substantially
similar to the Company's objectives will increase significantly over time.
See "Business and Properties -- Competition."
INVESTMENT CONCENTRATION IN SINGLE INDUSTRY
The Company's current strategy is to acquire primarily high quality
limited service hotel properties throughout the continental United States.
The Company will not seek to invest in assets selected to reduce the risks
associated with investments in the hotel industry, and therefore will be
subject to risks inherent in concentrating investments in a single industry.
Therefore, the adverse effect on the Company's lease revenue and amounts
available for distribution to Shareholders resulting from a downturn in the
hotel industry will be more pronounced than if the Company had diversified
its investments outside of the hotel industry. See "Business and Properties
- -- The Hotel Industry."
SEASONALITY OF HOTEL BUSINESS
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth
quarters. All of the Hotels typically reflect the effects of this industry
seasonality. This seasonality can be expected to cause significant quarterly
fluctuations in the Company's lease revenues. See "Financial Considerations
- -- Seasonality."
LIMITED NUMBER OF HOTELS; EMPHASIS ON LIMITED SERVICE HOTEL MARKET
The Company initially will own only five Hotels. Significant adverse
changes in the operations of any one or more of the Hotels could have a
material adverse effect on lease revenues and the Company's ability to make
distributions to its Shareholders. In addition to the Hotels, the Company
intends to place particular emphasis on the acquisition of hotel properties
that are high quality limited-service hotels. Accordingly, at least
initially, the Company will be subject to risks inherent in concentrating
investments in a single type of hotel property, which could have an adverse
effect on the Company's lease revenues and amounts available for distribution
to Shareholders. See "Business and Properties -- Limited Service Hotels."
The Hotels are located in areas throughout the United States. See
"Business and Properties -- The Hotels." Therefore, adverse events or
conditions which affect those areas particularly (such as natural disasters
or adverse changes in local economic conditions) could have a very pronounced
negative impact on the operations of the Hotels and amounts available for
distribution to the Company's Shareholders.
RENEWAL OF LEASES AND RELETTING OF HOTELS
The Company will be subject to the risks that upon expiration or
termination of the Percentage Leases, such Percentage Leases may not be
renewed, the hotel properties may not be relet or the terms of renewal or
reletting (including the cost of required renovations or concessions) may be
less favorable than previous lease terms. In addition, a default by the
Lessee under the terms of its Percentage Leases with the Company may result
in the termination of all such Percentage Leases. If the Company were unable
to promptly enter into new leases for all or a substantial portion
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of the hotel properties or if the rental rates upon such renewal or reletting
were significantly lower than expected due to market conditions or other
factors, then the Company's cash flow and ability to make distributions to
Shareholders could be adversely affected. Moreover, except with respect to a
foreclosure property, as a result of the restrictions imposed on the Company
under the REIT provisions of the Code, the Company would likely not be able
to operate any hotel property without resulting in failure to qualify as a
REIT for federal income tax purposes. All of the Percentage Leases for the
Initial Hotels will commence effective on the closing of the Offering and are
for a term of fifteen (15) years. The Percentage Lease for the Acquisition
Hotel will commence on the completion of the Mission Bay Acquisition and will
have a term of 15 years.
REAL ESTATE INVESTMENT RISKS
The Company's investments will be subject to varying degrees of risk
generally incident to the ownership of real property, including, in addition
to the risks discussed below, adverse changes in general or local economic
conditions, zoning laws, traffic patterns and neighborhood characteristics,
tax rates, governmental rules and fiscal policies, and by civil unrest, acts
of war, adverse 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. Further, although the Hotels have been recently
appraised, no assurances can be given that such appraised values reflect
realizable market values. See "Business and Properties -- Appraisals" herein
for certain information regarding such appraisals. Also, no assurances can
be given that the market value of any of the Hotels will not decrease in the
future. Because market forces will most certainly value the Company as an
ongoing business rather than through liquidation values of the Company or the
Hotels, the valuation of the Company most likely will be determined based
primarily upon a capitalization of the estimated cash flow available for
distribution and other market-related factors rather than as a summation of
property by property values. There can be no assurance that the Company will
be able to dispose of an investment when it finds disposition advantageous or
necessary or that the sale price realized in any disposition will recoup or
exceed the amount of the Company's investment therein.
UNINSURED AND UNDERINSURED LOSSES
Each of the Hotels will be covered by comprehensive policies of
insurance, including liability, fire and extended coverage. Based its past
experience in obtaining insurance policies on the Initial Hotels, the
Acquisition Hotel, and numerous other hotel properties, management believes
such specified coverage is of the type and amount customarily obtained by
owners of real property assets. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes, hurricanes and
floods, that may be uninsurable or not economically insurable. The Company's
Board of Directors will use their discretion in determining amounts, coverage
limits and the deductibility provisions of insurance, 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
impractical to use insurance proceeds to replace the property after such
property has been damaged or destroyed. Under such circumstances, the
insurance proceeds received by the Company might not be adequate to restore
its economic position with respect to such property.
ENVIRONMENTAL MATTERS
Under various federal, state, and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may
be liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was
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responsible for, the presence of such hazardous or toxic substances.
Liability also may extend to persons holding a security interest in the
property, under certain limited circumstances. In addition, the presence of
contamination from hazardous or toxic substances, or the failure to properly
remediate such contaminated property, may adversely affect the owner's
ability to dispose of such property, to fully utilize such property without
restriction or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may
also be liable for the costs of removal or remediation of such substances at
the disposal or treatment facility, whether or not such facility is or ever
was owned or operated by such person. Certain environmental laws and common
law principles could be used to impose liability for release of hazardous or
toxic substances, including the release of asbestos-containing materials
("ACMs") into the air, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage
associated with such releases, including exposure to released ACMs.
Environmental laws also may impose restrictions on the manner in which
property may be used or businesses may be operated, and these restrictions
may require expenditures. Environmental laws provide for sanctions in the
event of non-compliance and may be enforced by governmental agencies or, in
certain circumstances, by private parties. In connection with the ownership
of the Hotels and any subsequently acquired hotels, the Company or the
Company may be potentially liable for such costs. The cost of defending
against claims of liability, or compliance with environmental regulatory
requirements or of remediating the contaminated property could materially
adversely affect the business, assets or results of operations of the Company
and the Company and, consequently, amounts available for distribution to the
Company's Shareholders.
Phase I environmental audits were previously obtained for each of the
Hotels from independent environmental engineers and supplemental Phase i
audits of all of the Hotels have recently been prepared in connection with
the Offering. The principal purpose of Phase i audits is to identify
indications of potential environmental contamination for which the Company
may be responsible and, secondarily, to assess, to a limited extent, the
potential for environmental regulatory compliance liabilities. The
supplemental Phase i audits were designed to meet the requirements of the
current industry approach and ASTM Standard E 1527-93 governing Phase i
audits, and consistent with those requirements, none of the audits involved
testing of groundwater, soil or air. Accordingly, they do not represent
evaluations of conditions at the studied sites that would be revealed only
through such testing. In addition, their assessment of environmental
regulatory compliance issues was general in scope and was not a detailed
determination of the various above described properties' complete compliance
status. Similarly, the audits did not involve comprehensive analysis of
potential off-site liability. None of the Phase i audit reports revealed
that a Phase II audit was necessary or required. The Phase i audit reports
have not revealed any environmental liability that management believes would
have a material adverse effect on the Company's business, assets or results
of operations, nor is the Company aware of any such liability. Nevertheless,
it is possible that these reports do not reveal all environmental liabilities
or that there are material environmental liabilities of which the Company is
unaware. See "Business and Properties -- Environmental Matters."
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While management of the Company believes
that the Hotels are substantially in compliance with these requirements, a
determination that the Company is not in compliance with the ADA could result
in imposition of fines or an award of damages to private litigants. If the
Company were required to make substantial modifications at the Hotels to
comply with the ADA, the Company's ability to make distributions to its
Shareholders could be adversely affected.
INCREASES IN PROPERTY TAXES
Each Hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which the Company invests may
increase as property tax rates change and as the properties are assessed or
assessed by taxing authorities. Since the Company (and not the Lessee) will
pay the property taxes on all of the Hotels, an increase in property taxes
could adversely affect the Company's ability to make distributions to its
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Shareholders. See "Business and Properties -- The Hotels." The Company is
responsible for paying the property taxes on the Hotels. The historical and
pro forma terms of the property taxes are disclosed in the section entitled
"Selected Financial Information and Operations Data" and the financial
statements attached hereto. Any changes in the terms of the property taxes
will be made pursuant to local tax statutes.
ACQUISITION AND DEVELOPMENT RISKS
The Company intends to pursue acquisitions of additional hotel
properties and may in the future pursue development opportunities.
Acquisitions entail risks that investments will fail to perform in accordance
with expectations and that estimates of the cost of improvements necessary to
market and acquire properties will prove inaccurate, as well as general
investment risks associated with any new real estate investment. New project
development is subject to a number of risks, including risks of construction
delays or cost overruns that may increase project costs, risks that the
properties will not achieve anticipated occupancy levels or sustain
anticipated room rate levels, and new project commencement risk 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 pursued to completion. In addition, the Company
anticipates that any new development it may undertake would be financed under
lines of credit or other forms of secured or unsecured construction financing
that could result in a risk that permanent financing for newly developed
projects might not be available or would be available only on disadvantageous
terms. In addition, the fact that the Company must distribute 95% of its net
taxable income in order to maintain its qualification as a REIT will limit
the ability of the Company to rely upon lease income from the hotel
properties to finance acquisitions or new development. As a result, if
permanent debt or equity financing were not available on acceptable terms to
refinance acquisitions or new development undertaken without permanent
financing, further acquisitions or development activities might be curtailed
or cash available for distribution might be adversely affected.
CHANGES IN LAWS
Increased costs resulting from changes in governmental requirements will
generally be the responsibility of the Lessee. The Lessee, however, may be
unable to pass through such increased costs to their customers and
substantial increases in expenses resulting from such increased costs may
affect the Lessee' financial condition and their ability to pay rent. Such
increases in expenses will not result in adjustments of the obligations of
the Lessee to pay rent under the terms of the Percentage Leases and will not
result in adjustments of the amount of such rent, including Percentage Rents.
However, certain Percentage Leases provide that, during the latter half of
the lease term, the Company will be responsible for a portion of the costs of
any capital improvements resulting from changes in law to the extent the
useful life of such capital improvements exceeds the remaining lease term.
As a consequence, any changes in governmental requirements which result in
increased costs at an Initial Hotel subject to such a provision could
adversely affect the Company's ability to make distributions to Shareholders.
In addition, changes in laws increasing potential liability for
environmental conditions may result in significant unanticipated expenditures
by the Company, which would adversely affect the Company's ability to make
distributions to Shareholders.
37
<PAGE>
THE COMPANY IN GENERAL
OVERVIEW
The Company, a Maryland corporation formed in December, 1994, was
established to acquire the four Initial Hotels. The Initial Hotels are
located in Kentucky, Missouri, and Illinois. The Company acquired the
Initial Hotels from AAG (an entity controlled by Mr. Hatfield) pursuant to
the Contribution and Assumption Agreement. See "Formation Transactions and
Other Related Transactions -- AAG Acquisition". The Company is governed by a
five person Board of Directors. The three Independent Directors are Don W.
Cockroft, William Birdsall, and Charles R. Dunn. The two non-Independent
Directors are Michael S. McNulty and Guy E. Hatfield. Mr. Hatfield and his
related family trusts own 1.3% of the Mission Bay limited partnership units
and collectively they are they are the second largest holder of limited
partnership units of Mission Bay. The Company's executive offices are
located at 7825 Fay Avenue, Suite 250, La Jolla, California 92037 and its
telephone number is (619) 456-6070. The Company will be externally-advised
and therefore, will rely primarily upon the experience of the Advisor who
will constitute the Company's senior management. Upon closing of the
Offering, the Company will enter into an Advisory Agreement with the Advisor
pursuant to which the Advisor will provide its management and strategic
business services to the Company. The Company will not undertake actions
recommended by the Advisor unless the Independent Directors of the Company
approve of such recommended actions. The Company shall pay to the Advisor an
annual base fee of $30,000 payable quarterly and a percentage fee of 1.25% of
the total market value of all real property owned by the Company when the
real property owned by the Company exceeds $35 million, subject to some
restrictions. See "Formation Transactions and Other Related Transactions -- The
Advisor and The Advisory Agreement." The Company shall reimburse the Advisor
for any third party professional fees incurred in its role as Advisor. Upon
closing of the Offering, the Company will enter into a Post-Formation
Acquisition Agreement with the Acquisition Co. pursuant to which the Acquisition
Co. will be paid up to a 6% placement fee payable in Common Stock of the Company
for services in connection with the acquisition of additional (new and
incremental) hotel properties and/or for structuring cash private placements of
the Company's Common Stock. The Acquisition Co. will be required to receive the
approval of the Independent Directors of the Company before performing certain
actions. No fees will be paid to the Acquisition Co. with respect to any
aspect of the Formation Transactions. See "Formation Transactions and Other
Related Transactions -- The Acquisition Co. and The Post-Formation Acquisition
Agreement." To enable the Company to satisfy certain requirements for
qualification as a REIT, the Company, at the closing of the Offering, will lease
the Initial Hotels and the Acquisition Hotel to the Lessee pursuant to the
Percentage Leases. Further, the Company will lease any hotel properties
acquired by it after the completion of the Formation Transactions and the
Offering to a variety of lessees pursuant to agreements substantially the same
in form to the Percentage Leases. The Percentage Leases are designed to allow
the Company to participate in any future growth in revenues at such Hotels.
Due to the Lessee's limited net worth apart from its leasehold interest in the
Hotels, the Lessee's ability to make lease payments under the Percentage Leases
will be primarily dependent upon its generation of sufficient cash flow from the
operation of the Hotels. See "Risk Factors - Conflicts of Interest."
GROWTH STRATEGY
The Company's growth strategy is to increase cash flow and enhance
shareholder value by acquiring additional existing hotels that meet the
Company's investment criteria and by participating, through the Percentage
Leases, in any growth in revenue at its Hotels. Currently, the Company
intends to focus its acquisition strategy primarily upon the acquisition of
additional high quality, limited service hotels in the Midwest and the
Southwest and its internal growth strategy will focus primarily upon
improvements in occupancy and ADR. Based upon recent increases in occupancy,
ADR and REVPAR of all U.S. hotels, management of the Company believes that
the U.S. lodging industry is recovering from a period of low profitability
resulting from high levels of debt, economic recession and an over-supply of
hotel rooms. As a result, management expects the Company to have
opportunities to acquire additional established limited service hotels at
attractive prices because of such factors. Upon completion of the Offering
(and the completion of the Formation Transactions), the Company expects to
have outstanding indebtedness of approximately $462,000 representing the
mortgage loan on the Rock Falls Super 8. The Company's Charter does not
limit the consolidated indebtedness of the Company.
38
<PAGE>
ACQUISITION STRATEGY
Messrs. Gardner-Smith and McNulty will utilize their extensive
experience in the hotel industry to identify for acquisition additional
existing hotel properties that meet the Company's investment criteria. The
Company intends to place particular emphasis on the acquisition of additional
high quality, limited service hotels throughout the United States. The
Company may consider the acquisition of hotels in the extended-stay market
segment, as well as other full service hotel properties in the up-scale and
mid-scale market segments. The Company intends that the Lessee will operate
hotel properties which are acquired. Management believes that, in the near
term, the Company will have opportunities to acquire additional existing
hotels at attractive prices because of the adverse impact of high leverage on
the profitability and operations of many hotel properties, past over-building
of hotel properties and the effects of the recent economic recession.
Potential sellers of hotel properties now include not only hotel operators
but also financial institutions and government agencies that assumed control
of such properties in distressed situations.
The Company intends to consider investments in hotel properties of the
types described above that meet one or more of the following criteria: (i)
properties in markets with projected growth potential; (ii) properties which
may be under-performing due to poor management, weak franchise affiliation or
a need for renovation; (iii) properties with relatively stable operating
histories; and (iv) properties with attractive purchase prices. Although the
Company presently anticipates that additional investments in hotel properties
will be made through the Company, additional investments also may be made
indirectly by other entities controlled by the Company. Such investments may
be financed, in whole or in part, from borrowings, the balance of the net
proceeds from the future offerings, if any, subsequent issuances of Common
Stock or other securities or from cash flow. However, because the Company
must distribute annually at least 95% of its taxable net income to maintain
its REIT status, cash flow available for investment may be limited. The
Company's Charter does not limit the consolidated indebtedness of the
Company. See "Risk Factors -- Risks of Leverage", "Financial Considerations
- -- Liquidity and Capital Resources", and "Management and Various Policies and
Objectives -- Investment Policies" and " -- Financing."
INTERNAL GROWTH STRATEGY
The Percentage Leases are designed to allow the Company to participate
in any growth in room revenues at the Hotels, which management of the Company
believes can be achieved through increases in both occupancy rates and ADR.
During the term of each Percentage Lease, the Lessee will be obligated to pay
(i) Base Rent, (ii) Percentage Rent, and (iii) the Impositions (as defined
herein), and (iv) the Additional Charges (as defined herein). Base Rent
accrues and is required to be paid monthly. Percentage Rent is based on
percentages of room revenues for each of the Hotels.
The Company believes that the economic trends affecting the hotel
industry will be the major factor in any future growth in Percentage Lease
revenue from the Hotels and in the ability of the Company to successfully put
on line additional hotel properties that may be acquired by it. Additionally,
the Company believes that if the Lessee operates and manages the Hotels in an
efficient manner, such operation and management could have a positive effect
on any future growth in Percentage Lease revenue from the Hotels and in the
hotel properties that may be acquired by the Company. The Hotels will be,
and all hotel properties are expected to be, operated and managed by the
Lessee. The Lessee will provide the Hotels with employees, accounting
services, site-based marketing and day-to-day operations management. The
Lessee will develop detailed business and marketing plans and budgets for
each Hotel. The Lessee routinely will measure actual results against the
business and marketing plans and budgets for each hotel to create a
goal-oriented, coordinated and site-based approach to hotel management. The
Company also believes that moderate levels of debt will enhance management's
ability to focus attention on the issues most critical to the effective
management of the Hotels. The Company's Charter does not limit the amount of
indebtedness the Company may incur for investment in hotel properties.
Combined REVPAR for the Hotels has increased from $25.60 for 1992 to
$26.73 for 1994. See "Business and Properties -- The Hotels." The Company
expects that, since January 1, 1994 and prior to the closing of the Offering,
39
<PAGE>
an amount equal to at least 1% to 4% of room revenues of the Hotels for such
period will have been spent on upgrades and improvement of the Hotels;
however, if less than such amount is spent, the difference will be received
by the Company, in cash, in the merger. Management of the Company believes
the growth in REVPAR at the Hotels reflects the impact that can result from
improved economic conditions, management, and operating efficiencies.
POSSIBLE REFINANCING STRATEGY
After the Offering, the Company may seek to implement a private
placement of its Common Stock with a view towards generating net cash
proceeds from the offering sufficient to discharge all or some material part
of the Company's indebtedness. Depending on the price at which the Company
can sell its Common Stock in such a private placement, such a transaction may
favorably impact cash available for distribution. While the Company is
currently considering this strategy, there are no assurances that it will be
able to sell its Common Stock in such a private placement.
USE OF PROCEEDS
The net cash proceeds to the Company from the Public Offering portion of
the Offering are estimated to be $4.5 million based on an Exchange Value of
$10 per share of Common Stock and a 10% costs of such offering. All of such
net proceeds will be held by the Company first to pay costs and expenses of
the Formation Transactions (including the cash required for the Mission Bay
Dissenting Partners); second, to establish a working capital reserve; third,
to pay off approximately $3,804,000 million of debt of the Initial Hotels.
The following schedule provides the anticipated uses of the $5,000,000 gross
proceeds of the Public Offering (assuming 1.25% Mission Bay Dissenting
Partners):
USE OF PROCEEDS UPON PUBLIC OFFERING
Sales Commission on Offering $500,000
Total Costs of Formation Transactions 500,000
Mortgage Payoffs/Pay down:
Miner - pay off 1,101,000
Somerset - pay off 1,160,000
Poplar Bluff - pay off 893,000
Rock Falls - pay down (Partial) 561,000
Poplar Bluff/Rock Falls - pay off 89,000
---------
Total Payoffs 3,804,000
Loan Refinance Fees 15,000
Mission Bay Dissenters'(1.25% x $2,810,000) 35,130
Working Capital Reserve 245,870
---------
Total $5,000,000
---------
---------
Pending the above described uses, the net proceeds may be invested in
interest-bearing accounts and short-term, interest-bearing securities 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.
In the event in excess of 1.25% of the Mission Bay partners perfect
their dissenters' rights and the Company waives its dissenters' condition and
closes the Mission Bay Acquisition, the Company will have less cash available
to meet the above uses. For example, if 6.25% Mission Bay Partners dissent,
the extra cash required by the Company to pay out those dissenting partners
would be $140,500 beyond the scheduled $35,130. A payment by the Company of
such an amount would decrease the cash available for mortgage loan
payoff/pay downs.
40
<PAGE>
DISTRIBUTION POLICY
After the Offering, the Company intends to make regular quarterly
distributions to holders of its Common Stock. Initially, the Company's sole
source of revenue will be from lease payments under the Percentage Leases and
interest income. The Company must rely on the Lessee to generate sufficient
cash flow from the operation of the Hotels to meet the Lessee's rent
obligations under the Percentage Leases. See "Formation Transactions and
Other Related Transactions -- The Lessee." The Company does not intend to
make any distributions to its shareholders through December 31, 1995. Since
the Company will elect REIT status fro its taxable year beginning January 1,
1996, the lack of any distributions to shareholders from the close of the
Formation Transactions through December 31, 1995 will have no effect on the
Company's ability to elect REIT status for the 1996 tax year. However,
commencing January 1, 1996, the Company intends to make regular quarterly
distributions to holders of Class A Common Stock. The Company has
established a Pro Forma Distribution per share. The Pro Forma Distribution
is the amount determined from the existing pro forma estimated level of
income and cash flow ($0.895 per share for 1996).
If the Company distributes approximately 97.7% of its cash available for
distribution utilizing the pro forma September 30, 1995 twelve month earnings,
then the indicated annual distribution per share would be $0.895 per share
prior to the conversion of the shares of Class C Common Stock and $0.7985 per
share after such conversion (the "Pro Forma Distribution"). The Company
estimates that approximately 22% of this assumed 12 month Pro Forma
Distribution per share will represent a return of capital for federal income
tax purposes, which generally will not be subject to federal income tax under
current law.
The Company established the amount of the initial Pro Forma Distribution
based upon estimated cash available for distribution, the pro forma condensed
statement of operations and calculation of pro forma cash available for
distribution as of, and for the twelve months ended September 30, 1995. The
Company believes that historical financial information, with pro forma
adjustments, provides a reasonable basis for setting the Pro Forma
Distribution. The Board of Directors will determine the actual quarterly
distribution rate based upon the Company's actual results of operations,
economic conditions and other factors. Approximately 33.7% of the initial
distributions by the Company initially will be received (directly or
indirectly) by the Hatfield Affiliates.
41
<PAGE>
The following table sets forth certain pro forma financial
information of the twelve months ended September 30, 1995, which was used to
establish the estimated Pro Forma Distribution per share (based on a 97.7%
payout of pro-forma cash available for distribution).
<TABLE>
<CAPTION>
TABLE 5
HOST FUNDING, INC.
Twelve Months Ended September 30, 1995
(dollars in thousands, except per share data)
(unaudited)
<S> <C>
Pro forma net income (1) $ 893
Pro forma depreciation and amortization (2) 184
Pro forma amortization of unearned directors compensation (3) 54
-------
Pro forma estimated net cash provided by operating activities 1,131
Pro forma estimated net cash used in financing activities (4) (16)
-------
Pro forma estimated cash available for distribution $1,115
-------
-------
Pro forma estimated initial aggregate distribution (5)
Class A $1,090
Class B $0
Class C $0
Pro forma estimated initial annual distribution per share (6) (7)
Class A $0.895
Class B $0.00
Class C $0.00
Pro forma estimated payout ratio of cash available for distribution (8)
Class A 97.7%
Class B 0.00%
Class C 0.00%
</TABLE>
- --------------------
(1) The pro forma net income for the twelve months ended September 30, 1995 is
calculated on a pro forma basis by applying the rent provisions in the
Percentage Leases for the Hotels to the pro forma room revenues of the Hotels
(as if October 1, 1994 were the beginning of the lease year) and subtracting
pro forma depreciation, advisory fees, interest expense, general and
administrative expenses and the amortization of unearned directors
compensation. For the combined Hotels, pro forma Percentage Lease revenue
for the twelve months ended September 30, 1995 (which was used in calculating
pro forma net income) exceeded the Lessee's annual Base Rent obligation by
$196,340.
(2) Represents depreciation and amortization of property and equipment.
(3) Represents amortization of unearned directors compensation related to the
issuance of shares of Class A Common Stock to certain Directors in the Formation
Transactions.
(4) Pro forma estimated cash used in debt service represents payments made
for debt service on the pro forma estimated remaining Rock Falls, Illinois
long-term debt.
(5) On January 1, 1997, the 140,00 shares of Class C Common Stock are
converted to shares of Class A Common Stock. Prior to the conversion of
Class C to Class A Common Stock, the pro forma estimated initial aggregate
distributions is equal to $0.895 per share times 1,217,487 weighted average
shares of Class A Common Stock outstanding and $0.00
42
<PAGE>
per share times 140,000 weighted average shares of Class B Common Stock
outstanding and $0.00 per share times 140,000 weighted average shares of
Class C Common Stock outstanding.
(6) Based on 1,217,487 shares of Class A Common Stock outstanding upon
completion of the Formation Transactions, including an aggregate of 30,000
shares of Class A Common Stock to be issued to three Directors. The
140,000 shares of Class B and 140,000 shares of Class C Common Stock, on a
pro forma basis, will not receive a distribution.
(7) Management estimates that combined approximately 22% ($0.161 per share of
Class A Common Stock) of the assumed initial twelve month distribution per share
will represent a return of capital for federal income tax purposes. No
assurances can be given that the portion of such pro forma twelve months ended
September 30, 1995 distribution that is estimated to be, or constitutes, a
return of capital will be indicative of the return of capital in any future
period.
(8) The pro forma estimated distribution percentage represents the
anticipated initial aggregate annual distribution divided by estimated cash
available for distribution.
- ------------------------
The estimate of anticipated initial quarterly distributions relates only
to the year ending December 31, 1996, and no assurance can be given as to the
rate of distributions, if any, after that date. The Company's actual cash
available for distribution will be affected by a number of factors, including
changes in occupancy, ADR and REVPAR at the Hotels. To the extent that the
Company has outstanding debt, whether from the Formation Transactions or
whether from financing investments in additional hotel properties or for
other purposes, the Company may utilize a portion of cash flow for debt
service. The Company presently anticipates that additional acquisitions,
including initial capital improvements thereto, will be financed primarily
through debt financing or the issuance of addition equity securities. To the
extent that such financing is insufficient to meet all of such cash needs, or
the cost of such financing exceeds the cash flow generated by the acquired
properties for any period, cash available for distribution could be reduced.
In order to maintain its qualification as a REIT, the Company must make
annual distributions to its Shareholders of at least 95% of its taxable
income (which does not include net capital gains). Since the Company's pro
forma estimated taxable income is $893,000, the minimum initial distribution
required by the 95% requirement discussed above would be approximately
$848,000. Based on 1,217,487 shares of Class A Common Stock outstanding,
such an annual distribution of $848,000 would represent an annual per share
distribution of $0.697 per share which is significantly less than the $0.895
Pro Forma Distribution. 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
presently would expect to borrow funds, or to sell assets for cash, to the
extent necessary to obtain cash sufficient to make the distributions required
to retain its qualification as a REIT for federal income tax purposes. It is
presently anticipated that the Company's cash flow from operation of the Hotels
will be sufficient to enable it to make distributions at the estimated initial
rate. To the extent that cash flow from operations were to be insufficient
during any quarter, due to temporary or seasonal fluctuations in Percentage
Lease revenue, the Company expects to utilize other cash on hand or additional
borrowings. No assurance can be given, however, that the Company will make
distributions in the future at the initially estimated rate, or at all.
The timing and amount of distributions made by the Company will be
determined by the Board of Directors and will depend on a number of factors,
including the amount of cash available for distribution, the Company's
financial condition, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Directors may
deem relevant. See "Federal Income Tax Considerations."
43
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the pro forma short-term debt and
capitalization of the Company at September 30, 1995, as adjusted to give effect
to the Offering by the Company of the shares of Class A Common, the issuance of
the Class B Common Stock and Class C Common Stock to the Hatfield Affiliates
in exchange for their Initial Shares and the application of the net proceeds
therefrom as described under "Use of Proceeds."
<TABLE>
TABLE 6
PRO FORMA HOST FUNDING, INC.
As of September 30, 1995
(Dollars in Thousands)
(unaudited)
<CAPTION>
Actual As Adjusted
<S> <C> <C>
Short-term debt $0 $0
------ ----
Long-term debt $4,266 $462
Shareholders' equity (deficit):
Class A Common Stock, $.01 par value; authorized
50,000,000 shares; issued and outstanding 100 shares;
and, issued and outstanding 1,217,487 as adjusted. $1 $13
Class B Common Stock, $.01 par value; authorized
4,000,000 shares; issued and outstanding 140,000 shares. --- 1
Class C Common Stock, $.01 par value; authorized
1,000,000 shares; issued and outstanding 140,000 shares. --- 1
Additional paid-in capital 7,420
Retained earnings (accumulated deficit) (274) 9
Unsecured note receivable - related party (1,806) (1,806)
Unearned directors compensation ------- (300)
------- ------
Total shareholders' equity (deficit) ($2,079) $5,358
------- ------
------- ------
Total capitalization $2,187 $5,800
------- ------
------- ------
</TABLE>
- --------------
SUBSTANTIAL DILUTION OF SHARES
The Offering price per share of Common Stock offered hereby will be
equal to the $10.00 per share Exchange Value. The Exchange Value was based
on the appraised value of the underlying hotel properties of the Company and
Mission Bay. However, the net asset value of the Company, even as adjusted
for the Formation Transactions, is
44
<PAGE>
considerably less than $10.00 per share. Accordingly, the Limited Partners,
the Company's existing Shareholders who own the Initial Shares and the
purchasers of the Class A Common Stock in the Public Offering will realize
substantial dilution in the net tangible book value of the Common Stock
acquired by them in the Offering. Net pro forma tangible book value per
share is determined by subtracting total liabilities from total tangible
assets and dividing the remainder by the number of shares of Common Stock
that will be outstanding after the Offering.
The estimated pro forma dilution will be as follows:
<TABLE>
<CAPTION>
$ Per Share
------------- ------------
<S> <C> <C>
Historical Shareholders' Deficit $(2,079,463) $(1.39)
Acquisition of Mission Bay 2,774,870 1.85
Reversal of Deferred Income Taxes upon
Completion of the Formation Transactions 166,000 0.11
Writeoff of Loan Commitment Fees upon
Payoff, Pay down and Restructuring of
Certain Mortgages upon Completion of
the Formation Transactions (23,624) (0.01)
-------- ------
Subtotal 837,783 0.56
Net Proceeds from Stock Offering 4,500,000 3.57
--------- ----
Estimated Pro Forma Shareholders' Equity upon
Completion of the Formation Transactions $5,337,783 $3.57
----------
----------
Exchange Value per Share for Mission Bay
Shareholders 10.00
-----
Estimated Pro Forma Dilution per Share for
Mission Bay Shareholders upon completion of
the Formation Transactions $(6.44)
------
------
Number of shares of Common Stock Outstanding upon
Completion of the Formation Transactions 1,497,487
---------
---------
</TABLE>
- -------------------
When the $1,805,675 Hatfield Note is paid in full, the dilution will be
reduced by approximately $1.20 per share. The 140,000 shares of Class C
Common Stock will convert into Class A Common Stock on January 1, 1997.
Since the shares of Class C Common Stock are subordinated to the annual
distribution of $0.91 on the shares of Class A Common Stock, the conversion
of the shares of Class C Common Stock will dilute the dividends/distributions
payable to the holders of Class A Common Stock.
45
<PAGE>
SELECTED FINANCIAL INFORMATION AND OPERATIONS DATA
The following tables set forth (a) selected unaudited, combined
estimated, pro forma balance sheet as of September 30, 1995 (b) selected
unaudited combined estimated, pro forma financial data for the Company for
fiscal year ended September 30, 1995, and the years ended December 31, 1994,
December 31, 1993 and December 31, 1992, (c) selected unaudited combined
estimated, pro forma financial data for the Lessee for the nine months ended
September 30, 1994, the nine months ended September 30, 1995, the fiscal year
ended September 30, 1995, and for the years ended December 31, 1994, December
31, 1993, December 31, 1992.
The pro forma Statements of Operations Data is presented as if the
Formation Transactions had occurred on January 1, 1994 and therefore
incorporates certain assumptions that are included in the Notes to the Pro
Forma Condensed Consolidated Statements of Operations included elsewhere in
this Prospectus. The pro forma operating information for the Hotels and
Lessee is presented to reflect the pro forma operations of the Lessee for the
period presented, which operations are the source of the Lessee's Percentage
Lease payments to the Company. The pro forma balance sheet data is presented
as if the Formation Transactions had occurred on September 30, 1995.
46
<PAGE>
TABLE 7 (a)
HOST FUNDING, INC.
SELECTED COMBINED ESTIMATED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1995
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Land, property and equipment, net $5,482
Rent receivable $ 408
Interest receivable 91
Loan commitment fees, net 15
Cash 246
------
Total Assets $6,242
------
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $462
Accrued interest payable 71
Accounts payable-related parties 360
Income taxes payable 11
------
Total Liabilities 904
------
Shareholders' Equity
Class A Common Stock, $0.01 par value;
authorized 50,000,000 shares; issued and
outstanding 1,217,487 shares 13
Class B Common Stock, $.01 par value;
authorized 4,000,000 shares; issued and
outstanding 140,000 shares. 1
Class C Common Stock, $0.01 par value;
authorized 1,000,000 shares; issued and
outstanding 140,000 shares. 1
Additional paid in capital 7,420
Retained earnings 9
Less: Unsecured note receivable-related party (1,806)
Less: Unearned directors compensation (300)
------
Total Shareholders' Equity 5,338
------
Total Liabilities and Shareholders' Equity $6,242
------
------
</TABLE>
47
<PAGE>
TABLE 7 (b)
SELECTED COMBINED ESTIMATED PRO FORMA FINANCIAL DATA-HOST FUNDING, INC.
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
------------------------------------
Twelve
Twelve Months Ended 12/31 Nine Months Ended Months
------------------------- ----------------- Ended
1992 1993 1994 9/30/94 9/30/95 9/30/95
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rents:
Base $1,030 $1,030 $1,030 $772 $772 $1,030
Percentage 153 114 174 160 211 196
------ ------ ------ ---- ---- ------
Total rents $1,182 $1,144 $1,204 $932 $983 $1,226
Mortgage interest income 217 217 217 163 163 217
Share purchase plan interest 21 21 21 16 16 21
------ ------ ------ ---- ---- ------
Total revenues $1,420 $1,381 $1,442 1,111 1,162 $1,464
------ ------ ------ ----- ----- ------
EXPENSES:
Interest 41 41 41 30 30 41
Depreciation and amortization 184 184 184 138 138 184
Advisory fee 30 30 30 23 23 30
General and administrative 150 150 150 113 113 150
Amortization of unearned
directors compensation 54 54 54 41 41 54
Property taxes 101 110 114 86 85 112
------ ------ ------ ----- ----- ------
Total expenses 560 569 572 430 429 571
------ ------ ------ ----- ----- ------
NET INCOME 861 813 870 680 733 893
------ ------ ------ ----- ----- ------
ADD:
Depreciation and amortization 184 184 184 138 138 184
Amortization of unearned
directors compensation 54 54 54 41 41 54
LESS: Debt service principal
payments (16) (16) (16) (12) (12) (16)
------ ------ ------ ----- ----- ------
CASH AVAILABLE FOR
DISTRIBUTION 1,082 1,035 1,091 847 899 $1,115
------ ------ ------ ----- ----- ------
------ ------ ------ ----- ----- ------
</TABLE>
48
<PAGE>
TABLE 7 (c) - FISCAL SEPTEMBER 30, 1995
SELECTED COMBINED ESTIMATED PRO FORMA FINANCIAL DATA -
INITIAL HOTELS, ACQUISITION HOTEL AND LESSEE
(in thousands)
(Unaudited)
Twelve Months ended September 30, 1995
---------------------------------------
<TABLE>
<CAPTION>
Initial Hotels and Lessee
-------------------------
Rock Poplar Sub- Mission
Falls Miner Somerset Bluff total Bay Total
----- ----- -------- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Sales $650 $801 $538 $617 $2,606 $1,064 $3,671
Telephone 22 20 15 19 76 37 113
Other 18 10 2 11 42 35 77
---- ---- ---- ---- ------ ------ ------
Total revenues 690 831 555 647 2,724 1,136 3,860
Expenses:
Rooms 138 157 123 143 560 315 876
Interest 27 25 19 25 95 0 95
Administrative and general 78 101 65 67 312 140 451
Depreciation and
amortization 16 14 12 14 55 92 147
Management fee 23 29 19 22 94 68 162
Franchise 33 40 27 31 130 64 194
Repairs and maintenance 31 28 21 22 102 53 155
Energy cost 33 32 23 27 114 63 177
Property taxes 37 11 12 14 73 39 112
Telephone 11 9 12 9 41 10 51
Insurance 10 23 7 9 49 23 71
Marketing 1 16 12 13 43 57 100
Rent 219 250 167 197 833 0 833
Provision for Loss 0 0 0 0 0 1,535 1,535
---- ---- ---- ---- ------ ------ ------
Total expenses 656 733 519 593 2,501 2,458 4,959
---- ---- ---- ---- ------ ------ ------
HISTORICAL NET INCOME 35 98 37 54 223 (1,322) (1,099)
---- ---- ---- ---- ------ ------ ------
Add:
Management fee 23 29 19 22 94 68 162
Interest expense 27 25 19 25 95 0 95
Depreciation and
amortization 16 14 12 14 55 92 147
Rent 219 250 167 197 833 0 833
Property taxes 37 11 12 14 73 39 112
Provision for Loss 0 0 0 0 0 1,535 1,535
---- ---- ---- ---- ------ ----- ------
Sub-Total 321 326 228 272 1,150 1,734 2,884
---- ---- ---- ---- ------ ----- ------
Less:
Rent expense (232) (325) (159) (234) (950) (276) (1,226)
Replacement reserve (32) (32) (32) (32) (126) (59) (185)
Additional franchise fee (13) (16) (11) (12) (52) (11) (63)
---- ---- ---- ---- ------ ----- ------
Sub-Total (277) (373) (201) (278) (1,128) (345) (1,473)
---- ---- ---- ---- ------ ----- ------
ESTIMATED PRO FORMA $79 $54 $64 $48 $245 $67 $312
NET INCOME (LOSS) ---- ---- ---- ---- ------ ----- ------
---- ---- ---- ---- ------ ----- ------
</TABLE>
49
<PAGE>
TABLE 7 (c) - SEPTEMBER 30, 1995
SELECTED COMBINED ESTIMATED PRO FORMA FINANCIAL DATA -
INITIAL HOTELS, ACQUISITION HOTEL AND LESSEE
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended September 30, 1995
------------------------------------------------------------
Initial Hotels
--------------
Rock Poplar Sub- Mission
Falls Miner Somerset Bluff total Bay Total
----- ----- -------- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Sales $507 $602 $409 $473 $1,992 $873 $2,866
Telephone 16 15 11 15 57 27 85
Other 12 8 2 8 30 30 59
---- ---- ---- ---- ------ ---- ------
Total revenues 536 626 422 496 2,079 930 3,010
---- ---- ---- ---- ------ ---- ------
Expenses:
Rooms 107 117 90 109 422 236 660
Interest 0 0 0 0 0 0 0
Administrative and general 58 74 48 51 231 106 337
Depreciation and
amortization 3 0 1 1 5 63 68
Management fee 16 19 13 15 62 56 118
Franchise 25 30 20 24 100 52 152
Repairs and maintenance 25 20 17 16 78 39 117
Energy cost 26 27 18 21 93 47 140
Property taxes 28 8 9 9 53 32 85
Telephone 8 7 9 7 31 7 38
Insurance 7 17 5 7 37 18 54
Marketing 1 11 9 10 31 45 76
Rent 219 250 167 197 833 0 833
---- ---- ---- ---- ------ ---- ------
Total expenses 523 579 406 467 1,975 704 2,679
---- ---- ---- ---- ------ ---- ------
HISTORICAL NET INCOME 13 47 16 29 105 226 331
---- ---- ---- ---- ------ ---- ------
Add:
Management fee 16 19 13 15 62 56 118
Interest expense 0 0 0 0 0 0 0
Depreciation and
amortization 3 0 1 1 5 63 68
Rent expense 219 250 167 197 833 0 833
Property taxes 28 6 9 9 53 32 85
---- ---- ---- ---- ------ ---- ------
Sub-Total 265 277 189 222 953 151 1,104
---- ---- ---- ---- ------ ---- ------
Less:
Rent expense (179) (245) (121) (181) (726) (258) (963)
Replacement Reserve (24) (24) (24) (24) (95) (44) (138)
Additional franchise fee (10) (12) (8) (9) (40) (9) (49)
---- ---- ---- ---- ------ ---- ------
Sub-Total (213) (280) (152) (214) (860) (310) (1,170)
ESTIMATED PRO FORMA $65 $43 $53 $37 $198 $67 $265
NET INCOME (LOSS) ---- ---- ---- ---- ------ ---- ------
---- ---- ---- ---- ------ ---- ------
</TABLE>
50
<PAGE>
TABLE 7 (c) - SEPTEMBER 30, 1995
SELECTED COMBINED ESTIMATED PRO FORMA FINANCIAL DATA -
INITIAL HOTELS, ACQUISITION HOTEL AND LESSEE
(in thousands)
(Unaudited)
Nine Months Ended September 30, 1994
------------------------------------------------
<TABLE>
<CAPTION>
Initial Hotels
--------------
Rock Poplar Sub- Mission
Falls Miner Somerset Bluff total Bay Total
----- ----- -------- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Sales $521 $613 $414 $447 $1,996 $799 $2,795
Telephone 18 18 12 13 61 32 93
Other 14 9 2 7 32 18 50
---- ---- ---- ---- ------ ------ ------
Total revenues 553 640 428 468 2,089 849 2,938
Expenses:
Rooms 111 125 97 92 424 224 648
Interest 76 84 83 63 305 0 306
Administrative and general 58 83 49 47 237 100 337
Depreciation and
amortization 22 23 23 22 89 56 145
Management fee 27 32 21 23 104 51 155
Franchise 26 31 21 22 100 48 148
Repairs and maintenance 31 23 24 21 98 43 140
Energy cost 27 28 17 21 93 49 142
Property taxes 27 7 9 7 49 37 86
Telephone 10 8 8 8 34 9 43
Insurance 7 12 6 6 31 18 49
Marketing 2 11 13 14 40 46 86
Rent 0 0 0 0 0 0 0
---- ---- ---- ---- ------ ------ ------
Total expenses 422 464 369 347 1,602 682 2,284
---- ---- ---- ---- ------ ------ ------
HISTORICAL NET INCOME 132 176 59 121 487 167 655
---- ---- ---- ---- ------ ------ ------
Add:
Management fee 27 32 21 23 104 51 155
Interest expense 76 84 83 63 305 0 306
Depreciation and
amortization 22 23 23 22 89 56 145
Rent Expense 0 0 0 0 0 0 0
Property taxes 27 7 9 7 49 37 86
---- ---- ---- ---- ------ ------ ------
Sub-Total 151 145 135 115 547 145 692
---- ---- ---- ---- ------ ------ -----
Less:
Rent expense (184) (250) (123) (169) (726) (206) (932)
Replacement reserve (24) (24) (24) (24) (95) (44) (138)
Additional franchise fee (10) (12) 8 (9) (40) (8) (48)
---- ---- ---- ---- ------ ------ ------
Sub-Total (218) (286) (155) (202) (861) (258) (1,119)
ESTIMATED PRO FORMA $64 $35 $40 $34 $173 $54 $228
NET INCOME (LOSS) ---- ---- ---- ---- ------ ------ ------
---- ---- ---- ---- ------ ------ ------
</TABLE>
51
<PAGE>
TABLE 7 (c) - 1994
SELECTED COMBINED ESTIMATED PRO FORMA FINANCIAL DATA -
INITIAL HOTELS, ACQUISITION HOTEL AND LESSEE
(in thousands)
(Unaudited)
Twelve Months Ended December 31, 1994
-------------------------------------
<TABLE>
<CAPTION>
Initial Hotels
---------------------------------------------
Rock Poplar Sub- Mission Combined
Falls Miner Somerset Bluff total Bay Total
----- ----- -------- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Sales $664 $812 $543 $591 $2,610 $990 $3,600
Telephone 24 23 16 17 80 41 121
Other 20 11 3 11 44 24 68
---- ---- ---- ---- ------ ----- ------
Total revenues 708 846 561 619 2,734 1,055 3,789
Expenses:
Rooms 142 165 130 126 562 302 864
Interest 102 108 101 88 400 0 400
Administrative and general 77 110 66 64 317 134 451
Depreciation and
amortization 34 37 33 35 139 85 224
Management fee 35 42 28 31 135 63 199
Franchise 33 41 27 30 131 59 190
Repairs and maintenance 37 30 28 26 122 57 178
Energy cost 34 33 22 26 115 64 179
Property taxes 36 10 11 12 69 44 114
Telephone 13 11 11 10 44 11 55
Insurance 10 17 7 9 43 23 66
Marketing 2 16 16 18 52 57 109
Rent 0 0 0 0 0 0 0
Provision for Loss 0 0 0 0 0 1,535 1,535
---- ---- ---- ---- ------ ----- ------
Total expenses 555 619 482 473 2,128 2,436 4,564
---- ---- ---- ---- ------ ----- ------
HISTORICAL NET INCOME 154 227 79 146 606 (1,381) (775)
---- ---- ---- ---- ------ ----- ------
Add:
Management fee 35 42 28 31 135 63 199
Interest expense 102 108 101 88 400 0 400
Depreciation and
amortization 34 37 33 35 139 85 224
Rent Expense 0 0 0 0 0 0 0
Property taxes 36 10 11 12 69 44 114
Provision for Loss 0 0 0 0 0 1,535 1,535
---- ---- ---- ---- ------ ----- ------
Sub-Total 207 197 174 166 744 1,728 2,472
---- ---- ---- ---- ------ ----- ------
Less:
Rent expense (237) (330) (160) (224) (953) (251) (1,204)
Replacement reserve (32) (32) (32) (32) (126) (59) (185)
---- ---- ---- ---- ------ ----- ------
Sub-Total (269) (362) (192) (256) (1,079) (310) (1,389)
---- ---- ---- ---- ------ ----- ------
ESTIMATED PRO FORMA $78 $46 $51 $43 $219 $27 $246
NET INCOME (LOSS) ---- ---- ---- ---- ------ ----- ------
---- ---- ---- ---- ------ ----- ------
</TABLE>
52
<PAGE>
TABLE 7 (c) - 1993
SELECTED COMBINED ESTIMATED PRO FORMA FINANCIAL DATA -
INITIAL HOTELS, ACQUISITION HOTEL AND LESSEE
(in thousands)
(Unaudited)
Twelve Months Ended December 31, 1993
-------------------------------------
<TABLE>
<CAPTION>
Initial Hotels
---------------------------------------------
Rock Poplar Sub- Mission Combined
Falls Miner Somerset Bluff total Bay Total
----- ----- -------- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Sales $654 $771 $458 $559 $2,442 $960 $3,402
Telephone 20 21 13 13 67 28 95
Other 19 12 4 12 47 34 81
---- ---- ---- ---- ------ ----- ------
Total revenues 693 804 475 584 2,556 1,022 3,577
Expenses:
Rooms 130 155 108 127 520 317 837
Interest 119 149 136 112 516 0 516
Administrative and general 80 112 64 71 327 157 484
Depreciation and
amortization 33 32 24 34 123 91 213
Management fee 34 40 24 29 127 61 188
Franchise 33 39 23 28 122 58 180
Repairs and maintenance 31 31 37 31 130 59 189
Energy cost 33 33 20 24 110 59 169
Property taxes 36 9 11 8 65 46 110
Telephone 14 11 12 10 47 15 61
Insurance 8 7 6 7 29 26 55
Marketing 4 17 17 14 51 60 111
Rent 0 0 0 0 0 0 0
Loan Restructuring Costs 25 25 25 25 102 0 102
---- ---- ---- ---- ------ ----- ------
Total expenses 579 660 507 520 2,267 948 3,215
---- ---- ---- ---- ------ ----- ------
HISTORICAL NET INCOME 113 144 (32) 64 288 74 362
---- ---- ---- ---- ------ ----- ------
Add:
Management fee 34 40 24 29 127 61 188
Interest expense 119 149 136 112 516 0 516
Depreciation and
amortization 33 32 24 34 123 91 213
Rent Expense 0 0 0 0 0 0 0
Property taxes 36 9 11 8 65 46 110
---- ---- ---- ---- ------ ----- ------
Sub-Total 222 230 195 183 830 197 1,028
---- ---- ---- ---- ------ ----- ------
Less:
Rent expense (233) (316) (133) (212) (894) (250) (1,144)
Replacement reserve (32) (32) (32) (32) (126) (59) (185)
---- ---- ---- ---- ------ ----- ------
Sub-Total (264) (347) (164) (244) (1,020) (309) (1,328)
---- ---- ---- ---- ------ ----- ------
ESTIMATED PRO FORMA $84 $37 $14 $18 $152 ($47) $105
NET INCOME (LOSS) ---- ---- ---- ---- ------ ----- ------
---- ---- ---- ---- ------ ----- ------
</TABLE>
53
<PAGE>
TABLE 7 (c) - 1992
SELECTED COMBINED ESTIMATED PRO FORMA FINANCIAL DATA -
INITIAL HOTELS, ACQUISITION HOTEL AND LESSEE
(in thousands)
(Unaudited)
Twelve Months Ended December 31, 1992
-------------------------------------
<TABLE>
<CAPTION>
Initial Hotels
---------------------------------------------
Rock Poplar Sub- Mission Combined
Falls Miner Somerset Bluff total Bay Total
----- ----- -------- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Sales $557 $731 $435 $532 $2,255 $1,201 $3,457
Telephone 12 9 9 6 36 30 66
Other 8 9 7 9 33 30 63
---- ---- ---- ---- ------ ------ ------
Total revenues 576 749 451 548 2,325 1,262 3,586
Expenses:
Rooms 117 146 101 113 477 299 775
Interest 150 172 151 159 631 0 631
Administrative and general 73 109 65 65 313 171 485
Depreciation and
amortization 78 83 40 86 286 194 481
Management fee 17 22 13 16 68 75 144
Franchise 28 37 22 27 113 72 185
Repairs and maintenance 43 31 21 39 133 38 170
Energy cost 31 34 19 23 107 67 173
Property taxes 32 9 8 10 59 43 101
Telephone 15 10 12 9 46 18 64
Insurance 10 9 8 9 36 21 56
Marketing 2 16 13 14 45 70 115
Rent 0 0 0 0 0 0 0
Loan Restructuring Costs 15 15 15 15 60 0 60
---- ---- ---- ---- ------ ------ ------
Total expenses 610 692 487 584 2,374 1,067 3,441
---- ---- ---- ---- ------ ------ ------
HISTORICAL NET INCOME (34) 57 (36) (36) (49) 194 145
---- ---- ---- ---- ------ ------ ------
Add:
Management fee 17 22 13 16 68 75 144
Interest expense 150 172 151 159 631 0 631
Depreciation and
amortization 78 83 40 86 286 194 481
Rent Expense 0 0 0 0 0 0 0
Property taxes 32 9 8 10 59 43 101
---- ---- ---- ---- ------ ------ ------
Sub-Total 278 285 211 271 1,045 312 1,357
---- ---- ---- ---- ------ ------ ------
Less:
Rent expense (201) (297) (125) (202) (824) (358) (1,182)
Replacement reserve (32) (32) (32) (32) (126) (59) (185)
---- ---- ---- ---- ------ ------ ------
Sub-Total (232) (328) (157) (234) (950) (417) (1,367)
---- ---- ---- ---- ------ ------ ------
ESTIMATED PRO FORMA $ 15 $15 $25 $ 5 $60 $78 $138
NET INCOME (LOSS) ---- ---- ---- ---- ------ ------ ------
---- ---- ---- ---- ------ ------ ------
</TABLE>
54
<PAGE>
FINANCIAL CONSIDERATIONS
OVERVIEW
Upon consummation of the Mission Bay Acquisition and the Formation
Transactions, the Company will own all of the Hotels. In order for the
Company to qualify as a REIT, the Company cannot operate hotels. Therefore,
the Company will lease the Hotels to the Lessee. Accordingly, the Company's
principal source of revenue will be lease payments under the Percentage
Leases. Percentage Rent will be based upon the Hotels' revenues, and the
Lessee's ability to make payments to the Company under the Percentage Leases
will be dependent on the Lessee's ability to generate cash flow from the
operation of the Hotels.
All of the Initial Hotels were opened in 1985, all of the Initial Hotels
were initially opened as Super 8s, and were acquired by AAG in 1985. The
Acquisition Hotel which was opened in 1987, was initially opened as a Super 8.
Average occupancy, ADR and REVPAR have each shown slight gains from 1992
through 1994. The following table sets forth information with respect to
average occupancy, ADR and REVPAR for each of the years ended December 31,
1992, 1993, and 1994. No assurance can be given that the trends reflected in
the following table will continue or that occupancy, ADR and/or REVPAR will
not decrease due to changes in national or local economic or hospitality
industry conditions.
Management believes the slight growth in average occupancy, ADR and
REVPAR at the Hotels reflects stronger market demand. While no assurance can
be given that the Hotels will continue to experience growth in all or any of
these areas, management of the Company believes that additional growth,
particularly in the areas of occupancy, ADR and REVPAR, could occur in light
of improving industry conditions.
In addition to participating in increased revenues at the Hotels, the
Company's strategy is to increase cash flow and enhance shareholder value by
acquiring additional existing hotels that meet the Company's investment
criteria and by participating, through the Percentage Leases, in any revenue
growth experienced at its Hotels. Management believes the U.S. lodging
industry is recovering from a period of low profitability resulting from high
levels of debt, past over-building of hotel properties and the effects of the
recent economic recession. As a result, the Company believes that, in the
short-term, it will have opportunities to acquire additional existing hotels
at attractive prices.
55
<PAGE>
GENERAL
The following table sets forth certain historical financial information
for the combined Hotels, as a percentage of revenue, for the periods
indicated.
TABLE 8
<TABLE>
<CAPTION>
Twelve Months Ended December 31, Twelve Months
------------------------------------------------------- Nine Months Ended Ended
--------------------
1991 1992 1993 1994 9/30/94 9/30/95 9/30/95
-------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Hotels and Lessee
- -------------------------
Rock Falls
Average occupancy 70.2% 70.0% 79.2% 79.4% 83.6% 78.8% 75.8%
Average daily rate $31.51 $34.50 $35.88 $36.37 $36.28 $37.42 $37.30
Revenue per available room $22.05 $24.15 $28.43 $28.90 $30.43 $29.61 $28.29
Miner
Average occupancy 90.2% 92.7% 94.7% 96.2% 98.3% 90.1% 90.0%
Average daily rate $31.56 $34.22 $35.40 $36.73 $36.28 $38.89 $38.69
Revenue per available room $28.40 $31.72 $33.54 $35.31 $35.79 $35.15 $34.83
Somerset
Average occupancy 59.1% 55.2% 58.9% 67.6% 68.5% 69.4% 68.3%
Average daily rate $32.28 $34.19 $33.83 $34.62 $35.18 $34.29 $34.28
Revenue per available room $19.01 $18.88 $19.92 $23.63 $24.19 $23.88 $23.40
Poplar Bluff
Average occupancy 64.1% 69.2% 71.5% 72.2% 73.1% 76.0% 74.4%
Average daily rate $31.54 $33.35 $34.00 $35.32 $35.55 $36.19 $36.06
Revenue per available room $20.23 $23.07 $24.30 $25.69 $26.09 $27.62 $26.83
Total-Initial Hotels and Lessee
- -------------------------------
Average occupancy 70.9% 71.8% 76.1% 78.8% 80.9% 78.6% 77.1%
Average daily rate $31.69 $34.07 $34.89 $36.00 $36.02 $36.99 $36.74
Revenue per available room $22.47 $24.45 $26.55 $28.38 $29.12 $29.06 $28.34
Acquisition Hotel
- -----------------
Mission Bay
Average occupancy 67.5% 65.2% 52.5% 54.9% 58.6% 61.5% 57.1%
Average daily rate $42.66 $43.04 $42.84 $42.40 $42.72 $44.49 $43.65
Revenue per available room $28.80 $28.06 $22.48 $23.18 $25.11 $27.45 $24.92
</TABLE>
56
<PAGE>
The following tables set forth historical revenue for the Hotels and the
percent change among the periods indicated.
TABLE 9- SEPTEMBER 30, 1994
Nine Months Ended September 30, 1994
<TABLE>
<CAPTION>
Initial Hotels and Lessee
---------------------------------------------
Rock Poplar Mission
Falls Miner Somerset Bluff Total Bay
----- ----- -------- ----- ----- ---
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales 94.2% 95.8% 96.8% 95.6% 95.5% 94.1%
Telephone 3.3% 2.8% 2.7% 2.8% 2.9% 3.7%
Other 2.5 1.4% 0.5% 1.6% 1.5% 2.2%
----- ----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
EXPENSES:
Rooms 20.7% 19.4% 22.6% 19.7% 20.3% 26.4%
Interest 13.7% 13.0% 19.3% 13.6% 14.6% 0.0%
Administrative & general 10.4% 12.9% 11.4% 10.1% 11.3% 11.8%
Depreciation &
amortization 3.9% 3.6% 5.3% 4.6% 4.3% 6.6%
Management fee 4.9% 5.0% 5.0% 5.0% 5.0% 6.0%
Franchise 4.7% 4.8% 4.8% 4.8% 4.8% 5.6%
Repairs and maintenance 5.5% 3.5% 5.6% 4.4% 4.7% 5.0%
Energy cost 4.9% 4.4% 4.0% 4.4% 4.4% 5.8%
Property taxes 4.8% 1.0% 2.0% 1.5% 2.3% 4.4%
Telephone 1.7% 1.3% 1.9% 1.6% 1.6% 1.1%
Insurance 1.3% 1.8% 1.3% 1.4% 1.5% 2.2%
Marketing 0.3% 1.7% 3.0% 3.1% 1.9% 5.4%
Rent 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
----- ----- ----- ----- ----- -----
Total expenses 76.2% 72.5% 86.3% 74.1% 76.7% 80.3%
NET INCOME 23.8% 27.5% 13.7% 25.9% 23.3% 19.7%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
57
<PAGE>
TABLE 9-SEPTEMBER 30, 1995
Nine Months Ended September 30, 1995
<TABLE>
<CAPTION>
Initial Hotels and Lessee
--------------------------
Rock Poplar Mission
Falls Miner Somerset Bluff Total Bay
----- ----- -------- ----- ----- ---
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales 94.7% 96.3% 96.9% 95.4% 95.8% 93.9%
Telephone 3.0% 2.4% 2.7% 3.0% 2.8% 2.09
Other 2.2 1.3% 0.4% 1.5% 1.4% 3.2%
----- ----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
EXPENSES:
Rooms 19.9% 18.6% 21.2% 22.0% 20.3% 25.6%
Interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Administrative & general 10.9% 11.8% 11.4% 10.2% 11.1% 11.4%
Depreciation &
amortization 0.6% 0.0% 0.2% 0.2% 0.3% 6.8%
Management fee 2.9% 3.0% 3.0% 3.0% 3.0% 6.0%
Franchise 4.7% 4.8% 4.8% 4.8% 4.8% 5.6%
Repairs and maintenance 4.6% 3.2% 3.9% 3.3% 3.7% 4.2%
Energy cost 4.9% 4.3% 4.4% 4.3% 4.5% 5.1%
Property taxes 5.2% 1.2% 2.1% 1.8% 2.5% 3.4%
Telephone 1.5% 1.1% 2.2% 1.4% 1.5% 0.8%
Insurance 1.4% 2.7% 1.3% 1.4% 1.8% 1.9%
Marketing 0.1% 1.8% 2.1% 2.0% 1.5% 4.9%
Rent 40.8% 40.0% 39.6% 39.7% 40.1% 0.0%
----- ----- ----- ----- ----- -----
Total expenses 97.6% 92.6% 96.2% 94.1% 95.0% 75.7%
NET INCOME 2.4% 7.4% 3.8% 5.9% 5.0% 24.3%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
58
<PAGE>
The following tables set forth historical revenue for the Hotels and
the percent change among the periods indicated.
TABLE 9-FISCAL SEPTEMBER 30, 1995
Twelve Months Ended September 30, 1995
<TABLE>
<CAPTION>
Initial Hotels and Lessee
-------------------------
Rock Poplar Sub Mission
Falls Miner Somerset Bluff Total Bay
----- ----- -------- ----- ----- ---
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales 94.2% 96.4% 96.8% 95.3% 95.7% 93.7%
Telephone 3.1% 2.4% 2.7% 3.0% 2.8% 3.3%
Other 2.6% 1.3% 0.4% 1.7% 1.5% 3.1%
----- ----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
EXPENSES:
Rooms 20.0% 18.8% 22.1% 22.1% 20.6% 27.8%
Interest 3.9% 2.9% 3.4% 3.8% 3.5% 0.0%
Administrative & general 11.3% 12.1% 11.7% 10.4% 11.4% 12.3%
Depreciation &
amortization 2.3% 1.7% 2.1% 2.2% 2.0% 8.1%
Management fee 3.4% 3.5% 3.5% 3.4% 3.4% 6.0%
Franchise 4.7% 4.8% 4.8% 4.8% 4.8% 5.6%
Repairs and maintenance 4.5% 3.3% 3.8% 3.4% 3.7% 4.7%
Energy cost 4.8% 3.8% 4.2% 4.1% 4.2% 5.5%
Property taxes 5.4% 1.3% 2.1% 2.1% 2.7% 3.4%
Telephone 1.6% 1.1% 2.2% 1.4% 1.5% 0.9%
Insurance 1.4% 2.7% 1.3% 1.4% 1.8% 2.0%
Marketing 0.2% 2.0% 2.2% 2.0% 1.6% 5.0%
Rent 31.7% 30.1% 30.1% 30.4% 30.6% 0.0%
Provision for Loss 0.0% 0.0% 0.0% 0.0% 0.0% 135.1%
----- ----- ----- ----- ----- -----
Total expenses 95.0% 88.2% 93.4% 91.7% 91.8% 216.4%
NET INCOME 5.0% 11.8% 6.6% 8.3% 8.2% (116.4%)
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
<PAGE>
TABLE 9 - 1994
Twelve Months Ended December 31, 1994
<TABLE>
<CAPTION>
Initial Hotels
---------------------------------------------
Rock Poplar Mission
Falls Miner Somerset Bluff Total Bay
----- ----- -------- ----- ----- ---
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales 93.8% 96.0% 96.8% 95.5% 95.5% 93.8%
Telephone 3.4% 2.7% 2.8% 2.8% 2.9% 3.9%
Other 2.8% 1.3% 0.5% 1.7% 1.6% 2.2%
----- ----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
EXPENSES:
Rooms 20.0% 19.5% 23.1% 20.4% 20.6% 28.6%
Interest 14.4% 12.8% 18.1% 14.3% 14.6% 0.0%
Administrative & general 10.9% 12.9% 11.8% 10.4% 11.6% 12.7%
Depreciation &
amortization 4.8% 4.4% 6.0% 5.6% 5.1% 8.1%
Management fee 4.9% 5.0% 5.0% 5.0% 5.0% 6.0%
Franchise 4.7% 4.8% 4.8% 4.8% 4.8% 5.6%
Repairs and maintenance 5.3% 3.6% 5.0% 4.2% 4.4% 5.4%
Energy cost 4.7% 3.9% 3.9% 4.2% 4.2% 6.1%
Property taxes 5.1% 1.2% 2.0% 1.9% 2.5% 4.2%
Telephone 1.8% 1.3% 1.9% 1.6% 1.6% 1.1%
Insurance 1.4% 2.0% 1.3% 1.4% 1.6% 2.2%
Marketing 0.3% 1.9% 2.9% 2.9% 1.9% 5.4%
Rent 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Provision for Loss 0.0% 0.0% 0.0% 0.0% 0.0% 145.5%
----- ----- ----- ----- ----- -----
Total expenses 78.3% 73.1% 85.9% 76.5% 77.8% 230.9%
NET INCOME (LOSS) 21.7% 26.9% 14.1% 23.5% 22.2% (130.9%)
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
59
<PAGE>
TABLE 9 - 1993
Twelve Months Ended December 31, 1993
<TABLE>
<CAPTION>
Initial Hotels
---------------------------------------------
Rock Poplar Mission
Falls Miner Somerset Bluff Total Bay
----- ----- -------- ----- ----- ---
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales 94.4% 95.9% 96.5% 95.6% 95.6% 94.0%
Telephone 2.8% 2.6% 2.7% 2.3% 2.6% 2.7%
Other 2.8% 1.4% 0.8% 2.1% 1.8% 3.3%
----- ----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
EXPENSES:
Rooms 18.8% 19.2% 22.8% 21.7% 20.3% 31.1%
Interest 17.2% 18.6% 28.5% 19.2% 20.2% 0.0%
Administrative & general 11.6% 13.9% 13.5% 12.1% 12.8% 15.3%
Depreciation &
amortization 4.8% 3.9% 5.0% 5.8% 4.8% 8.9%
Management fee 4.9% 5.0% 5.0% 5.0% 5.0% 6.0%
Franchise 4.7% 4.8% 4.8% 4.8% 4.8% 5.6%
Repairs and maintenance 4.4% 3.9% 7.8% 5.3% 5.1% 5.8%
Energy cost 4.7% 4.1% 4.3% 4.1% 4.3% 5.8%
Property taxes 5.2% 1.1% 2.4% 1.4% 2.5% 4.5%
Telephone 2.0% 1.4% 2.4% 1.8% 1.8% 1.4%
Insurance 1.1% 0.9% 1.4% 1.2% 1.1% 2.5%
Marketing 0.5% 2.1% 3.5% 2.4% 2.0% 5.9%
Rent 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Loan Restructuring Costs 3.7% 3.2% 5.4% 4.4% 4.0% 0.0%
----- ----- ----- ----- ----- -----
Total expenses 83.6% 82.1% 106.8% 89.1% 88.7% 92.8%
NET INCOME (LOSS) 16.4% 17.9% (6.8%) 10.9% 11.3% 7.2%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
60
<PAGE>
TABLE 9 - 1992
Twelve Months Ended December 31, 1992
<TABLE>
<CAPTION>
Initial Hotels
---------------------------------------------
Rock Poplar Mission
Falls Miner Somerset Bluff Total Bay
----- ----- -------- ----- ----- ---
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales 96.6% 97.6% 96.4% 97.1% 97.0% 95.2%
Telephone 2.1% 1.3% 1.9% 1.2% 1.6% 2.4%
Other 1.3% 1.1% 1.6% 1.7% 1.4% 2.4%
----- ----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
EXPENSES:
Rooms 20.2% 19.5% 22.4% 20.6% 20.5% 23.7%
Interest 26.1% 22.9% 33.4% 29.0% 27.2% 0.0%
Administrative & general 12.7% 14.6% 14.5% 11.9% 13.5% 13.6%
Depreciation &
amortization 13.6% 11.0% 8.8% 15.7% 12.3% 15.4%
Management fee 2.9% 3.0% 2.9% 2.9% 2.9% 6.0%
Franchise 4.8% 4.9% 4.8% 4.9% 4.9% 5.7%
Repairs and maintenance 7.4% 4.1% 4.6% 7.0% 5.7% 3.0%
Energy cost 5.3% 4.5% 4.3% 4.1% 4.6% 5.3%
Property taxes 5.6% 1.2% 1.7% 1.9% 2.5% 3.4%
Telephone 2.7% 1.3% 2.6% 1.7% 2.0% 1.4%
Insurance 1.7% 1.3% 1.8% 1.6% 1.5% 1.6%
Marketing 0.3% 2.2% 2.9% 2.6% 1.9% 5.5%
Rent 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Loan Restructuring Costs 2.6% 2.0% 3.3% 2.7% 2.6% 0.0%
----- ----- ----- ----- ----- -----
Total expenses 105.9% 92.4% 108.0% 106.6% 102.1% 84.6%
NET INCOME (LOSS) (5.9%) 7.6% (8.0%) (6.6%) (2.1%) 15.4%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
61
<PAGE>
TABLE 10
TWELVE MONTHS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1991 1992 1993 1994
---------------------- -------------------- ---------------------- ---------------------
Percent Percent Percent Percent
change change change change
Percent/ from prior Percent from Percent/ from Percent/ from
Amount year Amount 1991 Amount 1992 Amount 1993
-------- ---------- ------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL HOTELS AND LESSEE
Rock Falls
Occupancy 70.2% 1.1% 70.0% (0.3%) 79.2% 13.2% 79.4% 0.2%
ADR $31.51 (2.5%) $34.50 9.5% $35.88 4.0% $36.37 1.4%
REVPAR $22.05 (1.8%) $24.15 9.5% $28.43 17.7% $28.90 1.6%
Room sales 508,414 (1.5%) $556,939 9.5% $653,730 17.4% $664,480 1.6%
Miner
Occupancy 90.2% 9.6% 92.7% 2.7% 94.7% 2.2% 96.2% 1.5%
ADR $31.56 1.5% $34.22 8.4% $35.40 3.4% $36.73 3.8%
REVPAR $28.40 11.0% $31.72 11.7% $33.54 5.8% $35.31 5.3%
Room sales 654,886 11.3% $731,293 11.7% $771,277 5.5% $811,923 5.3%
Somerset
Occupancy 59.1% 5.7% 55.2% (6.5%) 58.9% 6.7% 67.6% 14.8%
ADR $32.28 (3.6%) $34.19 5.9% $33.83 (1.1%) $34.62 2.3%
REVPAR $19.01 (0.2%) $18.88 (0.7%) $19.92 5.5% $23.63 18.6%
Room sales 438,320 0.0% $435,314 (0.7%) $458,145 5.2% $543,305 18.6%
Poplar Bluff
Occupancy 64.1% 7.8% 69.2% 7.9% 71.5% 3.3% 72.2% 1.0%
ADR $31.54 2.0% $33.35 5.7% $34.00 1.9% $35.32 3.9%
REVPAR $20.23 10.0% $23.07 14.0% $24.30 5.3% $25.69 5.7%
Room sales 465,143 10.0% $531,938 14.4% $558,761 5.0% $590,788 5.7%
TOTAL- INITIAL HOTELS AND LESSEE
Occupancy 70.9% 5.8% 71.8% 1.2% 76.1% 6.0% 78.8% 3.6%
ADR $31.69 (0.6%) $34.07 7.5% $34.89 2.4% $36.00 3.2%
REVPAR $22.47 5.1% $24.45 8.8% $26.55 8.6% $28.38 6.9%
Room sales 2,066,763 5.1% $2,255,484 9.1% $2,441,913 8.3% $2,610,496 6.9%
ACQUISITION HOTEL
Mission Bay
Occupancy 67.5% 0.4% 65.2% (3.4%) 52.5% (19.5%) 54.9% 4.6%
ADR $42.66 3.8% $43.04 0.9% $42.84 ( 0.5%) $42.20 (1.5%)
REVPAR $28.80 4.2% $28.06 (2.6%) $22.48 (19.9%) $23.18 3.1%
Room sales 1,229,791 4.2% $1,201,412 (2.3%) $960,166 (20.1%) $989,703 3.1%
<CAPTION>
Nine Months Ended Twelve Months Ended
----------------------- -----------------------
9/30/95 9/30/95
------- -------
Percent Percentage
change change
Percent/ from Percentage/ from
Amount prior year Amount 1994
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
INITIAL HOTELS AND LESSEE
Rock Falls
Occupancy 78.8% (5.6%) 75.8% (9.3%)
ADR $37.42 3.1% $37.30 5.3%
REVPAR $29.61 (2.7%) $28.29 (4.5%)
Room sales $507,387 (2.7%) $650,497 (4.5%)
Miner
Occupancy 90.1% (8.4%) 90.0% (5.7%)
ADR $38.89 7.2% $38.69 5.0%
REVPAR $35.15 (1.8%) $34.83 (1.0%)
Room sales $602,363 (1.8%) $800,948 (1.0%)
Somerset
Occupancy 69.4% 1.3% 68.3% 13.6%
ADR $34.29 (2.5%) $34.28 (8.4%)
REVPAR $23.88 (1.3%) $23.40 4.1%
Room sales $409,129 (1.3%) $537,986 4.1%
Poplar Bluff
Occupancy 76.0% 4.0% 74.4% 2.8%
ADR $36.19 1.8% $36.06 6.1%
REVPAR $27.62 5.9% $26.83 9.0%
Room sales $473,304 5.9% $617,075 9.0%
TOTAL- INITIAL HOTELS AND LESSEE
Occupancy 78.6% (2.8%) 77.1% (1.0%)
ADR $36.99 2.7% $36.74 2.3%
REVPAR $29.06 (0.2%) $28.34 1.3%
Room sales $1,992,183 (0.2%) $2,606,488 1.3%
ACQUISITION HOTEL
Mission Bay
Occupancy 61.5% 5.0% 57.1% 6.4%
ADR $44.49 4.1% $43.65 4.6%
REVPAR $27.45 9.3% $24.92 11.3%
Room sales $873,478 9.3% $1,064,136 11.3%
</TABLE>
62
<PAGE>
RESULTS OF OPERATIONS
ACTUAL RESULTS OF OPERATIONS INITIAL HOTELS AND LESSEE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
On January 1, 1995, the Initial Hotels were leased to Inn Fund by AAG.
On April 1, 1995, the real estate assets and long-term debt were transferred
to the Company. Please refer to the Initial Hotels and Inn Fund financial
statements and footnotes thereto for additional information and for purposes
of comparison of actual results of operations.
Occupancy and average room rates of 81% versus 79% and $36.02 versus
$36.99 for the nine months ended September 30, 1995 as compared to 1994 resulted
in approximately equal room revenues of $1,992,102 and $1,996,191, respectively.
During the first nine months of 1995 the Initial Hotels incurred no
interest expense and depreciation of $5,288 and rent expenses totaling
$832,945, while for the same comparative period of 1994 no rent expense was
incurred, interest expense totaled $305,364, and depreciation and
amortization totaled $88,924. As described above, the Initial Hotels were
leased effective January 1, 1995 to Inn Fund. Thereafter, Inn Fund incurred
rent expense while depreciation and amortization on existing assets and
interest expense on long-term debt remained with AAG and the Company.
Expenses of hotel operations, excluding rent, depreciation and
amortization and interest expense for the comparable nine month periods ended
September 30, 1995 and 1994 totaled $1,136,353 versus $1,207,756. The
approximate 6% decrease in hotel expenses in 1995 as compared to 1994 are
principally attributed to decreased management fees as a result of the decrease
in the management fee rate from 5% to 3% and reduced repairs and maintenance
and marketing due to expense controls.
The principal reason for the decrease in net income to $104,673 from
$487,319 for the nine months ended September 30, 1995 as compared to 1994 is the
effect the execution of the intercompany lease had on rent expense,
depreciation and amortization and interest expense.
YEAR ENDED DECEMBER 31, 1994 AS COMPARED TO YEAR ENDED DECEMBER 31, 1993
Occupancy and average room rates of 79% versus 76% and $36.00 versus
$34.89 for the year ended December 31, 1994 as compared to 1993 resulted in
room revenues of $2,610,496 versus $2,441,913 respectively. The increase in
room revenues is principally attributed to the increase in occupancy due to
increased business travel in 1994 as compared to 1993 and to the increased
room rate able to be achieved due to higher demand for rooms.
The restructuring of the long-term debt in 1993 resulted in lower
interest rates which caused interest expense to decrease to $400,002 from
$516,116 in 1994 as compared to 1993. Further, in 1993, loan restructuring
costs totaling $101,883 were incurred while restructuring the previous debt
with no similar expense in 1994.
Room expense increased in 1994 as compared to 1993 principally because
of increased occupancy at the Hotels.
Depreciation expense increase in 1994 as compared to 1993 principally
because of late 1993 and 1994 asset additions for which increased
depreciation expense was incurred in 1994.
Insurance expense increased in 1994 as compared to 1993 principally due
to increased liability insurance premiums due to market conditions.
The principal reasons for the increase in net income to $605,879 from
$288,162 for the comparable 1994 and 1993 calendar year periods was the
effect on interest rates and elimination of loan restructuring costs and the
increase
63
<PAGE>
in occupancy and average room rates in 1994 as compared to 1993.
YEAR ENDED DECEMBER 31, 1993 AS COMPARED TO YEAR ENDED DECEMBER 31, 1992
Occupancy and average room rates of 76% and 72% and $34.89 versus $34.07
for the year ended December 31, 1993 as compared to 1992 resulted in room
revenues of $2,441,913 versus $2,255,483. The increase in room revenues is
principally attributed to increased business travel in 1993 as compared to
1992 due to improvement in the Midwest economy and to the slight increase in
the average room rate, principally the result of inflation.
Interest expense decreased to $516,116 from $631,489 for the comparable
1993 and 1992 calendar year ends, principally due to lower interest rates as
a result of loan restructuring completed in 1993.
Loan restructuring costs totaled $101,883 in 1993 as compared to $59,528
in 1992, which costs were expensed as incurred during the loan restructuring
completed in 1993.
Depreciation and amortization decreased in 1993 as compared to 1992 due
to the final depreciation in 1992 of the costs incurred for the original
hotel furnishings and equipment upon construction.
Management fees increased in 1993 as compared to 1992 due to the one
year agreed upon reduction in 1992 by the General Partner of AAG of
management fee expense form 5% to 3% of gross revenue.
The principal reasons for the increase in net income to $288,162 in 1993
from a loss of ($50,130) in 1992 was the improved effect on interest rates
due to the loan restructuring completed in 1993, the decrease in depreciation
and amortization expense due to the final depreciation in 1992 of the
original hotel furnishing sand equipment and improved occupancy and average
room rates in 1993 as compared to 1992.
ACTUAL RESULTS OF OPERATIONS--MISSION BAY
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
Please refer to the Mission Bay Super 8, Ltd. financial statements and
footnotes thereto for additional information and for purposes of comparison of
actual results of operations. Occupancy and average room rates of 61.47% versus
58.58% and $44.49 versus $42.72 for the nine months ended September 30, 1995 as
compared to the nine months ended September 30, 1994 resulted in room revenues
of $873,478 and $799,045, respectively.
The net income for the nine months ended September 30, 1995 was $226,414
compared to $167,261 for the nine months ended September 30, 1994. This $59,153
increase in net income resulted from (i) an $81,295 increase in gross income
(attributable to higher occupancy and average room rates), and (ii) a $22,142
increase in expenses.
YEAR ENDED DECEMBER 31, 1994 AS COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net income (loss) was ($1,381,028) in 1994 and $73,760 in 1993. In light
of this loss in 1994 and income in 1993, on a current basis 100% of the $180,000
distribution in 1994 was a return of capital and 54.5% of the $162,000
distribution made in 1993 was a return of capital. Total revenues were
$1,054,819 in 1994 and $1,021,785 in 1993. The property operated at an
occupancy rate of 54.9% in 1994 and 52.5% in 1993. The average daily room rate
was $42.20 in 1994 and $42.84 in 1993. This decrease of 1.5% was attributable
to selective decreases in room rates in order to maintain and/or improve
marketing. In fact, total gross revenues increased by 3.2% for this same
period. The new loss for 1994 resulted from an unrealized loss due to decline
in value of investment property of $1,534,950 as discussed above.
YEAR ENDED DECEMBER 31, 1993 AS COMPARED TO YEAR ENDED DECEMBER 31, 1992
Net income $73,760 in 1993 and $194,197 in 1992. In light of this income
in 1993 and 1992, on a current basis 54.5% of the $162,000 distribution made in
1993 was a return of capital, and 56.9% of the $340,996 distribution made in
1992 was return of capital. Total revenues were $1,021,785 in 1993, and
$1,261,616 in 1992. The property operated at an occupancy rate of 52.5% in
1993, and 65.2% in 1992. The average daily room rate was $42.84 in 1993, and
$43.04 in 1992. The $120,437 decrease in net income from 1993 to 1992 was
primarily attributable to the combination of the $239,831 decrease in gross
revenue (caused by a 12.7% drop in occupancy) and the $103,336 decrease in
depreciation expense.
PRO FORMA RESULTS OF OPERATIONS--THE COMPANY
YEAR ENDED SEPTEMBER 30, 1995
On a pro forma basis for the year ending September 30, 1995, the Company
would have generated base and percentage lease revenue of $1,226,140
resulting from combined occupancy of 71% at an average daily room rate of
$38.51 from the five Hotels. Interest income from the Hatfield Note would
have totaled $216,681, which interest income is payable quarterly, interest
only, at 12% per annum. Share purchase plan interest income, payable
quarterly at 7% per annum, would have totaled $21,000 on loans outstanding of
$300,000. The share purchase plan income is the interest income is the
interest income the Company will earn on the three promissory notes of
$100,000 each given to the Company by each of the Independent Directors for
the purchase of Class A Common Stock. Accordingly, pro forma gross revenue
for the year ending September 30, 1995 would have been $1,463,821.
Pro forma general administrative expenses are $150,000, including office
occupancy costs, directors expenses, accounting fees, legal fees, audit fees,
public company costs and other miscellaneous expenses. Advisory fees are
contractually fixed at a base fee of $30,000 per annum at current property and
lease revenue levels and a percentage fee of 1.25% of the total market value of
all real property owned by the Company when the real property owned by the
Company exceeds $35 million. Depreciation expense of $183,778 is calculated
based upon the costs of the motel acquisitions on a straight line basis over
their estimated useful lives. Annual amortization of $54,000 of unearned
directors' compensation assumes the initial Independent Directors will remain
as directors for the pro forma year. Interest expense of $40,585 is calculated
based upon a refinancing of the Rock Falls, Illinois mortgage approximating
$462,000 to be paid monthly, amortizing fully over 15 years at 8.75% interest
per annum. Property taxes payable by the Company pursuant to the Percentage
Leases would be $112,292. Total pro forma expenses would have been $570,655.
Pro forma net income would be $893,166, while cash available for
distribution would be $1,115,040. The Pro Forma Distribution in 1996 prior
to the conversion of the shares of Class C Common Stock is $0.895 per share of
Class A Common Stock (a total distribution of $1,083,563) would represent a
distribution of approximately 97.7% of the cash available for distribution.
64
<PAGE>
On a pro forma basis for the year ending December 31, 1994, the Company
would have generated base and percentage lease revenue of $1,204,007
resulting from combined occupancy of 71% at an average daily room rate of
$37.52 from the five Hotels. Interest income from the Hatfield Note would
have totaled $216,681. Share purchase plan interest income would have
totaled $21,000. Accordingly, pro forma gross revenue for the year ending
December 31, 1994, would have been $1,441,668.
Pro forma general administrative expenses are $150,000, including office
occupancy costs, directors expenses, accounting fees, legal fees, audit fees,
public company costs and other miscellaneous expenses. Advisory fees are
contractually fixed at a base fee of $30,000 per annum at current property and
lease revenue levels and a percentage fee of 1.25% of the total market value of
all real property owned by the Company when the real property owned by the
Company exceeds $35 million. Depreciation expense of $183,778 is calculated
based upon the costs of the motel acquisitions on a straight line basis over
their estimated useful lives. Annual amortization of $54,000 of unearned
directors' compensation assumes the initial Independent Directors will remain
as directors for the pro forma year. Interest expense of $40,585 is calculated
based upon a refinancing of the Rock Falls, Illinois mortgage approximating
$462,000 to be paid monthly, amortizing fully over 15 years at 8.75% interest
per annum. Property taxes payable by the Company pursuant to the Percentage
Leases would be $113,734. Total pro forma expenses would have been $572,097.
Pro forma net income would be $869,591, while cash available for
distribution would be $1,091,465. A distribution in 1996 (prior to the
conversion of the shares of Class C Common Stock) of $0.895 per share of Class
A Common Stock (a total distribution of $1,083,563) would represent a
distribution of approximately 99.3% of the cash available for distribution.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
Upon consummation of the Offering and application of net proceeds, the
Company will have approximately $462,000 of outstanding debt and
approximately $246,000 of cash. The Company has no commitments for
additional financing. Accordingly, since there are no committed sources of
external liquidity available to the Company, the Company will rely on its
internal cash flow to meet its liquidity needs. The Company's principal
source of cash to meet its cash requirements, including distributions to
Shareholders, will be its share of the Company's cash flow from the
Percentage Leases. Although, the Lessee's obligations under the Percentage
Leases are guaranteed in part by Crossroads Parent, a subsidiary of
Interstate Hotels (See "The Percentage Leases -- Master Agreement"), the
Lessee's ability to make lease payments under the Percentage Leases, and
therefore the Company's liquidity, including its ability to make
distributions to Shareholders, will be dependent on the ability of the Lessee
to general sufficient cash flow from the Hotels.
Other than the debt service and/or refinancing costs of the $462,000
debt, the Company is not aware of any demands, commitments, events or
uncertainties that will result or are likely to result in a change in the
Company's liquidity. In addition, the Company is not aware of any capital
improvements, required or planned, for any of the Hotels which the Company
will be required to fund. In that connection, the Company believes that the
monthly deposits made by the Lessee into the Capital Expenditure Reserve
Account will be sufficient to fund capital expenditures during the term of
the Percentage Leases.
The Company intends to make additional investments in hotel properties
and may incur indebtedness to make such investments or to meet distribution
requirements imposed on a REIT under the Code to the extent that working
capital and cash flow from the Company's investments are insufficient to make
such distributions. See "Policies and Objectives
65
<PAGE>
With Respect to Certain Activities - Financing" and "Description of Capital
Stock - Charter and Bylaw Provisions". The Company will invest in additional
hotel properties only as suitable opportunities arise, and the Company will
not undertake investments unless adequate sources of financing are available.
It is expected that future investments in hotel properties will be financed,
in whole or in part, with Common Stock, proceeds from additional issuances of
Common Stock, or from the issuance of other debt or equity securities. The
Company in the future may seek to obtain a line of credit or a permanent
credit facilities, negotiate additional credit facilities, or issue corporate
debt instruments, all in compliance with its Charter restrictions. Any debt
incurred or issued by the Company may be secured or unsecured, long-term or
short-term, charge a fixed or variable interest rate and may be subject to
such other terms as the Board of Directors of the Company deems prudent.
THE LESSEE
The Lessee will funds its cash needs, including monthly payments of Base
Rent and quarterly payments of Percentage Rent, with cash available from
operations of the Hotels. Based on the pro-forma financial statements
contained herein, the Company believes that the Lessee will have adequate
funds to meet its short-term liquidity requirements. The Lessee will have no
outstanding indebtedness for borrowed funds.
Pursuant to the Percentage Leases, the Lessee will be required to fund
the ongoing replacement or refurbishment of furniture, fixtures and equipment
at the Hotels in an amount equal to $125 per room per quarter . The Company
believes that such amount will be sufficient to fund required capital
expenditures for the term of the Percentage Leases. The Company anticipates
entering into similar arrangements with respect to future hotel properties in
which it invests. Further, in the event that a prospective buyer makes an offer
to purchase one or more of the Hotels, the Lessee will have a 30 day right of
first refusal to purchase such hotel(s) under the Percentage Leases equal to the
price offered to the Company.
The Lessee's obligations under the Percentage Leases will be secured by
a guaranty, set forth in the Master Agreement, whereby Crossroads Parent will
guaranty limited obligations of the Lessee. These obligations concern
payment of liquidated damages if the Lessee voluntarily terminates or
defaults on more than one of the Percentage Leases in the first five years of
each of the Percentage Leases. In addition, Crossroads Parent will guaranty
the Lessee's obligations concerning payment of Percentage Rent throughout the
respective terms of the Percentage Leases.
The limited guaranty is equal to $264,000 in the first three years of
the Percentage Leases and decreases thereafter to zero in the fifth year, but
not less than the Percentage Rent in the prior twelve months. The guaranty
will initially be secured by a letter of credit in the amount of $264,000.
After the first year, Crossroads may substitute the letter of credit by
providing to the Company a copy of Crossroad Parent's audited financial
statements which indicate a net worth of at least 2-1/2 times the value of
the letter of credit, with at least 40% of the net worth in cash or cash
equivalent assets. In addition, Crossroads Parent makes certain negative
covenants concerning maintenance of its minimum net worth levels.
INFLATION
Operators of hotels, in general, possess the ability to adjust room
rates quickly. Competitive pressures may, however, limit the Lessee's
ability to raise room rates in the face of inflation. Since 1987, industry
wide annual increases in ADR have failed to keep pace with inflation.
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates during the second and third quarters. This
seasonality can be expected to cause fluctuations in the Company's quarterly
lease revenue to the extent that it receives Percentage Rent. It is
presently anticipated that the Company's cash flow from operation of the
Hotels will be sufficient to enable it to make distributions at the estimated
initial rate. To the extent that cash flow from operations are to be
insufficient during any quarter, due to temporary or seasonal fluctuations in
lease revenue, the Company expects to utilize other cash on hand or
borrowings to make such distributions. No assurance can be given, however,
that the Company will make distributions in the future at the initially
estimated rate, or at all.
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BUSINESS AND PROPERTIES
THE HOTEL INDUSTRY
The United States hotel industry had approximately 28,930 hotel
properties with approximately 3.2 million rooms as of June 30, 1994. Of
these hotel rooms, approximately 1.9 million were affiliated with a "brand"
either through a franchise or license agreement or though ownership or
management by a national or regional hotel chain. The remainder were managed
by independent operations not affiliated with hotel chains of more than five
hotel properties. The Company believes that there are many advantages to
owning hotels which are "brand" affiliated, including access to reservation
systems, quality standards, training programs and enhanced customer
recognition.
The United States hotel industry is generally comprised of two sectors:
full-service hotels and limited-service hotels. Full-service hotels
generally offer restaurant and lounge facilities and meeting spaces, as well
as a wide range of services typically including bell service and room
service. Full-service hotels represent the largest segment of the hotel
industry and primarily attract business travelers as compared to leisure
travelers. By contrast, limited-service hotels usually only provide basic
room accommodations, but generally attract a more balanced mix of business
and leisure travelers. All five of the Hotels are limited-service hotels.
Based on the operating history of the Hotels and the chart below, the
Company believes that both the Hotels and the United States hotel industry in
general are experiencing cyclical growth. Since 1992, the hotel industry has
experienced improved fundamentals as the annual rates of growth in demand for
hotel rooms have exceeded the annual rates of growth in supply of hotel room
and annual ADR have increased each year. The 1994 information for occupancy
rates for limited-service hotels is not available. According to Smith Travel
Research, for the five-year period ended December 31, 1994, the United States
hotel industry demonstrated the following operating characteristics:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average hotel occupancy 61.8% 60.2% 61.9% 63.3% 65.2%
Annual % growth in room supply 3.4% 2.5% 1.3% 1.0% 1.4%
Annual% growth in room demand 2.1% 0.0% 3.2% 3.6% 4.5%
ADR $58.49 $58.83 $59.65 $61.14 $63.77
REVPAR $36.15 $35.42 $36.92 $38.70 $41.58
% Change in REVPAR 1.9% (2.0%) 4.2% 4.8% 7.4%
</TABLE>
The improvement in industry fundamental has likewise resulted in an
improvement in operating statistics for both full-service and limited-service
hotels. According to Smith Travel Research, the average hotel occupancy rate
for full-service hotels in the United States increased from 62.8% in 1992 to
65.2% in 1993 while ADR increased by 1.7%. The average hotel occupancy rate
for limited-service hotels in the United States decreased from 63.6% in 1992
to 63.3% in 1993 while ADR increased by 1.9%. On the same property basis,
the ADR at the five (5) Hotels, which are limited-service hotels, owned by
their Sellers as of January 1, 1993 increased from $36.82 in 1993 to $37.52
in 1994, an increase of 1.9%, and the average hotel occupancy rate of such
Hotels increased from 68.6% in 1993 to 71.3% in 1994.
The Company believes that improvements in performance in the United
States hotel industry since 1992 are primarily due to an improved economic
environment and a low rate of growth in room supply. The Company attributes
the low rate of growth in room supply to constraints on the availability of
financing for new hotel development from traditional sources and an excess
supply of hotel rooms resulting from high levels of hotel construction
activity in prior years. The Company anticipates that growth in room supply
will continue to be limited, except in certain select markets experiencing
rapid economic growth, due to continued restraints on the availability of
institutional funds for hotel construction. All information regarding the
hotel industry contained in this section ("Business and Properties -- The
Hotel Industry") was obtained from Smith Travel Research.
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<PAGE>
THE INITIAL HOTELS
GENERAL
The Hotels are diversified by geographic location (4 states). However,
the Hotels share the same (i) franchise affiliation (Super 8), (ii) Lessee
(Crossroads Hospitality Tenant Company, LLC), and (iii) approximate price
segment in the hotel industry (budget price segment). There are five Hotels.
The Hotels are the: Miner Super 8, Poplar Bluff Super 8, Rock Falls Super
8, and the Somerset Super 8. The Company believes that the geographic
diversity of its initial portfolio could moderate the potential effects on
the Company of adverse regional economic conditions and changes in local
market competitive conditions. The average acquisition price of the Initial
Hotels was approximately $27,380 per room. Based on the Phase i audits
performed by Law Engineering and Environmental Services, Inc., the criteria
set forth by Super 8 Motels, Inc., and its own evaluation and inspection of
each of the Hotels, the Company believes that the Hotels are in good
operating condition and meet the current quality and appearance standards
required by their respective Franchise Agreements.
THE MINER SUPER 8 -- 2609 EAST MALONE, SIKESTON, MISSOURI.
The Miner Super 8 hotel is located in Sikeston, Missouri, and is located
in a primarily rural area. The Miner Super 8 Hotel has 63 rooms, has a
maximum occupancy of 180 persons, and is located on 2.0 acres of land. The
Company acquired the Miner Super 8 effective April 1, 1995, pursuant to the
Contribution and Assumption Agreement. Arthur Andersen, LLP, has appraised
the Miner Super 8 at a value of $2,930,000. As of September 30, 1995, the
Miner Super 8 was encumbered by a mortgage with an approximate principal
amount of $1,101,000 at an adjustable interest rate of 9.75%. The mortgage
scheduled to be amortized over fifteen (15) years. The mortgage contained
no pre-payment penalties. The maturity date of the mortgage was March 11,
1998. The Miner Super 8 is in competition with the Hatfield Inn located in
Sikeston, Missouri, along with several other limited-service hotels in the
area. However, based on its experience and knowledge of the hotel industry,
management of the Company believes that the competitive conditions of the
Miner Super 8 are normal in comparison to most regions across the United
States.
There is no proposed plan for the renovation, improvement or development
of the Miner Super 8, nor does management foresee the implementation of such
a plan during the term of the Percentage Lease. The Company, via the Lessee,
plans to maintain the Miner Super 8 in good working condition and such
maintenance will require the Lessee to make the normal repairs and nominal
improvements necessary to maintain such good working condition. The Miner
Super 8 will continue to be used, owned and operated as a limited-service
hotel as it is best-suited for such usage. Based on its experience in
obtaining similar insurance policies in prior years on the Miner Super 8,
management believes that currently the Miner Super 8 is adequately covered by
insurance.
THE POPLAR BLUFF SUPER 8 -- 2831 NORTH WESTWOOD BLVD., POPLAR BLUFF,
MISSOURI.
The Poplar Bluff Super 8 hotel is located in Poplar Bluff, Missouri, and
is located in a primarily rural area. The Poplar Bluff Super 8 Hotel has 63
rooms, has a maximum occupancy of 180 persons, and is located on 1.71 acres
of land. The Company acquired the Poplar Bluff Super 8 effective April 1,
1995, pursuant to the Contribution and Assumption Agreement. Arthur
Andersen, LLP, has appraised the Poplar Bluff Super 8 at a value of
$2,160,000. As of September 30, 1995, the Poplar Bluff Super 8 was encumbered
by a mortgage with an approximate principal amount of $893,000 at an adjustable
interest rate of 9.75%. The mortgage scheduled to be amortized over fifteen
(15) years. The mortgage contained no pre-payment penalties. The maturity date
of the mortgage was March 12, 1998. Further, as of September 30, 1995, the
Poplar Bluff Super 8 was encumbered by a cross-collateralized second mortgage
(further collateral provided by the Rock Falls Super 8) totalling
approximately $89,000. The loan was closed and the property was encumbered
by the security interest on July 13, 1995. The interest rate on the loan
through September 15, 1995 was prime plus 2% and after September 15, 1995,
the interest rate is prime plus 3%. Accordingly, after September 15, 1995
and on September 30, 1995, the interest rate on the loan was 11.75%. The
loan is payable in monthly installments of $12,000. The second mortgage is
due on April 15, 1996. The Poplar Bluff Super 8 is in competition several
other limited-service hotels in the area. However, based on its experience
and knowledge of the hotel industry, management of the Company believes
that the competitive conditions of the Poplar Bluff Super 8 are moderate in
comparison to most regions across the United States.
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There is no proposed plan for the renovation, improvement or development
of the Poplar Bluff Super 8, nor does management foresee the implementation
of such a plan during the term of the Percentage Lease. The Company, via the
Lessee, plans to maintain the Poplar Bluff Super 8 in good working condition
and such maintenance will require the Lessee to make the normal repairs and
nominal improvements necessary to maintain such good working condition. The
Poplar Bluff Super 8 will continue to be used, owned and operated as a
limited-service hotel as it is best-suited for such usage. Based on its
experience in obtaining similar insurance policies in prior years on the
Poplar Bluff Super 8, management believes that currently the Poplar Bluff
Super 8 is adequately covered by insurance.
THE ROCK FALLS SUPER 8 -- 2100 FIRST AVENUE, ROCK FALLS, ILLINOIS.
The Rock Falls Super 8 hotel is located in Rock Falls, Illinois, and is
located in a primarily rural area. The Rock Falls Super 8 Hotel has 63
rooms, has a maximum occupancy of 180 persons, and is located on 2.45 acres
of land. The Company acquired the Rock Falls Super 8 effective April 1,
1995, pursuant to the Contribution and Assumption Agreement. Arthur
Andersen, LLP, has appraised the Rock Falls Super 8 at a value of $2,370,000.
As of September 30, 1995, the Rock Falls Super 8 was encumbered by a mortgage
with an approximate principal amount of $1,022,000 at an interest rate of
8.75%. The mortgage scheduled to be amortized over fifteen (15) years. The
mortgage contains no pre-payment penalties. The maturity date of the
mortgage was February 4, 1998. Further, as of September 30, 1995, the Rock
Falls Super 8 was encumbered by a cross-collateralized second mortgage
(further collateral provided by the Poplar Bluff Super 8) totalling
approximately $89,000 at an interest rate of prime plus 2%, payable in
monthly installments of $12,000. The second mortgage is due April 15, 1996.
The Rock Falls Super 8 is in competition several other limited-service
hotels in the area. However, based on its experience and knowledge of the
hotel industry, management of the Company believes that the competitive
conditions of the Rock Falls Super 8 are moderate in comparison to most
regions across the United States.
There is no proposed plan for the renovation, improvement or development
of the Rock Falls Super 8, nor does management foresee the implementation of
such a plan during the term of the Percentage Lease. The Company, via the
Lessee, plans to maintain the Rock Falls Super 8 in good working condition
and such maintenance will require the Lessee to make the normal repairs and
nominal improvements necessary to maintain such good working condition. The
Rock Falls Super 8 will continue to be used, owned and operated as a
limited-service hotel as it is best-suited for such usage. Based on its
experience in obtaining similar insurance policies in prior years on the Rock
Falls Super 8, management believes that currently the Rock Falls Super 8 is
adequately covered by insurance.
THE SOMERSET SUPER 8 -- 601 SOUTH HIGHWAY 27, SOMERSET, KENTUCKY.
The Somerset Super 8 hotel is located in Somerset, Illinois, and is
located in a primarily rural area. The Somerset Super 8 Hotel has 63 rooms,
has a maximum occupancy of 180 persons, and is located on 1.29 acres of land.
The Company acquired the Somerset Super 8 effective April 1, 1995, pursuant
to the Contribution and Assumption Agreement. Arthur Andersen, LLP, has
appraised the Somerset Super 8 at a value of $1,850,000. As of September 30,
1995, the Somerset Super 8 was encumbered by a mortgage with an approximate
principal amount of $1,160,000 at an adjustable interest rate of 9.25%. The
mortgage scheduled to be amortized according to a rolling six month schedule.
The mortgage contained no pre-payment penalties. The maturity date of the
mortgage is December 30, 1995. There is no proposed plan for the
renovation, improvement, or development of the Somerset Super 8. The
Somerset Super 8 is in competition several other limited-service hotels in
the area. However, based on its experience and knowledge of the hotel
industry, management of the Company believes that the competitive conditions
of the Somerset Super 8 are normal in comparison to most regions across the
United States.
There is no proposed plan for the renovation, improvement or development
of the Somerset Super 8, nor does management foresee the implementation of
such a plan during the term of the Percentage Lease. The Company, via the
Lessee, plans to maintain the Somerset Super 8 in good working condition and
such maintenance will require the Lessee to make the normal repairs and
nominal improvements necessary to maintain such good working condition. The
Somerset Super 8 will continue to be used, owned and operated as a
limited-service hotel as it is best-suited for such usage. Based on its
experience in obtaining similar insurance policies in prior years on the
Somerset Super 8, management believes that currently the Somerset Super 8 is
adequately covered by insurance.
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<PAGE>
CURRENT DEBT ON INITIAL HOTELS
The debt on the Initial Hotels (which will be paid off or paid down
considerably at the closing of the Formation Transactions) is more
particularly described below:
<TABLE>
<CAPTION>
Poplar Bluff/
Miner Poplar Bluff Rock Falls Somerset Rock Falls
----- ------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Principal Amount as of 9/30/95 $1,101,000 $893,000 $1,022,000 $1,160,000 $89,000
Interest Rate 9.75%* 9.75%* 8.75% 9.25% 11.75%
Amortization Provisions 15 years 15 years 15 years Rolling 6 months 9 months
Pre-Payment Penalty NO NO NO NO NO
Maturity Date 3/11/98 3/12/98 2/4/98 12/31/95 4/15/96
</TABLE>
* Adjustable interest rates
THE MISSION BAY PARTNERSHIP AND THE ACQUISITION HOTEL
Motels of America Series IX, a California Limited Partnership, ("Mission
Bay") was formed on February 5, 1987 pursuant to the California Revised
Uniform Limited Partnership Act. Mission Bay sold 6,600 limited partnership
interests at a public offering price of $1,000 each commencing November 19,
1986 pursuant to a Registration Statement on Form S-18 under the Securities
Act of 1933 (Registration 33-9075-LA). The offering of $6,600,00 was fully
subscribed and closed on June 15, 1987. The "purposes" section of Mission
Bay Agreement of Limited Partnership provided that the hotel to be built was
to be sold within approximately six to ten years of 1987. Accordingly, the
original intent of Mission Bay was to sell the Acquisition Hotel between 1993
and 1997 and to then distribute the sales proceeds to the Limited Partners.
The Partnership received $5,761,115 (net of offering costs of $838,885)
from the sale of limited partnership interests. These funds were available
for investment in property, to pay legal fees and other costs related to the
investments, to pay operating expenses, and for working capital. The
majority of the proceeds were used to acquire a 1.056 acre parcel of property
in the Mission Bay area of San Diego, California for $2,352,000 and to build
and operate thereon a 117 room "economy" motel as a franchise of Super 8
Motels, Inc. The motel was opened for business in November 1987 under a
twenty-year franchise agreement with Super 8 Motels, Inc., which required the
payment of initial franchise fees of $20,000 and requires ongoing royalties
equal to 4% of gross room revenues and chain-affiliated advertising fees
equal to 2% of gross room revenues.
Guy E. Hatfield was the original Managing General Partner of Mission
Bay. Mr. Hatfield held 32.79% of the general partner interests and Mr. Ian
Gardner-Smith held 9.89% of the general partner interests. The other 57.3%
of general partner interests were held by various other individuals. On
January 1, 1990, the general partners of Mission Bay sold their general
partner interests to GHG Hospitality, Inc., ("GHG") and the name of the
partnership was changed to "Mission Bay Super 8, Ltd.". The Hatfield
Affiliates currently own 88 of the 6,600 (1.3%) limited partnership units of
Mission Bay. Since January 1, 1990, the Acquisition Hotel has been operated
pursuant to a management agreement with GHG. Mission Bay has no employees,
and is not subject to any legal proceedings.
The Acquisition Hotel has 117 rooms, is located on 1.07 acres of land,
and is located in a primarily urban area. There is significant competition
in the San Diego lodging market. Mission Bay is in competition either
directly or
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indirectly with a large number of hotels and motels of varying quality and
sizes, including other motels which are part of national or regional chains.
Some of such competitive hotels and motels have greater financial resources
and personnel with more experience than Mission Bay and the general partner.
The San Diego area in particular has a large number of hotel and motel
projects that in the aggregate dilute average occupancy and affect
profitability. Mission Bay's motel does not compete directly with any large
budget motel chains, but competes indirectly in the greater San Diego area
with such budget motels as Comfort Inns and "E-Z 8" Motels.
There is no proposed plan for the renovation, improvement or development
of the Acquisition Hotel, nor does management foresee the implementation of
such a plan during the term of the Percentage Lease. The Company, via the
Lessee, plans to maintain the Acquisition Hotel in good working condition and
such maintenance will require the Lessee to make the normal repairs and
nominal improvements necessary to maintain such good working condition. The
Acquisition Hotel will continue to be used, owned and operated as a
limited-service hotel, pursuant to the Percentage Lease.
There is no public trading market for the Partnership's limited
partnership interests. There were approximately 1,149 holders of Mission
Bay's 6,600 limited partnership interests as of December 31, 1994. Cash
distributions to holders of limited partnership interests totaled $180,000
($27.27 per interest) in 1994 and $162,000 ($24.55 per interest) in 1993.
Arthur Andersen LLP valued Mission Bay's investment property at $2,810,000 as
of December 1, 1994. Because of a significant decrease in the market value
of the Acquisition Hotel, management elected to write down Mission Bay's
investment property to its appraised value of $2,810,000 as of December 31,
1994.
LIMITED SERVICE HOTELS
The Hotels do not offer a full variety of accommodations. They offer
daily and nightly occupancies, but do not offer food, room service,
restaurants, or laundry services.
APPRAISALS
GENERAL
Arthur Andersen LLP (the "Appraiser"), was retained by the Company and
by Mission Bay to appraise the Initial Hotels as well as the Acquisition
Hotel. While the final appraisals are dated December 1, 1994, the field work
for the appraisals of the Hotels was performed in the fall of 1994. The
appraised values of the Hotels generally were based on consideration of three
separate approaches: (i) the cost approach, (ii) the market approach, and
(iii) the income valuation approach.
THE COST APPROACH
The cost approach is based upon the principle of substitution which states
that no rational buyer will pay more for a property than the amount for which he
can obtain a comparable site and construct improvements of equal desirability
and utility, assuming no undue delay. This approach involves six basic steps in
arriving at a final appraised value for the appraised real estate:
(1) Estimate value of the land as if vacant;
(2) Estimate current cost of replacing the improvements;
(3) Estimate an entrepreneurial profit sufficient to attract a developer
to undertake the risk associated with the project;
(4) Estimate accrued depreciation and deduct it from the cost new
estimate (inclusive of profit) to arrive at a contributory value of
the improvements;
(5) Add land value to the contributory value of the improvements to arrive
at a value of the real estate; and
(6) Add amounts for personal property and for intangible business value.
THE SALES COMPARISON APPROACH
The sales comparison approach is based upon the principle of substitution,
which assumes that a prudent buyer will not pay more for a property than it
would cost to purchase an equally desirable property. A thorough analysis of
comparable sales data is performed. Additionally, the comparable sales must be
"arm's length" transactions with no unusual conditions affecting the prices
paid.
To obtain information on comparable sales, the Appraiser conducted its
search through real estate brokers, appraisers, and county records and
collected data on three sales which it considered comparable to the sale of
the Hotels. To appraise the Hotels under the sales comparison approach, the
Appraiser used price per room as its unit of comparison because it is
standard for limited service hotels and generally gives reliable results.
The Appraiser then compared the three comparable sales it selected to the
sale of the Hotels using the following factors as criteria to arrive at an
appraised value:
(1) Property Rights Conveyed; (6) Number of Rooms;
(2) Financing Terms; (7) Age/Condition
(3) Conditions of Sale; (8) Quality of Construction;
(4) Market Conditions; (9) Amenities; and
(5) Location; (10) Occupancy.
THE INCOME CAPITALIZATION APPROACH
The income capitalization approach is based on the premise that value is
created by the expectation of future benefits. To perform an appraisal under
this approach an appraiser must estimate the present value of such future
benefits to derive an indication of the amount that a prudent, informed
purchaser-investor would pay for the right to receive them as of the
valuation date. Next, an appraiser must estimate the net operating income of
a property. The estimated net operating income is then converted to a value
indication by use of (i) the Direct Capitalization Method, and/or (ii) the
Discounted Cash Flow Method.
The Direct Capitalization Method estimated the value of the subject
property by dividing the net income for a typical year by an overall
capitalization rate that is based on an analysis of the relationship between
income and sale prices achieved from recent sales of properties similar to the
subject and investor surveys. This method is most reliable when the income and
expenses maintain a basic level of stability.
The Discounted Cash Flow Method estimates the value of the property by
discounting the projected income stream over the holding period and the
estimated reversionary value of the property at the end of the period, to a
present value as of the date of valuation.
To arrive at a final appraised value using the income capitalization
approach, the Appraiser took three basic steps. First, it projected the
income and expenses for the subject property over a projected holding period
plus an additional year for purposes of estimating a reversion value. Next,
the Appraiser performed a valuation of the estimated income. Finally, it
reconciled the conclusions of value reached by the Direct Capitalization and
Discounted Cash Flow Methods.
RESULTS OF APPRAISALS
The valuation approach most heavily relied upon was the cost approach,
although each approach was utilized in arriving at final appraised values for
the Hotels. Operating data, financial data, and legal descriptions of the
Initial Hotels and the Acquisition Hotel provided to the Appraiser by the
owners thereof were assumed by the Appraiser to be accurate and correct, and
no audit or verification thereof was undertaken by the Appraiser.
The Appraiser did not assume responsibility for matters of title.
Caution should be exercised in evaluating appraisal
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<PAGE>
results. An appraisal is only an estimate of value and should not be relied
upon as a precise measure of realizable value. The appraisals assume that
the properties would be sold on an orderly basis under stable market
conditions. The appraisals for the five Hotels were completed using the same
methodology for each hotel (i.e., all appraisals were performed on a
consistent basis). See "Risk Factors--Real Estate Investment Risk".
The following chart sets forth the final appraised values of the Hotels
as of December 1, 1994:
<TABLE>
<CAPTION>
Hotels Appraised Value
- ------ ---------------
<S> <C>
Miner Super 8 $2,930,000
Poplar Bluff Super 8 $2,160,000
Rock Falls Super 8 $2,370,000
Somerset Super 8 $1,850,000
Mission Bay Super 8 $2,810,000
</TABLE>
With respect to the Miner Super 8, the Appraiser arrived at the same
appraised value under both the cost approach and the income capitalization
approach and relied on such values ($2,930,000) in determining the final
appraised value of the Miner Super 8. With respect to the Poplar Bluff Super
8, the Appraiser arrived at the same appraised value under both the cost
approach and the income capitalization approach and relied on such values
($2,160,000) in determining the final appraised value of the Poplar Bluff
Super 8. With respect to the Rock Falls Super 8, the Appraiser arrived at
the same appraised value under both the cost approach and the income
capitalization approach and relied on such values ($2,370,000) in determining
the final appraised value of the Rock Falls Super 8. With respect to the
Somerset Super 8, the Appraiser arrived at various appraised values under the
three approaches, but relied most heavily on the cost approach in determining
the final appraised value of the Somerset Super 8 ($1,850,000). With respect
to the Mission Bay Super 8, the Appraiser arrived at various appraised values
under the three approaches, but relied most heavily on the cost approach in
determining the final appraised value of the Mission Bay Super 8
($2,810,000).
THE PERCENTAGE LEASES
IN GENERAL
In order for the Company to qualify as a REIT, the Company cannot
directly or indirectly operate hotels. Therefore, each Initial Hotel will be
separately leased by the Company to the Lessee under a Percentage Lease. The
Lessee was recently formed in 1995 as a Delaware limited liability company.
Other than the inventory and working capital sufficient to operate the
Hotels, the Lessee has only nominal assets in addition to its rights and
benefits under the (i) franchise licenses, and (ii) the Percentage Leases.
Each Percentage Lease for the Hotels contains the provisions described below,
and the Company intends that future leases with respect to its hotel property
investments will contain substantially similar provisions, although the
Company's Board of Directors may, in its discretion, alter any of these
provisions with respect to any particular lease, depending on the purchase
price paid, economic conditions and other factors deemed relevant at the
time, and consistent with maintaining the Company's status as a REIT under
the Code. The following summary is qualified in its entirety by the
Percentage Leases and the Master Agreement, the forms of which have been
filed as exhibits to the Registration Statement of which this Prospectus is
a part.
PERCENTAGE LEASE TERMS
The Percentage Leases with respect to the Hotels will be entered into by
and between the Company and the Lessee upon the closing of the Offering.
Each Percentage Lease has an initial term of not less than fifteen years,
subject to earlier termination upon the occurrence of certain contingencies
described in the Percentage Leases (including, particularly, the provisions
described herein under "Damage to Hotels," "Condemnation of Hotels,"
"Termination of Percentage Leases on Disposition of Hotels" and "Master
Agreement").
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AMOUNTS PAYABLE UNDER THE PERCENTAGE LEASES
During the term of each Percentage Lease, the Lessee is obligated to pay
i) the Base Rent, ii) the Percentage Rent, and iii) other than the property
taxes on the Hotels (the Company will pay such property taxes), all taxes,
assessments, ground rents, water, sewer or other rents and charges, excises,
tax inspection, authorization or similar fees and all other governmental
charges (the "Impositions"), iv) every fine, penalty, interest and cost for
non-payment or late payment of Base Rent, Percentage Rent, or the Impositions
(the "Additional Charges"). Base Rent accrues and is required to be paid
monthly. Percentage Rent is based on percentages of room revenues for each
of the Hotels. Percentage Rent is due quarterly; however, the Lessee will not
be in default for payment of Percentage Rent due in any quarter if the Lessee
pays, within 20 days of the end of the quarter, the Percentage Rent due and
unpaid with respect to such quarter. The Lessee must also make quarterly
deposits into the a reserve account (the "Capital Expenditure Reserve Account")
of an amount equal to a minimum of $125 per room per quarter (increased by
an inflation factor for future years) to fund replacements of furniture,
fixtures and equipment in the Hotels which replacements must be generally
approved by the Company. The Lessee's obligations under the Percentage
Leases will be secured by a guaranty executed by Crossroads Parent, as set
forth in the Master Agreement, that requires the Lessee to maintain certain
levels of net worth during the first five years of the Percentage Leases.
See "The Percentage Leases -- Master Agreement."
The following table sets forth (i) the annual Base Rent, (ii) the annual
Percentage Rent formulas, (iii) room revenue for the twelve months ended
December 31, 1994 and (iv) the pro forma Percentage Rent that would have been
paid for each Initial Hotel currently owned by the Company pursuant to the
terms of the Percentage Leases based on historical revenues for the twelve
months ended December 31, 1994, as if the Company had owned those Hotels and
the Percentage Leases had been in effect since January 1, 1994. For each
such Initial Hotel, Percentage Rent would have been greater than Base Rent,
and the pro forma rents shown below represent such Percentage Rent.
<TABLE>
<CAPTION>
Pro Forma
Gross Revenues Percentage Rent
for the 12 for the 12
Annual Percentage Months Ended Annual Base Months Ended
Rent Formula December 31, 1994 Rent 12/31/94
------------ ----------------- ----------- ---------
<S> <C> <C> <C>
Hotels:
MINER 35% YTD REVENUES OVER INITIAL BREAK-EVEN THRESHOLD OF $660,000*
ON FIRST $200,000 OVER BREAK-EVEN THRESHOLD, AND 40% THEREAFTER, $846,109 $265,300 $65,107
LESS PERCENTAGE RENT PREVIOUSLY PAID YTD
POPLAR BLUFF 35% YTD REVENUES OVER INITIAL BREAK-EVEN THRESHOLD OF
$555,000* ON FIRST $100,000 OVER BREAK-EVEN THRESHOLD, AND 37% $618,862 $202,000 $22,352
THEREAFTER, LESS PERCENTAGE RENT PREVIOUSLY PAID YTD
ROCK FALLS 28.75% YTD REVENUES OVER INITIAL BREAK-EVEN THRESHOLD OF $580,000**
ON FIRST $200,000 OVER BREAK-EVEN THRESHOLD, AND 35% THEREAFTER, $708,125 $200,500 $36,836
LESS PERCENTAGE RENT PREVIOUSLY PAID YTD
SOMERSET 32% YTD REVENUES OVER INITIAL BREAK-EVEN THRESHOLD OF $410,000***
ON FIRST $200,000 OVER BREAK-EVEN THRESHOLD, AND 35% THEREAFTER, $561,459 $112,000 $48,467
LESS PERCENTAGE RENT PREVIOUSLY PAID YTD
MISSION BAY 30% YTD REVENUES OVER INITIAL BREAK-EVEN THRESHOLD OF $1,050,000**
ON FIRST $100,000 OVER BREAK-EVEN THRESHOLD, AND 40% THEREAFTER, $1,054,819 $250,000 $1,445
LESS PERCENTAGE RENT PREVIOUSLY PAID YTD ---------- ---------- ---------
Consolidated
Total for
Hotels $3,789,374 $1,029,800 $174,207
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
- -------------------------------------
* Break-Even Threshold increases by 2% per year
** Break-Even Threshold increases by 3% per year
*** Break-Even Threshold remains constant
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<PAGE>
Calculated on a pro forma basis by applying the rent provisions in the
Percentage Leases using historical room revenue of the Hotels for the year as
if January 1, 1994 were the beginning of the lease year.
Other than real estate taxes and maintenance of underground utilities
and structural elements, which are obligations of the Company, the Percentage
Leases require the Lessee to pay rent, insurance, all costs and expenses and
all utility and other charges incurred in the operation of the Hotels. The
Percentage Leases also provide for rent abatements in the event of a
Partial or Temporary Taking of any Initial Hotel as described under
"Condemnation of Hotels." However, Lessee is required through business
interruption insurance to provide Base Rent for a period of six (6) months in
the event of an occurrence described under "Condemnation of Hotels."
MAINTENANCE & MODIFICATIONS
Generally, the Lessee, at its expense, is required to maintain the
Hotels in good order and repair, except for ordinary wear and tear, and to
make non-structural, foreseen and unforeseen, and ordinary repairs which may
be necessary and appropriate to keep the Hotels in good order and repair.
The Lessee, at its expense and subject to approval by the Company, 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 Company upon
termination of the Percentage Leases. The Company will own substantially all
personal property (other than inventory, linens and other nondepreciable
personal property) not affixed to, or deemed a part of, the real estate or
improvements thereon, except to the extent that ownership of such personal
property would cause the Rents under a Percentage Lease not to qualify as
"rents from real property" for REIT income test purposes. See "Federal
Income Tax Considerations - Requirement for Qualification."
INSURANCE AND PROPERTY TAXES
The Company will be responsible for paying the property taxes on the
Hotels. The historical and pro forma terms of the property taxes are
disclosed in the section entitled "Selected Financial Information and
Operations Data" and the financial statements attached hereto. Any changes
in the terms of the property taxes will be made pursuant to local tax
statutes.
The Lessee is required to pay for all insurance on the Hotels, with
extended coverage, including business interruption, casualty, comprehensive
general public liability, workers' compensation and other insurance as
described in the Percentage Leases, and must name the Company as the insured
or an additional named insured.
INDEMNIFICATION
Under each of the Percentage Leases, the Lessee is obligated to
indemnify, and is obligated to hold harmless, the Company from and against
all liabilities, costs and expenses (including reasonable attorneys' fees and
expenses) incurred by, imposed upon or asserted against the Company on
account of, among other things, (i) any accident or injury to person or
property on or about the Hotels, (ii) any misuse by the Lessee or any of its
agents of the leased property, or (iii) any breach of the Percentage Leases
by Lessee; provided, however, that such indemnification will not be construed
to require the Lessee to indemnify the Company against the Company's own
grossly negligent acts or omissions or willful misconduct. The Lessee has
only nominal assets with which to indemnify the Company. See "Risk Factors -
Newly Organized Entities; Limited Assets and Operating History."
ASSIGNMENT AND SUBLEASING
The Lessee is permitted, in its sole discretion, to sublet all or any
part of the Hotels or assign its interest under any
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<PAGE>
of the Percentage Leases to an Affiliate of the Lessee. The Lessee shall
have the right to assign this Lease to an unaffiliated third party transferee
if (i) Lessee is not in default, (ii) such transferee meets certain net worth
requirements (as described in the Percentage Leases), (iii) such transferee
assumes all of the Lessee's obligations and rights under the assigned
Percentage Lease, and (iv) the Lessee and/or the unaffiliated third party
transferee pays any and all outstanding Base Rent, Percentage Rent and
Additional Charges to the Company prior to the consummation of the assignment
or subletting. 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 Initial Hotel covered by
insurance which renders the Initial Hotel unsuitable for the Lessee's use and
occupancy, the Lessee will have the following options: (a) to repair,
rebuild, or restore the Initial Hotel, (b) to offer to acquire the Initial
Hotel on the terms set forth in the applicable Percentage Lease, or (c)
terminate the Percentage Lease. If the Lessee rebuilds the Initial Hotel,
the Company is obligated to disburse to the Lessee, from time to time and
upon satisfaction of certain conditions, any insurance proceeds actually
received by the Company as a result of such damage or destruction. If the
Lessee decides not to rebuild and the Company exercises its right to reject
the Lessee's offer to purchase the Initial Hotel on the terms set forth in
the Percentage Lease, the Percentage Lease will terminate. The insurance
proceeds will be retained by the Company, and Lessee may be entitled to
certain lease cancellation fees. If the Company accepts the Lessee's offer
to purchase the Initial 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 an Initial 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 Initial Hotel.
In the event of damage to or destruction of any Initial Hotel which is not
covered by insurance, the Lessee will have the following options: (a) repair,
rebuild, or restore the Initial Hotel, (b) offer to purchase the Initial
Hotel on the terms and conditions set forth in the Percentage Lease, or (c)
give the Company notice of termination of the Percentage Lease.
CONDEMNATION OF HOTEL
In the event of a total condemnation of an Initial Hotel, the relevant
Percentage Lease will terminate with respect to such Initial Hotel as of the
date of Taking, and the Company and the Lessee will be entitled to their
shares of the condemnation award in accordance with the provisions of the
Percentage Lease. In the event of a Partial Taking which does not render the
Initial Hotel unsuitable for the Lessee's use, the Lessee shall restore the
untaken portion of the Initial Hotel to a complete architectural unit and the
Company shall contribute to the cost of such restoration that part of the
condemnation award specified for restoration. Unless the Percentage Lease is
terminated due to Condemnation in accordance if the terms of such lease, Base
Rent will be equitably abated by mutual consent of the Company and the
Lessee.
EVENTS OF DEFAULT
Events of Default under the Percentage Leases include the following:
(i) if an event of default occurs under any other Lease between the
Company and Lessee or any Affiliate of Lessee; or
(ii) if Lessee fails to make payment of the Base Rent when the same
becomes due and payable for a period of ten days after receipt by
the Lessee of notice from the Company thereof, or
(iii) if Lessee fails to make payment of quarterly Percentage Rent
when the same becomes due and payable and such condition continues
for a period of 30 days after the end of such quarter; or
(iv) if either the Lessee or the Company fails to observe or perform any
term, covenant or condition of
75
<PAGE>
the Percentage Lease and such failure is not cured by such
party within a period of 30 days after receipt by such
party of notice thereof from the other party, unless such
failure cannot with due diligence be cured within a period
of 30 days, in which case it shall not be deemed an Event of
Default if such party proceeds promptly and with due diligence
to cure the failure and diligently completes the curing
thereof provided, however, in no event shall such cure period
extend beyond 90 days after such notice; or
(v) if either the Lessee or the Company shall file a petition in
bankruptcy or reorganization for an arrangement pursuant to any
federal or state bankruptcy law or any similar federal or state
law, or shall be adjudicated a bankrupt or shall make an assignment
for the benefit of creditors or shall admit in writing its inability
to pay its debts generally as they become due, or if a petition or
answer proposing the adjudication of either party 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 such party shall be adjudicated a bankrupt and such adjudication
shall not be vacated or set aside or stayed within 60 days after the
entry of an order in respect thereof, or if a receiver of such party
or of the whole or substantially all of the assets of such party
shall be appointed in any proceeding brought against such party or
if any such receiver, trustee or liquidator shall be appointed in
any proceeding brought against such party and shall not be vacated
or set aside or stayed within 60 days after such appointment; or
(vi) if either the Lessee or the Company is liquidated or dissolved, or
begins proceedings toward such liquidation or dissolution, or, in
any manner, permits the sale or divestiture of substantially all of
its assets; or
(vii) if the estate or interest or either the Lessee or the Company
in the leased premises or any part thereof is voluntarily or
involuntarily transferred, assigned, conveyed, levied upon or
attached in any proceeding (unless such party is contesting
such lien or attachment in good faith in accordance with Section
12 hereof); or
(viii) if, except as a result or damage, destruction or a partial or
complete condemnation, either the Lessee or the Company voluntarily
ceases operations on the leased premises for a period in excess of
30 days; or
(ix) if the Lessee or its parent or affiliate is in default under the
Master Agreement; or
(x) if an event of default has been declared by the franchisor under
any franchise agreement with respect to the leased premises as a
result of any action or failure to act by either the Lessee or the
Company.
If an Event of Default by the Lessee occurs, the Company will have,
among other options, the option of terminating the Percentage Lease or any or
all other Percentage Leases by giving the Lessee ten days written notice of
the date for termination of the Percentage Leases and, the Percentage Leases
shall terminate on the date specified in the Company's notice and the Lessee
is required to surrender possession of the affected Hotels.
If an Event of Default by the Company occurs, the Lessee may purchase
the relevant Initial Hotel from the Company for a purchase price equal to
that Initial Hotel's then fair market value.
TERMINATION OF PERCENTAGE LEASES ON DISPOSITION
In the event the Company enters into an agreement to sell or otherwise
transfer an Initial Hotel, the Company will be exonerated from all future
liabilities and obligations under the Percentage Leases if the transferee
expressly assumes all obligations of the Company under the Percentage Leases.
If such transferee does not assume the obligations of the
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<PAGE>
Company, the Company may cancel its obligations to Lessee under any such
Percentage Lease by paying a lease cancellation fee to Lessee as is more
particularly described in each of the Percentage Leases.
FRANCHISE LICENSE
The Lessee is the licensee under the franchise licenses on the Hotels.
Upon the occurrence of certain events of default by the Lessee under a
franchise license, the franchisor has agreed to transfer the franchise
license for the relevant Hotel to the Company (or its designee). See
"Business and Properties - Various Franchise Agreements."
INVENTORY
All inventory required in the operation of the Hotels is purchased and
owned by the Lessee at its expense. The Company will purchase all inventory
related to a particular Initial Hotel at fair market value upon termination
of the related Percentage Lease.
MASTER AGREEMENT
The Lessee and Crossroads Parent (a subsidiary of Interstate Hotels and
the parent of the Lessee) have entered into a Master Agreement whereby
Crossroads Parent will guaranty limited obligations of the Lessee. These
obligations concern payment of liquidated damages if the Lessee voluntarily
terminates or defaults on more than one of the Percentage Leases in the first
five years of each of the Percentage Leases. In addition, Crossroads Parent
will guaranty the Lessee's obligations concerning payment of Percentage Rent
throughout the respective terms of the Percentage Leases.
The limited guaranty is equal to $264,000 in the first three years of
the Percentage Leases and decreases thereafter to zero in the fifth year, but
not less than the Percentage Rent in the prior twelve months. The guaranty
will initially be secured by a letter of credit in the amount of $264,000.
After the first year, Crossroads may substitute the letter of credit by
providing to the Company a copy of Crossroad Parent's audited financial
statements which indicate a net worth of at least 2-1/2 times the value of
the letter of credit, with at least 40% of the net worth in cash or cash
equivalent assets. In addition, Crossroads Parent makes certain negative
covenants concerning maintenance of its minimum net worth levels.
FRANCHISE AGREEMENTS
All of the Hotels are currently operated pursuant to a Franchise
Agreement. The Company expects that a majority of any additional hotel
properties it may acquire will also be subject to similar agreements. The
Company believes that franchises (including hotel licenses) generally provide
advantages to hotel operators (such as the Lessee) through the use of
advertising on a much broader scale than would be possible for an individual
hotel or small group of hotels, nationally recognized brand names, nationally
accessible reservations systems, technical and business assistance to the
individual franchisee and substantial buying power over approved suppliers.
The Franchise Agreements generally require the Lessee to pay a monthly
royalty fee based on gross sales and to pay various other marketing fees
associated with certain marketing or advertising and centralized reservation
service funds, usually based on gross sales. Such fees may vary between
individual hotels within a franchise system based on the type of marks,
restaurants or other aspects of the franchise system used.
The Franchise Agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the Hotels
which are established by the Franchisors to maintain uniformity in the system
created by each such Franchisor. Such standards generally regulate the hours
of operation, maintenance, appearance and cleanliness, quality and type of
goods and services offered, signage, protection of marks and advancement of
marks. Compliance with such standards could require significant expenditures
by the Lessee for capital improvements at the
77
<PAGE>
Hotels. Any such improvements could increase the value of the applicable
Hotels to the benefit of the Company. The Lessee will primarily fund such
expenditures via the Capital Expenditure Reserve Account.
Ongoing training costs, requirements to purchase only from approved
suppliers, financial reporting requirements, insurance requirements and
various covenants not to compete imposed upon the franchisee are other common
terms in the Franchise Agreements. Such financial reporting requirements
often stipulate the maintenance of books and records, the monthly reporting
of sales and other operating data, quarterly or semi-annual unaudited
financial statements and, in some cases, annual financial statements audited
by an independent certified public accountant. Required insurance usually
must cover both the Franchisor and franchisee with respect to certain
specified liabilities, must fall within certain approved coverage limits and
be written by an approved insurance company. Covenants not to compete
include prohibitions against engaging in a similar business within a certain
geographical area, hiring employees away from the Franchisor or other
unrelated franchisees otherwise diverting business from other franchisees.
The Franchise Agreements generally require the consent of the Franchisor
to a transfer of an interest in the applicable franchise, and both the
consent of the Franchisor and the execution of a new franchise agreement in
the event of a transfer of all or a controlling portion of the franchisee
under the relevant Franchise Agreement. The Company has obtained the consent
of the Franchisor to the transfer of the Franchise Agreements and executed
the "Substitute Franchise Agreement" which substituted Lessee, as the current
franchisee, for the original franchisee.
Each of the Hotels is a party to a Franchise Agreement with Super 8
Motels, Inc., a South Dakota corporation ("Super 8"), as franchisor. Each of
the various Franchise Agreements has a term of twenty (20) years. The
following are the commencement dates of the various Franchise Agreements:
<TABLE>
<CAPTION>
Hotel Commencement Date
----- ------------------
<S> <C>
Rock Falls 7/25/85
Poplar Bluff 7/26/85
Miner 1/3/85
Somerset 7/29/85
Mission Bay 7/15/87
</TABLE>
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances,
regulations and common law, a current or previous owner or operation of real
property may be liable for the costs of removal or remediation of hazardous
or toxic substances on, under or in such property. Such laws, ordinances and
regulations often impose liability whether or not the owner or operator knew
of, or was responsible for, the presence of such hazardous or toxic
substances and the liability under such laws, ordinances and regulations has
been interpreted to be strict, joint and several unless the harm is divisible
and there is a reasonable basis for allocation of responsibility. In
addition, the presence of hazardous or toxic substances, or the failure to
remediate such property properly, may adversely affect the market value of
the property, as well as, the owner's ability to sell or lease the real
property or to borrow using such real property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may
also be liable for the costs of removal or remediation of such substances at
the disposal or treatment facility, whether or not such facility is or ever
owned or operated by such person. In addition, certain environmental laws
and common law principles govern the responsibility for the removal,
encapsulation or disturbance of ACMs when these ACMs are in poor condition or
when a property with ACMs is undergoing remodeling, renovation or demolition.
Such laws and common law principles could also be used to impose liability
upon owners or operators of real properties for release of ACMs that cause
personal injury or other damage.
The Company has received a Phase I environmental assessment report for
each of the Hotels, prepared by an independent environmental consultant. The
purpose of each such report was to identify, to the extent reasonably
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<PAGE>
possible and based on reasonably available information, any existing and
potential conditions resulting from hazardous or toxic substances, including
petroleum products and asbestos, at the Hotels. The scope of the Phase I
environmental assessment for each Initial Hotel generally included: (i) a
review of available maps, aerial photographs and past and present uses of the
site; (ii) limited inquiries of federal, state and local agencies having
jurisdiction over certain environmental matters and (iii) an inspection of
appropriate public record. Each Phase I environmental assessment also
included an on-site inspection of the Hotels to determine evidence of past or
present on-site waste disposal, visible surface contamination, potential
sources of soil and containers, current waste streams and management
practices, ACMs and PCB transformers. In addition, as part of Phase I
environmental assessment, abutting properties and nearby sources of potential
contamination were identified and evaluated for potential impact to the
Hotels, to the extent reasonably possible.
Certain of the Hotels are located on, adjacent to or in the vicinity of
properties (including gasoline stations) that contain or have contained
storage tanks or that have engaged, or may in the future engage, in
activities that may release petroleum products or other hazardous substances
into the soil or groundwater. Although there can be no assurance that
petroleum products from such properties or other hazardous substances have
not been released or have not migrated, or in the future will not be released
or will not migrate into the Hotels, the Company is not aware of any such
releases or migrations and the Phase I environmental assessment reports
described above did not reveal any information which would indicate that the
Hotels have been materially adversely affected by such storage tanks or
activities. None of the Phase I audit reports revealed that a Phase II audit
was necessary or required. The Company does not believe that it will have
any material liability as a result of such activities; however there can be
no assurance that the Company will not incur future environmental liabilities
arising out such activities or that any such liability would not have a
material adverse effect on the future financial condition or result of
operations of the Company.
Based on the Phase I environmental assessments of the Hotels and the
representations of AAG under the Contribution and Assumption Agreement and
the representative of Mission Bay under the Mission Bay Acquisition
Agreement, the Company is not aware of any environmental condition with
respect to the Hotels that could have had a material adverse effect on the
Company's financial condition or results of operations. No assurances can be
given, however, that (i) the Phase I environmental assessments undertaken
with respect to the Hotels have revealed all potential environmental
liabilities, (ii) any prior owner or operator of the real property on which
the Hotels are located did not create any material environmental condition
not known to the Company, or (iii) a material environmental condition does
not otherwise exist as to any one or more Hotels. Pursuant to the
Contribution and Assumption Agreement and Mission Bay Acquisition Agreement,
AAG and the Partners of Mission Bay, respectively, represented to the Company
that, except as disclosed in the Phase I environmental assessments for
certain of the Hotels, they have no knowledge or reason to believe hazardous
substances exist in or on the Hotels. As previously noted, pursuant to the
Percentage Leases, the Lessee has agreed to comply with applicable
environmental regulations. However, in the event that the Company is held
liable for costs and expenses in connection with a site clean-up or in
connection with ACMs, and the Company is unable to enforce or obtain
recoveries under the indemnity provisions of the Percentage Leases, the
Contribution and Assumption Agreement, and the Mission Bay Acquisition
Agreement, as the case may be, such costs and expenses could have a material
adverse effect on the Company's ability to make distributions to its
Shareholders.
EMPLOYEES
The Company expects to employ one person as of the completion of the
Offering, who will not be represented by a union.
COMPETITION
The hotel industry is highly competitive. All of the Hotels are located
in developed areas. There are numerous other hotel properties within the
market area of each Initial Hotel. The number of competitive hotel
properties in an area could have a material and adverse effect on the rental
market for the room units at each Initial Hotel and the rates which may be
charged for such room units. In addition, the Hotels must compete for
occupants with new hotels in the
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area that have not yet opened as of the date of this Prospectus.
DEPRECIATION
In exchange for Common Stock, the Company (i) acquired a 100% interest
in the Initial Hotels and (ii) will acquire a 100% interest in the
Acquisition Hotel. To that extent, the Company's initial basis in the Hotels
for federal income tax purposes generally is or will be equal to the value of
the stock at the time it was issued by the Company. The Company plans to
depreciate such depreciable hotel property for federal income tax purposes
under either the modified accelerated cost recovery system of depreciation
("MACRS") or the alternative depreciation system of depreciation ("ADS"). The
Company plans to use MACRS for fixtures and equipment. Under MACRS, the
Company generally will depreciate such fixtures and equipment over a
seven-year recovery period using a 200% declining balance method and a
half-year convention. If, however, the Company places more than 40% of its
fixtures and equipment in service during the last three months of a taxable
year, a mid-quarter depreciation convention must be used for the fixtures and
equipment placed in service during that year. The Company plans to use ADS
for buildings and improvements over a 40-year recovery period using a
straight line method and a mid-month convention. For financial statement
purposes, the Company intends to use the straight-line method of depreciation
over the remaining estimated useful lives of all assets acquired.
LEGAL PROCEEDINGS
The Company has a very short operating history and is not currently a
party to any legal proceedings. Under the Contribution and Assumption
Agreement and the Mission Bay Acquisition Agreement, AAG and the Partners of
Mission Bay, respectively, have represented to the Company that there are no
condemnation, eminent domain or other actions, suits or proceedings involving
the Hotels, except for certain real estate taxation disputes, certain matters
covered by insurance maintained by AAG and Mission Bay and certain immaterial
matters not covered by such insurance. The Company is not aware of any legal
proceeding affecting the Hotels for which it might potentially become liable.
INSURANCE
Pursuant to the Percentage Leases, the Lessee will be obligated to pay
the costs of insurance maintained on the Hotels covering commercial general
liability for injury to property, person or loss of life arising out of the
ownership, use, occupancy or maintenance of the Hotels, commercial property
liability for damage to the improvements, merchandise, trade fixtures,
fixtures, equipment and personal property, workers' compensation benefits,
alcoholic beverage and liquor liability, business interruption and other
losses customarily insured by businesses similar to the Company. Based on its
past experience in obtaining similar insurance policies on the Initial
Hotels, the Acquisition Hotel, and numerous other hotel properties,
management believes that the coverages specified in the Percentage Leases are
consistent with industry practice.
REGULATORY MATTERS
GENERAL
Hotel properties are subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities such
as swimming pools, activity centers and other common areas. Based on its
inspection and evaluation of the Hotels, the Company believes that each
Initial Hotel has the necessary permits and approvals required to enable the
Lessee to operate the Hotels in the manner contemplated by the Percentage
Leases.
AMERICANS WITH DISABILITIES ACT
The hotel properties must comply with Title III of the ADA to the extent
that such properties are "public accommodations" and/or "commercial
facilities" as defined by the ADA. Under the public accommodations
provisions
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<PAGE>
of the ADA, the Company as owner of the hotel properties, will be obligated
to reasonably accommodate the patrons of the hotel properties who have
physical, mental or other disabilities. This will include the obligation to
remove architectural and communication barriers at the hotel properties when
doing so is "readily achievable." In addition, under the commercial
facilities provisions of the ADA, the Company will be obligated to ensure
that alterations to the hotel properties made after January 26, 1992, conform
to the specific requirements of the ADA implementing regulations.
Noncompliance could result in the imposition of fines, injunctive relief, and
an award of damages and attorneys' fees. The Lessee generally is obligated
to remedy any ADA compliance matters pursuant to the Percentage Leases.
However, if required changes were to involve significantly greater
expenditures or expenditures on a more accelerated basis than is currently
anticipated, the ability of the Lessee to pay rent could be adversely
affected which in turn could adversely affect the Company's ability to make
distributions to its Shareholders. Currently, the Company believes that the
Hotels are in compliance with the ADA in all material respects.
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<PAGE>
FORMATION TRANSACTIONS AND OTHER RELATED TRANSACTIONS
OVERVIEW
The Formation Transactions will result in the ownership of the
Acquisition Hotel by the Company. The Company acquired the Initial Hotels
pursuant to the Contribution and Assumption Agreement. The Company will
acquire the Acquisition Hotel pursuant to the Mission Bay Acquisition
Agreement. The Company will elect REIT status effective January 1, 1996.
The Company will enter five Percentage Leases with the Lessee leasing each of
the Hotels to the Lessee.
AAG ACQUISITION
On March 31, 1995, the Hatfield Affiliates transferred the Hatfield Note
in the amount of $1,805,675 to AAG. Thereafter, on April 1, 1995, AAG
assigned the Hatfield Note and transferred the Initial Hotels to the Company,
in exchange for which the Company issued 100 Initial Shares of Common Stock
to the AAG Partners representing 100% of the equity interest in the Company.
The AAG Partners are: i) Guy and Dorothy Hatfield as Trustees of Trust dated
5/24/78 and Amended 8/12/87, owning 86.8% of AAG; ii) Scott Jeffrey Hatfield,
who owns 6% of AAG; iii) Julia Hatfield King, who owns 6% of AAG; and iv) All
American Group, Inc., a Delaware corporation, who owns 1.2% of AAG and is the
general partner of AAG.
The Hatfield Note is a promissory note of the Hatfield Affiliates in the
amount of $1,805,675 dated March 31, 1995, which, following its assignment on
April 1, 1995 to the Company, obligates the Hatfield Affiliates to make
interest and principal payments to the Company. Currently, the Hatfield Note
provides for quarterly interest payments at 10% per annum. Pursuant to the
Pledge Agreement, the Hatfield Note is currently secured by a pledge by the
Hatfield Affiliates of 26.2 of the 100 Initial Shares to the Company. A
personal guarantee of Guy and Dorothy Hatfield (the "Guarantee") also serves
as additional security for the Hatfield Note. The Hatfield Note provides for
a balloon principal payment on March 31, 2000. See "Formation Transactions --
The Hatfield Note."
Pursuant to the Contribution and Assumption Agreement, the fair value of
the Initial Shares received by the Hatfield Affiliates was $6.9 million. The
historical carrying value of the net assets contributed to the Company by AAG
was approximately ($2,112,000). Accordingly, the difference between the fair
value of the Company's Initial Shares received by the Hatfield Affiliates and
the net asset deficit of the Company resulting from the contribution of
assets to the Company was approximately $9,012,000 (referred to as the "Hatfield
Affiliates' Contribution Gain").
MISSION BAY ACQUISITION
In late 1995, the Company will acquire the Acquisition Hotel pursuant to
the "Mission Bay Acquisition Agreement". The Mission Bay Limited Partners
will receive 277,487 shares of Class A Common Stock (assuming 1.25%
Dissenting Partners) in the Mission Bay Offering in consideration for Mission
Bay's transfer of the Acquisition Hotel. (The 277,487 shares of Class A
Common Stock will be reduced by the shares of Class A Common Stock
attributable to Dissenting Partners greater than 1.25%.) The closing of the
Mission Bay Acquisition is conditioned upon the closing of the Public
Offering.
PUBLIC OFFERING
Upon the closing of the Mission Bay Acquisition, the Company will issue
500,000 shares of Class A Common Stock in a Public Offering at a gross sales
price of $10 per share. In connection with such Public Offering, the Company
will employ the Underwriter to place said shares of Class A Common Stock. See
"Miscellaneous -- Underwriting." The Company anticipates that the total
sales commission and other expenses associated with such sale will equal 10%
of the gross sales proceeds. Accordingly, the Company anticipates that the
Public Offering will generate net proceeds to it
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of $4.5 million. The Public Offering, in its present form, is conditioned
upon the closing of the Mission Bay Acquisition. However, the Company
anticipates that, in the event the Mission Bay Limited Partners do not
approve of the Mission Bay Acquisition, the Company will institute a public
offering where the Company owns only the Initial Hotels.
THE ADVISOR AND THE ADVISORY AGREEMENT
The Advisor is Host Funding Advisors, Inc., a Delaware corporation. The
Advisor was incorporated in June, 1994. Ian Gardner-Smith owns 100% of the
stock in the Advisor. Mr. Gardner-Smith has no present relationship with the
Company or Mission Bay. The three directors of the Advisor are Michael S.
McNulty, Ian Gardner-Smith, and Guy E. Hatfield. Mr. Gardner-Smith will be
Chief Executive Officer, Vice President, and Secretary of the Advisor. Mr.
McNulty will serve as the Advisor's President and Treasurer. The Advisor's
principal office is located at 7825 Fay Avenue, Suite 250, La Jolla,
California 92037.
Upon the closing of the Offering, the Company will enter into the
Advisory Agreement with the Advisor. Pursuant to the Advisory Agreement, the
Advisor will provide information, advice, assistance, and facilities to the
Company in connection with the Company's future investment in hotel
properties. Additionally, the Advisor will administer the daily operations
of the Company, negotiate on the Company's behalf, act as agent for the
Company in collecting funds and paying debts, and generally manage and
operate the Company. The Company will not undertake actions recommended by
the Advisor unless the Independent Directors of the Company approve of such
recommended actions. In consideration for such services, the Company will
pay to the Advisor an annual base fee of $30,000 payable quarterly, plus if
and when the market value of the Company's real property and/or loans secured
by real property equals or exceeds $35,000,000, then the Company shall pay to
the Advisor, for services rendered under this Agreement, an annual percentage
fee equal to 1.25% of the total market value of all real property and/or
loans secured by real property owned by the Company at the time of payment.
Additionally, the Company shall fully reimburse the Advisor for any and all
third party professional expenses. However, during the first three years of
the Advisory Agreement, if, for any such year, the distributions per share of
the Class A Common Stock of the Company are equal to an amount less than
$0.2275 per quarter, the Company shall only be obligated to pay the Advisor
fifty percent (50%) of the fees. During the fourth year of the Agreement and
all years thereafter, if the distributions per share of the Class A Common
Stock of the Company are equal to an amount less than $0.2275 per quarter,
then the Company shall pay the Advisor fifty percent (50%) of the fees in
cash and fifty percent (50%) of the fees in stock of the Company; otherwise,
the Company shall pay the entire amount of the fee to the Advisor in cash.
The Advisory Agreement may be terminated by either the Company or the Advisor
on 90 days written notice.
THE ACQUISITION CO. AND THE POST-FORMATION ACQUISITION AGREEMENT
The Acquisition Co. is Host Acquisition Group, a Delaware limited
liability company. Ian Gardner-Smith is the President and Treasurer of the
Acquisition Co. Michael S. McNulty will serve as the Vice President and
Secretary of the Acquisition Co. Mr. Gardner-Smith owns 99% of the
membership interest in the Acquisition Co. and Paul K. Richey owns 1%. Mr.
Gardner-Smith is Manager of the Acquisition Co. The Acquisition Co. was
formed on November 30, 1995. Upon closing of the Offering, the Company will
enter into the Post-Formation Acquisition Agreement with the Acquisition Co.
Pursuant to the Post-Formation Acquisition Agreement, the Acquisition
Co. will manage, coordinate, and supervise the Company's acquisition program
for the acquisition of additional hotel properties. The Acquisition Co. will
have authority to negotiate for and prepare acquisition documentation for the
Company's acquisition of additional hotel properties subject to the approval
of the Independent Directors of the Company. In exchange for such services,
the Company will pay in shares of Class A Common Stock the Acquisition Co.
six percent (6%) of the gross purchase price of any hotel properties acquired
by the Company during the term of the Post-Formation Acquisition Agreement.
The Company's Common Stock will be valued at its then current value (i.e.
last traded) for purposes of this agreement. The Post-Formation Acquisition
Agreement may be canceled by the Company on sixty (60) days notice within the
first six months of its existence.
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THE LESSEE
GENERAL
The Lessee is a newly formed Delaware limited liability company.
Crossroads Hospitality Company, a Delaware limited liability company,
("Crossroads Parent") is the Manager of the Lessee and owns 75% of the voting
interests and a 99% interest in the profits, losses and distributions of the
Lessee. IHC Member Corporation, a Delaware corporation, ("IHCM") owns 25% of
the voting interests and a 1% interest in the profits, losses and
distributions of the Lessee. Interstate Hotels Corporation, a Pennsylvania
corporation, ("Interstate") owns 75% of the voting interests and a 99%
interest in the profits, losses, and distributions of Crossroads Parent.
IHCM owns 25% of the voting interests and a 1% interest in the profits,
losses, and distributions of Crossroads Parent. The Lessee has no present
relationship with the Company or Mission Bay. The Lessee will operate and
manage the Hotels and will not operate or manage any hotels other than those
owned by the Company.
Milton Fine is Chairman of the Board and Chief Executive Officer of
Interstate and IHCM. W. Thomas Parrington, Jr. is President and Chief
Operating Officer of Interstate and IHCM. Robert L. Froman is Executive
Vice-President of Interstate and IHCM. J. William Richardson is Executive
Vice-President and Chief Financial Officer of Interstate and IHCM. Marvin
Droz is Senior Vice-President, General Counsel, and Secretary of Interstate
and IHCM. Timothy Q. Hudak is Assistant Secretary of Interstate and IHCM.
100% of Interstate and IHCM is owned by Milton Fine and his Affiliates.
Interstate manages more than 95 upscale hotels and 35 resorts
nationwide, including numerous Marriott hotels and resorts. Crossroads
Parent is an affiliate of Interstate Hotels and manages over 50 hotels
nationwide. The Lessee was created in response to requests from financial
institutions and private investors for superior provision of management
services for mid-market full service and limited service hotel properties.
The Lessee will operate the Hotels pursuant to the Percentage Leases. See
"The Percentage Leases."
Crossroads Parent, the parent of the Lessee, operates over 50 hotels
nationwide. Under the Percentage Leases, the Lessee generally is required to
perform all operational functions necessary to operate the Hotels. Such
functions include accounting, periodic reporting, ordering supplies,
advertising and marketing, maid service, laundry, and maintenance. The
Lessee is entitled to all profits and cash flow from the Hotels after payment
of Base Rent, Percentage Rent, Impositions, Additional Charges, the Capital
Expenditure Reserve Account monthly deposits, and other operating expenses
under the Percentage Leases.
The Company must rely on the Lessee to generate sufficient cash flow
from the operation of the Hotels to enable the Lessee to meet its obligations
under the Percentage Leases. The Lessee will have only nominal assets in
addition to its rights and benefits under the (i) franchise licenses, and
(ii) Percentage Leases. The Lessee's obligations under the various
Percentage Leases will be secured by a guaranty set forth in the Master
Agreement. See "The Percentage Leases -- Master Agreement."
THE HATFIELD NOTE
The Hatfield Note is a promissory note in the amount of $1,805,675 dated
March 31, 1995, which, following its assignment on April 1, 1995 to the
Company, obligates the Hatfield Affiliates to make interest and principal
payments to the Company. The Hatfield Note was originally secured by real
property owned by Mr. Hatfield. On September 30, 1995, the financing
agreement entered into by and between the Hatfield Affiliates and the Company
effective April 1, 1995 (the "Financing Agreement") was amended to terminate
the obligation of the Hatfield Affiliates to maintain real property security
for the Hatfield Note. This amendment also terminated all other duties and
obligations of the Hatfield Affiliates under the Financing Agreement. As
part of the amendment, Guy and Dorothy Hatfield agreed to deliver the
Guarantee to the Company. In conjunction with the amendment to the Financing
Agreement, the Hatfield Affiliates agreed to an interest rate adjustment on
the Hatfield Note (as described below) and the parties also agreed to a
substitution of security provision (also described below).
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Effective upon the closing of the Formation Transactions, the Hatfield
Note will be amended so that the interest rate shall increase from 10% to
12%. Also effective upon the closing of the Formation Transactions, the
Pledge Agreement will be amended. In the amendment to the Pledge Agreement,
the Hatfield Affiliates have agreed that the 140,000 shares of Class B Common
Stock and 140,000 shares of Class C Common Stock of the Company which the
Hatfield Affiliates will receive in exchange for a portion of their Initial
Shares will be substituted for the 26.2 Initial Shares presently pledged by
the Hatfield Affiliates in favor of the Company as security for the Hatfield
Note. The Hatfield Note provides for a balloon principal payment on March
31, 2000.
BENEFITS TO HATFIELD AFFILIATES
As a result of the Formation Transactions and the Offering, certain
officers and employees of the Company, AAG, and the Lessee will receive the
following benefits:
- the Hatfield Affiliates' Contribution Gain of approximately
$9,012,000 will be realized by the Hatfield Affiliates in the Formation
Transactions;
- the net proceeds of the Public Offering will be used in part to pay
off approximately $3,804,000 of debt which the Mr. Hatfield and his
Affiliates have personally guaranteed;
- the Common Stock of the Company received by the Hatfield Affiliates
will be more liquid than their prior equity interests in the Company;
- the Company's Common Stock which the Hatfield Affiliates will
possess after the Formation Transactions will constitute nearly a
majority of voting rights.
BENEFITS TO MISSION BAY LIMITED PARTNERS AND AFFILIATES
As a result of the Formation Transactions, the Mission Bay Limited
Partners and Affiliates of Mission Bay will receive the following benefits,
among others:
- the shares of Class A Common Stock of the Company received by
Mission Bay Limited Partners in the Mission Bay Offering will be more
liquid than their prior equity interests in Mission Bay;
ADVANTAGES AND DISADVANTAGES OF THE FORMATION TRANSACTIONS
ADVANTAGES
There are several advantages to the Formation Transactions, such as:
(i) they afford the Shareholders the opportunity to obtain liquidity and take
advantage of the currently favorable public market valuation of REIT equity
securities in a transaction that generally will not result in current federal
income tax liability, (ii) they give the Company a diverse portfolio of hotel
properties thereby reducing the dependence of Shareholders on the performance
of any single asset or group of assets.
The structure being proposed by the Company in the Formation
Transactions will permit formation of a business entity that (i) allows a
high degree of flexibility in the operation of the Company through the
Advisor, (ii) permits the long-range goal of achieving liquidity for the
Mission Bay Limited Partners, and (iii) allows the Hotels to be leased and
managed by the Lessee which is a subsidiary of Crossroads Parent which
operates and manages over 50 hotel properties throughout the United States.
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DISADVANTAGES
The Formation Transactions may have certain disadvantages for
Shareholders who acquire shares of Common Stock in the Formation Transactions
including:
Substantial Dilution of Shares: The holders of the shares of Class A
Common Stock issued in the Offering will experience dilution of approximately
$6.44 per share from the $10.00 Exchange Value as a result of the Formation
Transactions. Also, when the 140,000 shares of Class C Common Stock convert
to Class A Common Stock in January 1997, the dividends payable to the holders
of the Class A Common Stock acquired in the Offering will be diluted.
Insufficient Cash Available for Pro Forma Distributions: Base Rent due
under the Percentage Leases is, by itself, insufficient to enable the Company
to make distributions to holders of Common Stock at the Pro Forma
Distribution rate of $0.895 for 1996.
Class A Common Stock Received May Not Reflect Value of Mission Bay
Assets: Since there has been no prior market for the Company's Common Stock
there can be no assurance that the value of the shares of Class A Common
Stock to be received by the Limited Partners pursuant to the Mission Bay
Acquisition will reflect the value of the assets contributed by Mission Bay.
Thus, the approving limited partners who receive shares of Class A Common
Stock pursuant to the Mission Bay Acquisition could initially sustain a net
loss.
Stock Ownership of Hatfield Affiliates: Upon the closing of the
Formation Transactions, Mr. Hatfield and his Affiliates will own
approximately 33.7% of the Class A Common Stock. Thus, the future sale by
the Hatfield Affiliates of a significant number of shares of Class A Common
Stock may lower the market price of the Class A Common Stock. Further, the
Hatfield Affiliates will have the ability to substantially control the
corporate actions taken by the Company. The Hatifield Affiliates will
heavily influence any Shareholder vote to (i) elect directors, (ii) approve
the sale of substantially all the assets, (iii) approve a merger or an
acquisition, or (iv) take various other corporate actions.
Conflict of Interest: As a result of the Formation Transactions, Mr.
McNulty, the Chief Executive Officer and President of the Company, who is
also the President of the Advisor, may be subject to a conflict of interest.
Additionally, Mr. Hatfield owns interests in a limited number of hotel
properties which are not being acquired by the Company may be subject to a
conflict of interest.
ALLOCATION OF SHARES
EXCHANGE VALUE OF SHARES
The Exchange Value of the Class A Common Stock , the Class B Common
Stock, and the Class C Common Stock which will be utilized in the Formation
Transactions will be $10 per share.
APPRAISED VALUE BASIS OF EXCHANGE VALUE
The Exchange Value for the Company's net equity and for the net equity
of Mission Bay has been based on the appraised values as of December 1, 1994
together with the book value of the other financial assets of such entities.
PER SHARE PRICE OF PUBLIC OFFERING
While the purchasers of the shares of Class A Common Stock in the Public
Offering will pay $10 per share, the costs associated with the Public
Offering will reduce the estimated net proceeds of the Company to
approximately $9 per Share. Accordingly, the Company will realize net
proceeds of approximately $4.5 million from the Public Offering.
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VOTING PROCEDURES
DISTRIBUTION OF SOLICITATION MATERIALS
This Prospectus, together with the accompanying Transmittal Letter, the
Partner Consent (the Transmittal Letter and the Partner Consent are referred
to collectively as the "Consent Form," forms of which are attached hereto at
Appendix A), constitute the Solicitation Materials being distributed to the
Partners to obtain their votes "for", "against", or "abstain" with respect to
Mission Bay's approval of the Mission Bay Acquisition.
The effectiveness of the Mission Bay Acquisition is subject to the
following conditions: (1) If less than 1.25% of the limited partnership units
dissent, then more than 50% of the limited partnership interests must vote in
favor of the Mission Bay Acquisition; (2) If more than 1.25% of the limited
partnership interests dissent, then at least 67% of the limited partnership
interests must actually vote in favor of the Mission Bay Acquisition; and (3)
If more than 5% of the limited partnership interests dissent, then the
Company has no obligation to close the Mission Bay Acquisition
notwithstanding the amount of dissenting interests, provided, however, the
Company may waive this condition and elect to close the Mission Bay
Acquisition if at least 67% of the limited partnership interests actually
vote in favor of the Mission Bay Acquisition. The Hatfield Affiliates
currently own 1.3% of the limited partnership interests of Mission Bay and
the Company has obtained a representation from the Hatfield Affiliates
stating that they will cast a negative vote on the Mission Bay Acquisition,
perfect their dissenters' rights, and become Dissenting Partners if necessary
to insure that at least 1.25% of the limited partnership interests are
dissenting interests. Thus, more than 1.25% of the limited partnership
interests will dissent (1.3%) and at least 67% of the limited partnership
interests must actually vote in favor of the Mission Bay Acquisition. In
addition, in order to insure that the transaction qualifies for a statutory
exemption from the Federal roll-up rules the Underwriter has conditioned the
closing of the Public Offering upon the actual approval of the Mission Bay
Acquisition by at least 67% of the limited partnership interests of Mission
Bay. Accordingly, the Company cannot and will not close the Mission Bay
Acquisition if less than 67% of the limited partnership interests of Mission
Bay approve of the Mission Bay Acquisition. The Mission Bay Agreement of
Limited Partnership provides that where a matter which the General Partner
recommends approval is to be voted upon without a meeting (as is the case
here), the limited partners whose votes are not received by the end of the
Solicitation Period shall be deemed to have cast a vote of all of their
shares in favor of the General Partner's recommendation. Notwithstanding
this "deemed positive" provision of the Mission Bay Agreement of Limited
Partnership, the dissenters' condition described above requires that at least
67% of the Mission Bay limited partnership interests actually approve of the
Mission Bay Acquisition. Thus, the "deemed positive" votes of the Mission
Bay limited partners whose votes are not received within the Solicitation
Period will not be counted toward the 67% approval requirement. Further, any
"abstain" votes will not be counted toward the 67% approval requirement and
limited partners who vote to "abstain" will not be able to perfect their
dissenters' rights and thus, cannot become Dissenting Partners.
Each Partner, therefore, should complete and return the Consent Form
before the expiration of the Solicitation Period. The Solicitation Period is
the time period during which the Partners may vote "for" or "against" the
Mission Bay Acquisition. The Solicitation Period will commence upon the
delivery of the Solicitation Materials to the Partners (on or about
_________, 1995) and will continue until the later of (a) _________, 1995 (a
date not less than 30 calendar days from the initial delivery of the
Solicitation Materials) or (b) such later date as may be selected by the
Company and as to which notice is given to the Partners. At its discretion,
the Company may elect to extend the Solicitation Period. Under no
circumstances will the Solicitation Period be extended beyond January 31,
1995. Any Proxy Card received by the information agent (the "Information
Agent") prior to 11:59 p. m. Pacific time on the last day of the Solicitation
Period will be effective provided that such Proxy Card has been properly
completed and signed.
If you have interests in more than one capacity (e.g., (i) as husband
and wife, (ii) individually, (iii) in trust, or (iv) in an IRA), you will
receive a separate Consent Form for each capacity.
The Consent Form consists of two parts. The first part is the
Transmittal Letter, which highlights the procedures for completing the
Proxy Card. For a more detailed discussion of these procedures, see
"--Voting Procedures and Consents" and "Completion Instructions" below. The
second part (the Partner Consent) seeks your consent to the Mission Bay
Acquisition and certain related matters (including any amendment to the
Mission Bay Partnership Agreement, as required).
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PARTNERS WHO RETURN A SIGNED PROXY CARD BUT FAIL TO INDICATE THEIR
APPROVAL OR DISAPPROVAL WILL BE DEEMED TO HAVE VOTED TO APPROVE.
Consent of a Partner for (i.e., a vote "for") constitutes approval of
the Mission Bay Acquisition and all the transactions contemplated in the
Formation Transactions.
NO SPECIAL MEETINGS
Mission Bay has not scheduled a special meeting of its Partners to
discuss the Solicitation Materials or the terms of the Mission Bay
Acquisition. Members of the Company's management (and their Affiliates) and
the Information Agent intend to solicit actively the support of the Partners
for the Mission Bay Acquisition and, subject to applicable federal and state
securities laws, hold informal meetings with Partners, answer questions about
the Mission Bay Acquisition and the Solicitation Materials and explain the
reasons for the recommendation that Partners vote to approve the Mission Bay
Acquisition.
REQUIRED VOTE
The Company's acquisition of the Acquisition Hotel is effectively
conditioned upon the approval of the Mission Bay Acquisition by Partners
holding at least 67% of the outstanding limited partner interests and the
approval of the general partner of Mission Bay.
VOTING PROCEDURES AND CONSENTS
Only Partners of record as of September 30, 1995 will receive notice of
and be entitled to vote with respect to, the Mission Bay Acquisition.
However, if Mission Bay partnership interests are transferred after the
record date but before the expiration of the Solicitation Period, and the
holders of the transferred interests are admitted as substitute limited
partners of Mission Bay, such substitution will terminate the right of the
prior holder of the interests to vote in the Mission Bay Acquisition, and any
votes as to the transferred interests must be made by the substitute limited
partner. The Solicitation Materials will be sent to the substitute limited
partners along with notice of their admission as substitute limited partners
in Mission Bay.
The second part of the Consent Form includes a Partner Consent (i.e.
Proxy Card) to be used by each Partner in casting has votes "for" or "against"
the Mission Bay Acquisition. The Partner may mark the proxy card ("Proxy Card")
to vote "for," "against" or "abstain" as to his or her participation in the
Mission Bay Acquisition. A Partner electing to vote "for" participation in the
Mission Bay Acquisition must vote with respect to the interests owned by the
Partner in Mission Bay.
A PARTNER WHO SUBMITS A SIGNED PROXY CARD BUT FAILS TO MAKE ONE OR MORE
OR THE THREE ELECTIONS REQUIRED BY THE PROXY CARD WILL BE DEEMED TO HAVE
VOTED "FOR" THE MISSION BAY ACQUISITION. IF THE PROXY CARD IS UNDATED, YOUR
SIGNATURE WILL BE AUTHORITY FOR THE COMPANY TO ENTER THE DATE OF RECEIPT.
CONSENT OF A PARTNER (I.E., A VOTE "FOR") CONSTITUTES APPROVAL OF THE
MISSION BAY ACQUISITION AND ALL THE TRANSACTIONS CONTEMPLATED IN THE
FORMATION TRANSACTIONS.
Any questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal (if permitted) of the Proxy Cards will be
determined by the Information Agent, whose determination will be final and
binding. The Information Agent reserves the absolute right to reject any or
all Proxy Cards that are not in proper form or the acceptance of which, in
the opinion of the Information Agent's counsel, would be unlawful. Unless
waived, any irregularities in connection with the Proxy Cards must be cured
within such time as the Information Agent shall determine. Neither the
Company nor the Information Agent shall be under any duty to give
notification of defects in such Proxy Cards or shall incur liabilities for
failure to give such notification. The delivery of the Proxy Cards will not
be deemed to have been made until such irregularities have been cured or
waived.
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COMPLETION INSTRUCTIONS
Each Partner is requested to complete the Proxy Card, sign and date it
on the signature pages. If you have questions regarding the Proxy Card or
how to fill it out, you may call Elaine Ruff at (619) 226-1212.
For the Proxy Card to be effective, each Partner must deliver the
executed Proxy Card at any time prior to 11:59 p m. Pacific time on
____________, 1995 to the Information Agent at the following address:
Grosvenor Hospitality Group, Inc.
Attn: Information Agent
3145 Sports Arena Boulevard
San Diego, CA 92110
A self-addressed stamped envelope for return of the Proxy Card has been
included with the Solicitation Materials. The Proxy Card will be effective
only upon actual receipt by the Information Agent at the address specified
above. The method of delivery of the Proxy Card to the Information Agent is
at the election and risk of the Partner, but if such delivery is by mail, it
is suggested that Partners use certified or registered mail return receipt
requested and that the mailing be made sufficiently in advance of
____________, 1995 to permit delivery to the Information Agent on or before
____________, 1995.
WITHDRAWAL OR CHANGE OF VOTE
Consents given by Limited Partners in the form of the Proxy Card
accompanying this Prospectus/Consent Solicitation Statement will, when executed
and delivered to the General Partner, be revocable by written notice to the
General Partner until such time as unrevoked consents are received from Limited
Partners holding more than 50% of the outstanding Mission Bay Limited
Partnership interests. Accordingly, the right of revocation automatically will
terminate, upon receipt of unrevoked consents from Mission Bay Limited Partners
holding more than 50% of the outstanding Mission Bay Limited Partnership
interests.
FINAL CASH DISTRIBUTION BY MISSION BAY
As part of the Mission Bay Acquisition, Participating Partners will
receive a final distribution from Mission Bay of all excess cash. Excess
cash shall equal the excess of current assets (excluding cash) over current
liabilities plus the cash on hand at the time of the close of the Mission Bay
Acquisition.
SOLICITATION AND TABULATION OF CONSENTS BY INFORMATION AGENT
The Information Agent will use its best efforts to solicit Partners to
approve the Mission Bay Acquisition. The Information Agent also will be
responsible for receipt of the Proxy Cards. The Information Agent and the
Company's CPA -- William H. Ling -- will tabulate the Proxy Cards. The final
voting tabulation will be made available upon request after the expiration of
the Solicitation Period.
SPECIAL REQUIREMENTS FOR CERTAIN PARTNERS
Some Partners are entities rather than individuals, such as estates,
trusts, corporations, limited partnerships and general partnerships. With
respect to Proxy Cards received on behalf of any such entity, the Company may
elect, at its option, to require that each Proxy Card be accompanied by
evidence (which may include an opinion of counsel acceptable to the Company)
that such entity has met all requirements of its governing instruments, such as
applicable partnership agreements, and is authorized to execute such Proxy Card
under the laws of the jurisdiction in which such entity was organized.
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DISSENTERS' RIGHTS
The Mission Bay Acquisition has been structured to afford Dissenting
Partners the dissenters' rights contained the recently enacted California
legislation which is known as the Thompson-Killea Limited Partnership
Protection Act of 1992 (the "Thompson-Killea Act"). The Thompson-Killea Act
requires that the Dissenting Partners receive the appraised value of their
Interest in Mission Bay in the form of cash, freely tradeable securities or
secured or unsecured debt instruments satisfying certain statutory
requirements. The Company is satisfying this requirement by offering
Dissenting Partners the right to receive the appraised value of their pro
rata interest in Mission Bay (adjusted for outstanding indebtedness) (the
"Adjusted Appraised Value") in the form of cash (up to an aggregate of
$140,500, subject to increase by the Company in its sole discretion). The
Mission Bay Acquisition has also been structured to comply with the other
protections afforded in the Thompson-Killea Act.
A Dissenting Partner who perfects his or her dissenter's rights with
respect to Mission Bay as described below will be entitled to receive its
allocable percentage of the Adjusted Appraised Value of Mission Bay, if
Mission Bay approves the transaction. A limited partner who votes to
"abstain" cannot become a Dissenting Partner. The effect of such perfection of
dissenter's rights with respect to Mission Bay is that the Company purchases
the Dissenting Partner's Interest in Mission Bay. The exchange value of the
shares of Class A Common Stock (at $10 per share) and the Excess Cash to be
received by a Participating Partner of Mission Bay (as defined in the Mission
Bay Acquisition Agreement) who hypothetically owns the same number of limited
partnership interests as the Dissenting Partners. In short, a Dissenting
Partner will receive the same distribution as a Participating Partner only
the Dissenting Partner will receive $10 cash in lieu of each share of Class A
Common Stock.
In the event a Partner of Mission Bay elects to exercise his or her
right to dissent, such Partner must do the following to perfect his or her
rights as a Dissenting Partner:
- The Dissenting Partner must file a written request with the Company
at 7825 Fay Avenue, Suite 250, La Jolla, California 92037,
attention: Michael S. McNulty, Dissenters' Rights, prior to the
earlier of (i) the date such Dissenting Partner's completed Proxy
Card is received by the Company, and (ii) the expiration of the
Solicitation Period. The request must state the interests owned in
Mission Bay for which the Dissenting Partner is requesting dissenters'
rights. Only persons who vote against the Mission Bay Acquisition
with respect to their interests can be Dissenting Partners.
NEITHER THE DELIVERY OF A PROXY CARD DIRECTING A VOTE AGAINST THE
MISSION BAY ACQUISITION NOR A FAILURE TO VOTE FOR THE MISSION BAY
ACQUISITION CONSTITUTES A WRITTEN REQUEST FOR DISSENTERS' RIGHTS.
If Mission Bay approves the Mission Bay Acquisition, and the other
conditions of the Formation Transactions are satisfied so that the Mission
Bay Acquisition closes, then all Dissenting Partners will be sent a check
within 30 days following the closing of the Mission Bay Acquisition for his
or her interests in the amount as determined above.
LIMITED PARTNERS WISHING TO EXERCISE THEIR DISSENTERS' RIGHTS ARE
CAUTIONED THAT FAILURE TO FOLLOW THE ABOVE PROCEDURES PRECISELY MAY RESULT IN
THE LOSS OF DISSENTERS' RIGHTS.
COMPLIANCE WITH AND APPROVAL FROM FEDERAL AND STATE AUTHORITIES
The Mission Bay Acquisition will not be completed if any moratorium on
transactions of its type are imposed by federal, state or regulatory
authorities or if any federal or state blue sky or securities authority
imposes any restriction upon or prohibits any aspect of the transactions
contemplated by the Formation Transactions, which in the judgment of the
Company, renders the Formation Transactions undesirable or impractical.
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COMPARISON OF OWNERSHIP OF MISSION BAY INTERESTS AND SHARES
The information below highlights a number of the significant differences
between Mission Bay and the Company relating to, among other things, form of
organization, investment objectives, policies and restrictions, asset
diversification, capitalization, management structure compensation and fees,
and investor rights, and compares certain legal rights associated with the
ownership of Mission Bay partnership Interests, and Class A Common Stock,
respectively. These comparisons are intended to assist the Mission Bay
Limited Partners in understanding how their investments will be changed if,
as a result of the Mission Bay Acquisition, their Mission Bay Limited Partner
Interests are exchanged for Class A Common Stock. Following some of the
captioned sections is a summary discussion of the expected effects of the
Mission Bay Acquisition upon Partners receiving Class A Common Stock in
exchange for their Interests. THIS DISCUSSION IS SUMMARY IN NATURE AND DOES
NOT CONSTITUTE A COMPLETE DISCUSSION OF THESE MATTERS, AND PARTNERS SHOULD
CAREFULLY REVIEW THE BALANCE OF THIS PROSPECTUS/CONSENT SOLICITATION
STATEMENT, THE MISSION BAY PARTNERSHIP AGREEMENT AND THE FORM OF CHARTER OF
THE COMPANY FILED AS AN EXHIBIT TO THE APPLICATION FOR ADDITIONAL IMPORTANT
INFORMATION. The following discussion primarily refers to the rights,
privileges and obligations of the Limited Partners in Mission Bay which is a
California limited partnership. As used herein, the term "Partnership
Agreement" means the limited partnership agreement of Mission Bay, as amended.
FORM OF ORGANIZATION AND PURPOSE
MISSION BAY Mission Bay is a limited partnership which was organized
under the laws of the State of California in 1987. Mission Bay was formed to
acquire a parcel of land in San Diego, California, to construct and operate a
hotel thereon, and to sell the hotel property within 6 to 10 years. Mission
Bay has been treated as a partnership for federal income tax purposes.
COMPANY The Company is a Maryland corporation. The Company will own
five hotels. The Company intends to qualify as a REIT under the Code and to
operate as an externally managed REIT with its assets managed by the Advisor.
COMPARISON Mission Bay is a limited partnership organized under
California law. The Company is a Maryland corporation. For tax purposes,
the Company intends to qualify as a REIT under the Code.
LENGTH OF INVESTMENT
MISSION BAY An investment in Mission Bay is a finite life investment
with the Partner to receive regular cash distributions out of Mission Bay's
net operating income and to receive cash distributions upon liquidation of
Mission Bay's real estate investments. Mission Bay's term of existence (as
stated in the Partnership Agreement) expires on December 31, 2026.
COMPANY The Company has a perpetual term and intends to continue its
operations for an indefinite time period. The Company has no specific plans
for disposition of the assets acquired through Formation Transactions or
those that may be subsequently acquired. To the extent the Company sells or
refinances its assets, the net proceeds therefrom generally will be retained
by the Company for working capital and new investments rather than being
distributed to Shareholders in the form of distributions. In contrast to
Mission Bay, the Company will constitute a vehicle for taking advantage of
future investment opportunities that may be available in the real estate
markets.
COMPARISON Mission Bay is structured to dissolve when the assets of
Mission Bay are liquidated. In contrast, Shareholders of the Company are
expected to achieve liquidity of their investments by trading the Class A
Common Stock in the secondary market, and the Company will generally reinvest
the proceeds of asset dispositions, if any, in new property or other
appropriate investments consistent with the Company's objectives.
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PROPERTIES AND DIVERSIFICATION
MISSION BAY The investment portfolio of the Mission Bay consists of one
Hotel property. The Mission Bay Agreement of Limited Partnership provides that
the exclusive purpose of the partnership is to acquire, improve, hold, operate,
deal with and/or sell a specific property, and does not allude to the
possibility of other ventures. Consequently, without unanimous consent of
the Partners, Mission Bay is limited in its ability to expand its investment
portfolios.
COMPANY As a result of the Formation Transactions, the Company will own
five hotels and it intends to acquire additional hotel properties.
COMPARISON The investment portfolio of Mission Bay consists of one
hotel property. Through the Formation Transactions, and through additional
investments that may be made from time-to-time, the Company intends to create
an investment portfolio substantially larger and more diversified than the
individual portfolio of Mission Bay.
PERMITTED INVESTMENTS
MISSION BAY Mission Bay is authorized to acquire, develop, improve, own
and operate its real property as an investment for income-producing purposes.
COMPANY Under its Charter, the Company may engage in any lawful
activity permitted by the General Corporation Law of Maryland. Consequently,
the may purchase or lease income-producing properties for long-term
investment, expand and improve the properties presently owned, or sell such
properties, in whole or in part, when it deems appropriate. However, the
Company may not take any action which could adversely affect the ability of
the Company to qualify as a REIT. As to hotel properties, the REIT
qualification rules require that the Company lease the hotels to a third
party lessee.
COMPARISON Mission Bay has concentrated its investments solely in one
hotel property. The Company intends initially to limit its investments
primarily to similar properties. However, other than restrictions relating
to the protection of the Company's REIT status, the Company is not restricted
under its Charter from diversifying its portfolio to protect the value of its
assets or diversifying as a prudent hedge against the risk of having all its
investments limited to a single asset group.
ADDITIONAL EQUITY
MISSION BAY The Mission Bay Agreement of Limited Partnership generally is
silent as to the authority of Mission Bay to issue equity securities other than
the limited partner interests ("Mission Bay Partnership Interests") already
issued to Partners. However, under California limited partnership law
applicable to Mission Bay, with the consent of all Partners, Mission Bay may
issue additional partnership interests in the circumstances of the admission
of an additional limited partner.
COMPANY The Board of Directors may issue, in its discretion, additional
equity securities consisting of Common Stock or any other class of capital
stock (which may be classified and issued as a variety of equity securities,
including one or more classes of common or preferred stock, in the discretion
of the Board of Directors), provided that the total number of shares issued
does not exceed the authorized number of shares of capital stock set forth in
the Company's Charter. The Company expects to issue approximately 1.5
million shares of its Common Stock in the Formation Transactions. The
Company does not have any current plans to issue additional Class A Common
Stock or other equity securities.
COMPARISON Unlike Mission Bay, the Company has substantial flexibility
to raise equity, through the sale of additional common stock to finance the
business and affairs of the Company.
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BORROWING POLICIES
MISSION BAY Generally, Mission Bay is authorized to borrow funds for
the acquisition and development of real estate and to obtain loans required
for Partnership purposes.
COMPANY The Company is permitted to borrow, on a secured or unsecured
basis, funds to finance its business, without any Charter limitations.
COMPARISON In conducting its business, the Company may incur
indebtedness to the extent deemed appropriate by the Board of Directors.
OTHER INVESTMENT RESTRICTIONS
MISSION BAY The Mission Bay Agreement of Limited Partnership provides that
the exclusive purpose of the Partnership is to acquire, improve, hold, operate,
deal with, and/or sell a specific property, thereby imposing a general
restriction on the partners' authority to make additional investments outside
the specific property. Aside from the general restrictions contained in the
business purpose provisions, however, the Partnership Agreement also
prohibits the Partnership from making investments and entering into
transactions with its partners.
COMPANY Neither the Company's Charter nor its Bylaws impose any
restrictions upon the types of investments of the Company, except that under
the Charter, the Board of Directors is prohibited from taking any action that
would terminate the Company's REIT status, unless a majority of the
Shareholders vote to terminate such REIT status. The Company's Charter and
Bylaws do not impose any restrictions upon dealings between the Company and
directors, officers and Affiliates thereof. Applicable corporate law,
however, requires that the material facts of the relationship, the interest
and the transaction must (1) be disclosed to the Board of Directors and
approved by the affirmative vote of a majority of the Disinterested
Directors; (2) be disclosed to the Shareholders and approved by the
affirmative vote of a majority of the disinterested Shareholders; or (3) be
in fact fair and reasonable. In addition, the Company has adopted a policy
which requires that all contracts and transactions between the Company and
directors, officers or Affiliates thereof must be approved by the affirmative
vote of a majority of the Disinterested Directors and a majority of the
Independent Directors.
COMPARISON Aside from the general restrictions in business purpose
provisions, the Mission Bay Partnership Agreement implicitly limits the
investments as well as Mission Bay's ability to enter into transactions with
interested persons. The Charter and Bylaws of the Company contain no
restrictions limiting the types of investments that may be made except those
investments which would terminate the Company's REIT status. Maryland law
requires disclosure of transactions with directors, officers and Affiliates
and the Company has adopted a policy requiring approval of such transactions
by a majority of either Disinterested Directors or its Shareholders.
MANAGEMENT CONTROL
MISSION BAY Under the Mission Bay Agreement of Limited Partnership the
general partner is, subject to certain narrow limitations, vested with all
management authority to conduct the business of the Partnership, including
authority and responsibility for overseeing all executive, supervisory and
administrative services rendered to the Partnership. Under the Partnership
Agreement, the Limited Partners have no right to participate in the management
and control of the Partnership and have no voice in its affairs except for
certain limited matters that may be submitted to a vote of the Limited Partners
under the terms of the Partnership Agreement. In general, the Limited Partners
may remove a general partner upon the affirmative vote of a majority.
COMPANY The Board of Directors will have exclusive control over the
Company's business and affairs subject only to the restrictions in the
Charter and Bylaws. The Board of Directors is classified into three classes
of directors. At each annual meeting of the Shareholders, the successors of
the class of directors whose terms expires at that meeting will be
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elected. The policies adopted by the Board of Directors may be altered or
eliminated without a vote of the Shareholders. Accordingly, except for their
vote in the elections of directors, Shareholders will have no control over
the ordinary business policies of the Company. The Board of Directors cannot
change the Company's policy of maintaining its status as a REIT, however,
without the approval of the Shareholders.
COMPARISON Because a portion of the Board of Directors will be elected
each year by the Shareholders at the Company's annual meeting, the
Shareholders will have greater control over the management of the Company
than the Limited Partners have over Mission Bay.
FIDUCIARY DUTIES
MISSION BAY In Mission Bay, the general partner is accountable as a
fiduciary to the Partnership and is required to operate the business for the
benefit of all members and to not do any act detrimental to the best
interests of the Partnership. However, the Mission Bay Partnership Agreement
generally allows the general partner to conduct independent activities which
may be competitive with the business of the Partnership.
COMPANY Under Maryland law, the directors must perform their duties in
good faith, in a manner that they reasonably believe to be in the best
interests of the Company and with the care of an ordinarily prudent person in
a like position. Directors of the Company who act in such a manner will
generally not be liable to the Company for monetary damages arising from
their activities.
COMPARISON In both Mission Bay and the Company, the general partner of
the Partnership, and the Board of Directors of the Company, respectively, owe
fiduciary duties to their constituent parties. Some courts have interpreted
the fiduciary duties of the Board of Directors in the same way as the duties
of a general partner in a limited partnership. Other courts, however, have
indicated that the fiduciary obligations of a general partner to the limited
partners are greater than those that a director owes to stockholders.
Therefore, although it is unclear whether, or to what extent, there are
differences in such fiduciary duties, it is possible that the fiduciary
duties of the directors of the Company to the Shareholders may be less than
those of the general partners of the Partnership to the Limited Partners of
the Partnership.
MANAGEMENT LIABILITY AND INDEMNIFICATION
MISSION BAY As a matter of California law, the general partners have
liability for the payment of Partnership obligations and debts, unless
limitations upon such liability are expressly stated in the instrument or
document evidencing the obligation. In general, the Partnership Agreement
provides that the general partner will not be liable to the partnership or
its Limited Partners for any loss suffered by the partnership which arises
out of any action or inaction of the general partner if the general partner,
in good faith, determines that such course of conduct was in the best
interest of the Partnership and such course of conduct did not constitute
fraud, negligence or misconduct of the general partner. In addition, the
Partnership Agreement indemnifies the general partner for any losses,
liabilities, expenses and amounts paid in settlement of any claims sustained
by it in connection with the Partnership, provided that the same were not the
result of fraud, negligence or misconduct on the part of the general partner,
and provided further, that the general partner determines, in good faith,
that such course of action was in the best interest of the Partnership.
COMPANY The Company's Charter provides that the liability of the
Company's directors and officers to the Company and its Shareholders for
money damages is limited to the fullest extent permitted under Maryland law.
The Charter and state law provide broad indemnification to directors and
officers and indemnify any person who is, or any personal representative of a
deceased person who was, a director or officer of the Company against any
judgments, penalties, settlements and reasonable expenses.
COMPARISON The general partner in the Partnership generally has limited
liability to the Partnership for acts or omissions undertaken by it when
performed in good faith, in a manner reasonably believed to be within the
scope of its authority and in the best interests of the Partnership. In some
cases, the general partner of the Partnership also has,
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under specified circumstances, a right to be reimbursed for liability, loss,
expenses and amounts incurred by such general partner by virtue of serving as
general partner. Although the standards are expressed somewhat differently,
there are similar limitations upon the liability of the Directors and
officers of the Company when acing on behalf of the Company and upon the
rights of such persons to seek indemnification from the Company. The Company
believes that the scope of the liability and indemnification provisions in
the Company's Charter and Bylaws, while similar to those contained in the
Partnership Agreement, provides greater protection against claims for
personal liability against the Company's Directors and officers than the
protection afforded to the general partner under the Partnership Agreement.
ANTITAKEOVER PROVISIONS
MISSION BAY In Mission Bay, changes in management can be effected only
by removal of the general partner. The Limited Partners have a right to vote
on the removal of the partnership's general partner. In addition, due to
transfer restrictions in the Mission Bay Partnership Agreement, the general
partner may restrict transfers of the interests of Limited Partners. Under
the Partnership Agreement, an assignee of a limited partner interest may not
become a substitute limited partner, entitling him to vote on a matter that
may be submitted to the Limited Partners for approval, unless the general
partner consents to such substitution. The general partner may exercise
these rights of approval to deter, delay or hamper attempts by persons to
acquire a majority interest in the Partnership.
COMPANY The Charter and Bylaws of the Company contain a number of
provisions that may have the effect of delaying or discouraging an
unsolicited proposal for the acquisition of the Company or the removal of
incumbent management. These provisions include, among others, (1) a
classified Board of Directors, (2) authorized capital stock that may be
classified and issued as a variety of equity securities in the discretion of
the Board of Directors, including securities having superior voting rights to
the Common Stock, (3) restrictions on business combinations with persons who
acquire more than a certain percentage of Common Stock, (4) a requirement
that directors may be removed with or without cause only by a vote of at
least two-thirds of the outstanding Common Stock, and (5) provisions designed
to avoid concentration of share ownership in a manner that would jeopardize
the Company's status as a qualified real estate investment trust under the
Code.
COMPARISON Certain provisions of the Mission Partnership Agreement and
the Charter and Bylaws of the Company could be used to deter attempts to
obtain control of the Partnership, and the Company, in transactions not
approved by the general partners of the Partnership, or the Board of
Directors, respectively.
VOTING RIGHTS
MISSION BAY Generally, under the Partnership Agreement and applicable
California law, the Limited Partners, have voting rights only as to major
partnership transactions (e.g., amendment of the Partnership Agreement, sale
of all the assets of, dissolution of or merger of the partnership).
Otherwise, all decisions relating to the operation and management of the
Partnership are made by the general partner.
COMPANY The Company will be managed and controlled by a Board of
Directors consisting of three classes having staggered terms of office. Each
class is to be elected by the Shareholders at annual meetings of the
Company. Maryland law requires that certain major corporate transactions,
including most amendments to the Charter, may not be consummated without the
approval of Shareholders holding two-thirds of the outstanding voting stock,
but permits the Charter to provide for a lesser vote requirement, but not
less than a majority of the outstanding shares entitled to vote. The
Company's Charter provides for a majority vote with respect to most matters,
with certain exceptions in which a two-thirds vote is required. Subject to
the provisions of the Company's Charter regarding Excess Stock and to matters
discussed under "Description of Capital Stock -- Special Statutory
Requirements for Certain Transactions -- Control Share Acquisition Statute,"
all shares of Class A Common Stock, Class B Common Stock, and Class C Common
Stock will have one vote, and the Charter permits the Board of Directors to
classify and issue capital stock in one or more classes having voting power
which may differ from that of the Class A Common Stock.
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COMPARISON The Limited Partners have only limited voting rights. The
Shareholders of the Company will have voting rights that permit them to elect
the Board of Directors and to approve or disapprove certain major corporate
transactions.
The following is a comparison of the voting rights of the Limited Partners of
the Mission Bay and the Shareholders of the Company as they relate to certain
major transactions.
VOTE REQUIRED TO AMEND THE PARTNERSHIP AGREEMENT OR THE CHARTER
MISSION BAY A majority vote of the Limited Partners may amend the
Partnership Agreement, provided that the general partner must consent to such
amendment if the amendment adversely affects the general partner.
COMPANY Amendments to the Company's Charter must be approved by the
Board of Directors and by the vote of at least a majority of the votes
entitled to be cast at a meeting of Shareholders, except that an amendment of
the provisions relating to the classified Board of Directors, the power to
remove directors, the amendment of Bylaws, preemptive rights, indemnification
and limitation of liability, and the share ownership limits designed to
maintain qualified REIT status must be approved by a two-thirds vote, and any
provision, the amendment of which would jeopardize the Company's REIT status
for tax purposes, or adding cumulative voting in the election of directors
requires for adoption the approval of holders of two-thirds of the votes
entitled to be cast. An amendment relating to termination of REIT status
requires a majority vote of Shareholders.
COMPARISON The Shareholders of the Company will have significantly
fewer rights to authorize and approve amendments to the Charter and Bylaws of
the Company (the "Governing Documents") than do the Limited Partners with
respect to the Mission Bay Partnership Agreement.
VOTE REQUIRED TO DISSOLVE MISSION BAY PARTNERSHIP OR THE COMPANY
MISSION BAY The Partnership Agreement requires a vote of holders of
greater than 50% of the Interests, to dissolve the Partnership.
COMPANY Under the Charter, the Board of Directors must obtain approval
of holders of a majority of the outstanding Common Stock in order to
voluntarily dissolve the Company.
COMPARISON The Limited Partners' rights to vote to dissolve the
Partnership are relatively similar to the corresponding rights of the
Shareholders of the Company.
VOTE REQUIRED TO SELL ASSETS
MISSION BAY The Mission Bay Agreement of Limited Partnership provides that
a majority vote of the Limited Partners is necessary to approve or disapprove a
sale of the Partnership's assets, once such sale has been approved and
proposed by the general partner.
COMPANY Under the Charter, the Board of Directors is required to obtain
approval of a majority of the outstanding shares of Common Stock in order to
sell all or substantially all the assets of the Company.
COMPARISON The Partnership Agreement provides that a sale of all or
substantially all the assets of the Partnership requires the consent of the
general partner. Under the Partnership Agreement, the sale of all or
substantially all the assets of the Partnership also requires a majority
consent of the Limited Partners. In the case of the Company, the Board of
Directors must obtain the consent of a majority of Shareholders in order to
sell all or substantially all the assets of the Company.
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VOTE REQUIRED TO MERGE
MISSION BAY The Partnership Agreement is silent as to merger. Under
California law applicable to the Partnership Agreement, the Partnership and
the other business entity which desires to merge must approve an agreement of
merger. The agreement must be approved by the general partner and the
principal terms of the agreement must be approved by a majority in Interest
of each class of Limited Partners.
COMPANY Under the Charter, the Board of Directors is required to obtain
approval of a Shareholders holding a majority of the votes entitled to be
cast on the matter in order to merge or consolidate the Company.
COMPARISON Limited Partners have voting rights to approve or disapprove
a merger of the Partnership which are similar to the corresponding rights of
the Shareholders of the Company.
COMPENSATION, FEES AND DISTRIBUTIONS
MISSION BAY Generally, under the Partnership Agreement, the general
partner receives no compensation for its services, except fees it receives
for services provided to the Partnership pursuant to a management agreement.
However, the general partner has the same rights to distributions according
to its partnership interest as the Limited Partners. The general partner
also receives reimbursement for expenses incurred by it for the benefit of
the Partnership.
COMPANY The directors of the Company will receive compensation for
their services as described herein under "Management."
COMPARISON Under the Partnership Agreement, fees, distributions and
reimbursements are payable to the general partner and its Affiliates. The
directors of the Company will receive compensation for their services as
described herein under "Management."
LIABILITY OF INVESTORS
MISSION BAY Under the Partnership Agreement and California law, the
liability of Limited Partners for the Partnership's debts and obligations is
limited to the amount of their investment in the Partnership together with an
interest in undistributed income, if any. The Interests are fully paid and
nonassessable. Under the Partnership Agreement and California law, the
general partner is jointly liable for the debts and obligations of the
Partnership.
COMPANY Under Maryland law, Shareholders are not personally liable for
the debts or obligations of the Company. The Class A Common Stock, Class B
Common Stock, and the Class C Common Stock upon issuance, will be fully paid
and nonassessable.
COMPARISON The personal liability of the Shareholders of the Company
for the debts and obligations of the Company is comparable to that of the
Limited Partners in the Partnership.
NATURE OF INVESTMENT
The following compares certain of the investment attributes and legal rights
associated with the ownership of Interests by Limited Partners and shares of
Class A Common Stock by Shareholders of the Company.
MISSION BAY The Interests of the Partnership constitute equity
interests entitling each Partner to his pro rata share of cash distributions
made to the Partners of the Partnership. The Partnership generally maintains
a policy of long-term ownership for current cash flow and long term
appreciation. The Partnership Agreement specifies how the cash available for
distribution, whether arising from operations or sales or refinancing, is to
be shared among the general and Limited Partners. The distributions payable
to the Partners are not fixed in amount and depend upon the operating
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results and net sale or refinancing proceeds available from the disposition
of the Partnership's assets.
COMPANY The shares of Class A Common Stock constitute equity interests
in the Company. Each stockholder will be entitled to his pro rata share of
any distributions paid with respect to the Common Stock except that the
shares of Class B Common Stock and Class C Common Stock are subordinated to a
distribution of $0.91 annually on the shares of Class A Common Stock. The
distributions payable to the stockholders are not fixed in amount and are
only paid if, when and as declared by the Board of Directors. The Company
generally intends to retain and reinvest proceeds of the sale of property or
excess refinancing proceeds in its business. In order to qualify as a REIT,
the Company must distribute at least 95% of its taxable income (excluding
capital gains), and any taxable income (including capital gains) not
distributed will be subject to corporate income tax.
COMPARISON The Interests, and the shares of Class A Common Stock each
represent equity interests entitling the holders thereof to participate in
the growth and income of the Partnership, and the Company, respectively. The
Partnership and the general partner are required to distribute available cash
and proceeds of sales to Partners. In the Company, distributions of
available cash and proceeds payable with respect to the shares of Class A
Common Stock are payable in the discretion of the Board of Directors. The
Company intends to reinvest proceeds of any sale of property and refinancing.
Thus, Shareholders will not be able to realize upon their investments
through distributions of sale and refinancing proceeds as in the Partnership.
Instead, Partners will be able to realize upon their investments primarily
through the sale of Class A Common Stock of the Company received upon
exchange of their Interests.
POTENTIAL DILUTION OF PAYMENT RIGHTS
MISSION BAY Because generally the Partnership may issue additional
equity securities only in narrow circumstances and only upon the unanimous
consent of the Partners, there is little chance for dilution of the Limited
Partners' share of cash available for distribution.
COMPANY The Board of Directors may issue, in its discretion, additional
Class A Common Stock and have the authority to issue from the authorized
capital stock a variety of other equity securities of the Company with such
powers, preferences and rights as the Board of Directors may at the time
designate. The issuance of additional shares of either Common Stock or other
similar equity securities beyond the Class A Common Stock to be issued in the
Formation Transactions, may result in the dilution of the interests of the
Shareholders.
COMPARISON The Limited Partners are not subject to dilution of their
distributive shares with respect to cash available for distribution. The
Shareholders will be subject to potential dilution if the Board of Directors,
in its discretion, decides to issue additional Class A Common Stock.
Furthermore, the Board of Directors will have the authority to issue capital
stock a variety of other equity securities, which may subject Shareholders to
additional dilution.
LIQUIDITY
MISSION BAY The transfer of the Limited Partner's Interests is subject
to a number of restrictions imposed by the Partnership Agreement which are
designed in part to preserve the tax status of the Partnership as a
"partnership" under the Code. The transferee of a Limited Partner's Interest
does not have the right to become a substitute Limited Partner (entitling
such person to vote on matters submitted to a vote of the Limited Partners of
the Partnership) unless, among other things, such substitution is approved by
the general partner of the Partnership.
COMPANY The shares of Class A Common Stock will be freely transferable
once registered under the Securities Act. The shares of Common Stock are
expected to be listed on the American Stock Exchange, and the Company expects
a public market for the Class A Common Stock to develop. The breadth and
strength of this secondary market will depend among other things, upon the
number of shares outstanding, the Company's financial results and prospects,
the general interest in the Company's and other real estate investments, and
the Company's distribution yield compared to that of other debt and equity
securities.
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COMPARISON One of the primary objectives of the Mission Bay Acquisition
is to provide increased liquidity to the Limited Partners. The shares of
Class A Common Stock are expected to be listed on the American Stock Exchange
and there is expected to be a public market for the Class A Common Stock
following the Formation Transactions. The breadth of such market cannot yet
be determined, but it is expected that the market for such shares of Class A
Common Stock will be significantly broader than the current market, if any,
for the Interests held by the Limited Partners.
TAXATION
MISSION BAY The Partnership is not subject to federal income taxes.
Instead each partner in the partnership includes its allocable share of the
partnership's taxable income or loss in determining such Partner's individual
federal income tax liability. The maximum effective federal tax rate for
individuals under current law is 39.6%
COMPANY The Company will elect to be taxed as a REIT. So long as it
qualifies as a REIT, the Company will be permitted to deduct distributions
paid to its shareholders, which effectively will reduce the "double taxation"
that results when a corporation earns income and distributes that income to
its shareholders in the form of distributions.
PASSIVE VS. PORTFOLIO
MISSION BAY As to the Limited Partners, income and loss from the
Partnership generally is subject to the "passive activity" limitations.
Under the "passive activity" rules, income and loss from the Partnership
generally can be offset against income and loss from other investments that
constitute "passive activities."
COMPANY Distributions paid by the Company to its shareholders will be
treated as "portfolio" income and cannot be offset with losses from "passive
activities."
BENEFITS FROM DEPRECIATION
MISSION BAY Cash distributions from the Partnership are not taxable to
a Partner except to the extent they exceed a Partner's basis in its interest
in the Partnership. Because of depreciation dedications, in many cases the
cash distributed to a Limited Partner in a particular year will exceed the
Limited Partner's share of the taxable income of the Partnership for that
year, with the result that such excess cash is not currently taxable to such
Limited Partner.
COMPANY Distributions made by the Company to its taxable domestic
Shareholders out of current or accumulated earnings and profits will be taken
into account by them as ordinary income. Distributions that are designated as
capital gains dividends generally will be taxed as long-term capital gains.
Distributions in excess of current or accumulated earnings and profits will
be treated as a nontaxable return of basis to the extent of a stockholder's
adjusted basis in its shares of Class A Common Stock, with the excess taxed
as capital gain.
REPORTING PROCEDURES AND STATE TAXATION
MISSION BAY Each year, Partners receive a Schedule K-1 tax form
containing detailed tax information for inclusion in preparing their federal
income tax returns. Partners are required in some cases to file state
income tax returns and/or pay state income taxes in the state in which the
Partnership owns property, even if they are not residents of that state.
COMPANY Each year, the Shareholders will receive Form 1099 used by
corporations to report dividends and distributions paid to their
shareholders. Shareholders who are individuals generally will not be
required to file state income tax returns and/or pay state income taxes
outside of their state of residence with respect to the Company's operations
and distributions (although it is possible that the State of California or
other states may seek to impose tax on nonresidents with respect to
distributions to nonresidents). The Company may be required to pay state
income taxes in certain states.
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POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
OVERVIEW OF POLICIES AND OBJECTIVES
The following is a discussion of the Company's policies with respect to
investment, financing, real estate mortgages, and certain other activities.
The policies with respect to these activities have been determined by the
Board of Directors of the Company and may be amended or revised from time to
time at the discretion of the Board of Directors without a vote of the
Shareholders of the Company, except that (i) changes in certain policies with
respect to conflicts of interest must be consistent with legal requirements,
(ii) certain policies with respect to competition are imposed pursuant to
contracts that cannot be amended without the consent of all parties thereto,
and (iii) the Company cannot take any action intended to terminate its
qualification as a REIT without the approval of the holders of a majority of
the outstanding shares of Common Stock.
INVESTMENT POLICIES
INVESTMENT IN REAL ESTATE OR INTERESTS IN REAL ESTATE
In addition to the Hotels, the Company intends to acquire equity
interests in other hotel properties. Additional acquisitions could be made
directly or involve other entities controlled by the Company. The Company's
investment objective is to increase cash available for distribution to
Shareholders. The Company intends to pursue this objective by acquiring
additional hotel properties that meet the Company's investment criteria and
by contracting to have the equity interests of the Hotels and other
subsequently acquired hotel properties, managed efficiently and effectively.
The Company intends to consider investments in hotel properties which
meet one or more of the following criteria:
- Relatively stable operating histories and reasonable bases of
commercial business.
- Nationally franchised, well-maintained properties with preference
given to economy, limited service hotels such as Super 8, Hampton
Inn, and Comfort Inn.
- Properties in attractive locations which, after renovation, would
qualify for a franchise which the Company believes will strengthen
the acquired hotel's competitive position.
- Purchase prices, which, coupled with the elimination or significant
reduction of debt, may allow the Company to realize the attractive
profitability.
- Geographic diversity with general emphasis throughout the United States.
The Company's present policy is to not invest in luxury
properties or resorts. 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.
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
investment may be subject to existing mortgage financing and other
indebtedness which may have priority over the equity interest of the Company.
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FINANCING POLICIES
The Company's Charter does not limit the Company's ability to incur
indebtedness. Accordingly, borrowings may be incurred through the Company.
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 Company 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 property owned by the Company. Such indebtedness may
be recourse to all or any part of the property of the Company, or may be
limited to the particular property to which the indebtedness relates.
The proceeds from any borrowings by the Company may be used for the
payment of distributions or dividends, working capital, to refinance existing
indebtedness or to finance acquisitions or expansions of properties.
If the Board of Directors determines to raise additional equity capital,
the Board has the authority, without Shareholder approval, to issue
additional shares of Common Stock in any manner (and on such terms and for
such consideration as it deems appropriate, including in exchange for
property). Existing Shareholders have no preemptive rights to purchase
shares issued in any offering, and any such offering might cause a dilution
of a Shareholder's investment in the Company.
The Company may make investments other than as previously described,
although it does not currently intend to do so.
CONFLICT OF INTEREST POLICIES
The Company has entered into the Non-Competition Agreement with Guy and
Dorothy Hatfield with respect to the ownership and operation of hotel
properties throughout the United States by the Hatfield Affiliates. The
Non-Competition Agreement provides that during the five (5) year term of the
agreement, the Hatfield Affiliates shall not own, operate, or manage any
hotel property within a five (5) mile radius of any hotel property owned by
the Company, with the exception of the Hatfield Inn located in Sikeston,
Missouri.
The Company's Board of Directors is subject to provisions of Maryland
law designed to address conflicts of interest. There can be no assurance,
however, that these policies and provisions or the agreements always will be
successful in eliminating the influence of such conflicts. If they are not
successful, decisions could be made that fail to reflect fully the interests
of all the Shareholders.
ARM'S-LENGTH NEGOTIATIONS
Pursuant to the law of Maryland, where the Company is incorporated, all
contracts and transactions between the Company and a director or any entity
in which the director has a material financial interest must (i) be approved
by the affirmative vote of the directors not having such an interest
("Disinterested Directors") or by the affirmative vote of the majority of
votes cast by disinterested stockholders, or (ii) be in fact fair and
reasonable to the Company. Such transactions include, but are not limited
to, the provision of management or other services by the Company to
properties or entities which Messrs. McNulty and/or Gardner-Smith, or their
Affiliates have an interest but which are not owned by the Company; the
acquisition or sale of properties by the Company from or to Messrs. McNulty
and/or Gardner-Smith or their Affiliates; or the provisions of services to
the Company by entities owned or controlled directly or indirectly by Messrs.
McNulty and/or Gardner-Smith. The Company has adopted a policy which
requires that all contracts and transactions between the Company, on the one
hand, and a director or executive officer of the Company
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or any entity in which such director or executive officer has a material
financial interest, on the other hand, must be approved by the affirmative
vote of a majority of the Disinterested Directors and a majority of the
Independent Directors.
BUSINESS OPPORTUNITIES/ LACK OF NONCOMPETITION ARRANGEMENTS
Pursuant to the law of Maryland, each director is obligated to offer to
the Company any business opportunity (with certain limited exceptions) that
comes to him and that the Company could reasonable be expected to have an
interest in pursuing. Messrs. McNulty and Gardner-Smith will not be subject
to a covenant not to compete with the Company. Accordingly, subject to the
business opportunities limitations discussed above, Messrs. McNulty and
Gardner-Smith will not be prohibited from rendering services to or owning an
interest in (directly or indirectly, whether as an advisor, principal, agent,
partner, officer, director, employee, stockholder, associate, or consultant
to) any person, partnership, corporation, or any other business entity, which
is competitive, directly or indirectly, with any business carried on,
directly or indirectly, by the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
CHARTER AND BYLAWS PROVISIONS
The Company's Charter limits the liability of the Directors and officers
to the maximum extent that Maryland law permits. Any amendment to the
Charter or Bylaws provisions which provide otherwise shall not apply to any
act or failure to act which occurred prior to such amendment.
MARYLAND LAW -- LIMITATIONS OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Company's
Charter contains such a provision which eliminates such liability to the
maximum extent permitted by the MGCL.
The Company's Charter authorizes it, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a)
any present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has
served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise. The Bylaws of the Company obligate it, to
the maximum extent permitted by Maryland Law, to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding
to (a) any present or former director or officer who is made a party to the
proceeding by reason of his service in that capacity or (b) any individual
who, while a director of the Company and at the request of the Company,
serves or has served another corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner
or trustee of such corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise and who is made a party to the proceeding by
reason of his service in that capacity. The Charter and Bylaws also permit
the Company to indemnify and advance expenses to any person who served a
predecessor of the Company in any of the capacities described above and to
any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party
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by reason of his service in that capacity. The MGCL permits a corporation to
indemnify its present and former directors and officers, among others,
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may
be made a party by reason of their service in those or other capacities
unless it is established that (a) the act or omission of the director or
officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper
personal benefit in money, property or services or in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation. In addition, the MGCL requires the Company, as a condition to
advancing expenses, to obtain (a) a written affirmation by the director or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by the Company as authorized by the Bylaws and
(b) a written statement by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the
standard of conduct was not met.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer shares of its Common Stock or other
securities and to repurchase or otherwise reacquire its shares of Class A
Common Stock or any other securities and may engage in such activities in the
future. The Company expects to issue shares of Common Stock to holders of
limited partnership interests in Mission Bay upon the completion of the
Mission Bay Acquisition. Except for the Initial Shares of Common Stock
issued in connection with the formation of the Company, the Company has not
issued shares of Common Stock or any other securities to date. The Company
has no outstanding loans to other entities or persons, including its officers
and Directors. The Company may in the future make loans to joint ventures
and partnerships in which it participates in order to meet working capital
needs. The Company has not engaged in trading, underwriting or sale of
securities of other issuers, nor has the Company invested in the securities
of other issuers. 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 so that the Company will 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
consent of a majority of the Shareholders, determines that it is no longer in
the best interests of the Company to qualify 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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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors consists of five members, three of whom
are Independent Directors. The Board of Directors is divided into three
classes. The term of each class of directors is three years except that the
initial term of the Class i director is one year and the initial term of the
Class II director is three years. The Company has four executive officers
and no employees. Certain information regarding the Directors and executive
officers of the Company is set forth below.
DIRECTOR
NAME POSITION CLASS
- ---- -------- ----------
Michael S. McNulty President, Treasurer, and Director Class II
Michael P. Fedynyshyn Vice-President and Secretary N/A
Don W. Cockroft Independent Director Class III
William Birdsall Independent Director Class II
Guy E. Hatfield Non-Independent Director Class III
Charles R. Dunn Independent Director Class I
Michael S. McNulty, 47, is President of the Company and has extensive
experience in real estate. In 1973, he received his J.D. from Southern
Methodist University. In May, 1977, Mr. McNulty joined the real estate
development company of a multi-national family with business interests in
various countries. In that period, Mr. McNulty was responsible for
developing partnerships for investments in over thirty real estate projects
with gross investments exceeding $200,000,000. Since 1985, Mr. McNulty has
been self-employed and has directed numerous financial reorganizations. In
1987, he served as a consultant to the Herbert Hunt family. Mr. McNulty
represented United Inns, Inc., in a $60,000,000 debt restructure. From 1990
to 1993, he assisted other clients in various debt restructures involving
over $400,000,000 in debt. In 1994, Mr. McNulty prepared due diligence
materials, coordinated due diligence efforts, and met with potential suitors
when the majority shareholder family of United Inns, Inc., decided to sell
its interests. In November, 1994, a group introduced by Mr. McNulty
purchased the shares. According to BUSINESS WEEK, page 156, (December 26,
1994 issue), United Inns, Inc. was the best performing NYSE stock in 1994.
Mr. McNulty is President and director of a controlling venturer in a Napa
Valley based winery. Mr. McNulty was elected President and Treasurer of the
Company effective September 28, 1995.
Guy E. Hatfield, age 61, has been President of All American Group, Inc.,
a Delaware corporation, since 1989. Mr. Hatfield earned a Bachelor of
Science degree from Bradley University in 1955 and shortly thereafter,
enlisted in the U.S. Navy where he eventually served as a Lieutenant
Commander. In 1962, Mr. Hatfield graduated with a Juris Doctorate from
University of San Diego. From 1962 to 1965, Mr. Hatfield was Senior Partner
of Hatfield & Wasserman, a law firm specializing in Real Estate law. From
1965 to 1968, Mr. Hatfield was President of Guy Hatfield Homes a real estate
development company that built 940 single family homes. From 1968 to 1973,
he was President and Chairman of the Board of Empire Equities, Inc., a public
corporation that was a conglomerate composed of six title offices and three
mortgage offices. From 1973 to 1979, Mr. Hatfield was President and Owner of
All American Development Company, which built 3,250 single family homes.
From 1980 to 1982, he was President and Chairman of the Board of a computer
manufacturing company by the name of Itron, Inc., a publicly held company
whose shares were traded on the NASDAQ. Mr. Hatfield was Assistant
Convention Manager of the 1984 Republican National Convention. Also in 1984,
Mr. Hatfield was a Committee Member of the Committee of the 50th American
Presidential Inaugural Guaranty Fund. From 1984 to 1989, Mr. Hatfield was
Chairman of the Board and Chief Executive Officer of Motels of America, Inc.,
a corporation which built and managed 107 Super 8 motels and had gross annual
sales of $80,000,000. Currently, Mr. Hatfield is President of Hatfield Inns,
Inc., a corporation which owns and manages five motels and has annual sales
of $2,600,000.
Michael P. Fedynyshyn, age 37, is an attorney at law, licensed to
practice in the State of California since 1986. Mr.
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Fedynyshyn specializes in Hospitality law. He is a member of the San Diego
Convention and Visitors Bureau and the San Diego Hotel & Motel Association.
From December, 1993 to January, 1995, Mr. Fedynyshyn was Head of a
hospitality group, consisting of four attorneys. From July, 1992 to
December, 1993, Mr. Fedynyshyn was senior partner in a law firm specializing
in Commercial law, Insolvency law, and Hospitality law. From May, 1985 to
July, 1992, Mr. Fedynyshyn was a partner in a law firm that specialized in
Commercial Law, Insolvency Law, and Corporate Law. The Company believes that
Mr. Fedynyshyn's extensive knowledge and experience in the hospitality
industry will contribute positively to the Company. Mr. Fedynyshyn was
elected Vice-President and Secretary of the Company effective September 28,
1995.
Don W. Cockroft, 55, joined United Inns, Inc., in the early 1960's. Mr.
Cockroft occupied a variety of positions in his over 25 years with United
Inns, Inc. Eventually, he became Chairman of the Board and President of
United Inns, Inc. He resigned from these positions upon the recent purchase
of United Inns, Inc., by Hampstead, Ltd. United Inns, Inc. was traded on the
New York Stock Exchange and in 1994 it achieved the New York Stock Exchange's
largest percentage gain. Mr. Cockroft's duties with United Inns, Inc.
included asset development, acquisitions, dispositions, and debt restructure.
United Inns, Inc. was the initial franchisee of Holiday Inns and also opened
the initial Hampton Inn in Jackson, Mississippi and Atlanta, Georgia. Mr.
Cockroft is currently an Independent Director of the Company.
William Birdsall, 46, is President of Birdsall & Co., a real estate
investment and finance firm located in Del Mar, California. Before starting
at Birdsall & Co. in 1993, Mr. Birdsall was Chairman and CEO of the Price
REIT, a public company which he co-founded with Mr. Sol Price and took public
in 1991 in the form of a Real Estate Investment Trust trading on NASDAQ. Mr.
Birdsall has been involved with real estate development since 1978. He was
Chief Operating Officer of Estes Properties, Inc., where he was responsible
for operations of the Lowes Ventana Canyon Resort and Golf Club in Tucson,
Arizona, a 2000-acre planned community and resort hotel. From 1982 through
1987 he was Senior Vice President of Real Estate for Ramada, Inc., the
international hotel chain. Prior to 1978, he served as legal counsel to the
Interior Committee of the U.S. House of Representatives and as an Assistant
Attorney General for the State of Arizona where he specialized in
environmental legislation and enforcement. He now serves on the Scripps
Memorial Hospitals Foundation Board and is a member of the Young Presidents
Organization, Arizona Bar Association, Urban Land Institute, and
International Council of Shopping Centers.
Charles R. Dunn, age 49, is Founder and Chief Executive Officer of
Hospitality Concepts, established in July of 1988. Hospitality Concepts
provides accounting and consulting services to the lodging and restaurant
industry in the Southwestern United States. Clients are located in
California, Nevada, Arizona, New Mexico, and Texas. Services range from
financial statement production, budgeting and related planning, to system
design and consulting. Prior to July 1988, Mr. Dunn was Controller for the
San Diego Princess Hotel, a 450 room, full-service convention facility and
resort located in San Diego, California. Mr. Dunn graduated from Washington
State University with a B.A. degree in Hotel Administration.
Ian Gardner-Smith, 58, has been continually involved in capital
formation for over thirty years. He is the Founder of Hotel Mortgage
Resources, Inc., a Delaware corporation, and has served as the Chief
Executive Officer of Hotel Mortgage Resources since 1993. From 1988 to 1993,
he was the sole stockholder of Southwest Motel Equities Corporation, a motel
management company. He is a Co-Founder of Motels of America and served as
that company's Vice President of Finance from 1985 to 1988. Prior to that,
he spent seventeen years with various New York Stock Exchange firms and
participated in numerous capital formation activities as Chief Financial
Officer. Mr. Gardner-Smith is the sole shareholder of Host Funding Advisors
and the 99% owner of Host Funding Acquisition, LLC. He is a graduate of
United States International University with a B.A. degree in Business
Administration.
MANAGEMENT OF THE ADVISOR
Initially, Mr. McNulty will be the only salaried employee of the
Advisor. Pursuant to the Company's plan to operate as an externally managed
REIT, Mr. McNulty is President of the Advisor and will receive a substantial
portion of the Advisory fees (including the $30,000 base fee) paid in cash to
the Advisor by the Company pursuant to the Advisory Agreement as compensation
for his
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services and duties performed as the sole employee and President of the
Advisor.
AUDIT COMMITTEE
The Audit Committee consists and will only consist of the two
Independent Directors. The Audit Committee makes recommendations concerning
the engagement of independent public accountants, reviews with the
independent public accountants the plans and results of the audit engagement,
approves professional services provided by the independent public
accountants, reviews the independence of the independent public accountants,
considers the range of audit and non-audit fees and reviews the adequacy of
the Company's internal accounting controls.
COMPENSATION COMMITTEE
The Compensation Committee consists of the two Independent Directors.
The Company has not previously compensated its executive officers and does
not plan to compensate such officers while the Advisory Agreement is in
effect. The Company anticipates terminating the Advisory Agreement when its
asset base reaches a size which renders it more cost effective to employ
Company employees to perform management functions than to retain the Advisor.
Subsequent to such termination, 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 companies which are deemed by the Compensation Committee to be comparable
to the Company.
The Company may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated
by the Board of Directors.
COMPENSATION OF DIRECTORS
The Company intends to pay to its Independent Directors an annual fee of
$6,000 during its first year of operation. Directors who are employees of
the Company will not be paid any directors' fees. In addition, the Company
will reimburse directors for travel expenses incurred in connection with
their activities on behalf of the Company. Immediately after consummation of
the Formation Transactions, the Company will sell to three Directors of the
Company, 10,000 shares of Common Stock at a price per share equal to $10 per
share (i.e., the per share price of the shares of Common Stock in the Public
Offering). The purchase price will be paid by them through delivery of a
five year promissory note executed in favor of the Company by each purchaser,
which shall bear interest, payable quarterly, at a fixed rate equal to 7% per
annum. The shares of Common Stock purchased by each Independent Director
will be pledged to the Company to secure payment of the $100,000 promissory
note, which shall be non-recourse to the maker. Principal payments on the
note will be 2% per year. In addition, the Company has agreed to forgive the
promissory notes issued in exchange for the shares of Common Stock (i) in
increments of 18% of the principal amount per annum for each year that the
maker remains a director of the Company, and (ii) upon the death, disability,
or resignation of the Director (except for a voluntary resignation or failure
to serve). Accordingly, after five years the notes will be satisfied. In
addition, as a class, the Directors, shall be granted similar stock purchase
rights for 0.5% of the value of subsequent public issuances of the Company's
Stock.
The stock purchase rights would grant the Independent Directors the
right to acquire in the aggregate 0.5% of subsequent issuances of the
Company's Common Stock at the offering price of such shares with the
consideration for such shares payable by a 100% non-recourse note, with
principal payments of 2% per year and 18% of the principal forgiven each year
the maker remains a director of the Company.
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PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of shares of
Class A Common Stock, Class B Common Stock, and Class C Common Stock upon
consummation of the Formation Transactions for (1) each person who is
expected to hold more than a 5% interest in the Company, (2) directors of the
Company, (3) the executive officers, and (4) the directors and executive
officers of the Company as a group. Unless otherwise indicated in the table
or in the footnotes, all such interests are owned directly, and the indicated
person or entity has sole voting and investment power (or shares with
spouse). The "Percentage of all Shares" represents the number of shares of
Class A, B, and C Common Stock the person is expected to hold immediately
after the Formation Transactions as a percentage of the total number of
shares of Class A Common Stock to be outstanding immediately after the
Formation Transactions assuming the full issuance of 500,00 shares of Class A
Common Stock in the Public Offering. The table assumes the following
ownership:
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF
BENEFICIAL OWNER BENEFICIALLY OWNED ALL SHARES
- ------------------ ------------------ --------------
- -------------------------------
Guy E. and Dorothy Hatfield |
Route 1, Box 162 |
Ridgeland, SC 29936 |
|
Julia Hatfield King |
63 Bigwood Drive | -------- 690,224 * 46.1%
Hilton Head Island, SC 29926 |
|
Scott Jeffrey Hatfield |
1243 16th Avenue East |
Seattle, WA 98112 |
- -------------------------------
William Birdsall 10,000 .67%
2325 Del Mar Heights Road, Suite 225
San Diego, CA 92130
Don W. Cockroft 10,000 .67%
United Inns
5100 Poplar Avenue, Suite 2300
Memphis, TN 38137
Charles R. Dunn 10,000 .67%
7925 Wing Span Drive ------- ------
San Diego, CA 92119
OFFICERS AND DIRECTORS TOTALS 720,224 48.11%
------- ------
------- ------
* The Hatfield Affiliates will receive 410,000 shares of Class A Common
Stock, and 140,000 shares of Class B Common Stock, 140,000 shares of Class C
Common Stock in exchange for their 100 Initial Shares in the Company.
Assuming that Guy E. Hatfield is a Dissenting Partner as to a 1.25% Mission
Bay limited partnership interest, he and his Affiliates will acquire 224
shares of Class A Common Stock in exchange for their remaining Mission Bay
limited partnership interests.
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THE COMPANY'S CAPITAL STOCK
DESCRIPTION OF SECURITIES
The following summary of the terms of the stock of the Company does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Charter and the Company's Bylaws, copies of which
are exhibits to the Registration Statement of which this Prospectus is a
part. See "Additional Information."
IN GENERAL
The Charter provides that the Company may issue up to 50,000,000 shares
of Class A Common Stock, $.01 par value per share; up to 4,000,000 shares of
Class B Common Stock, $.01 par value per share; up to 1,000,000 shares of
Class C Common Stock, $.01 par value per share; and up to 20,000,000 shares
of its preferred stock, $.01 par value per share ("Preferred Stock"). The
shares of Class B Common Stock and Class C Common Stock will have full voting
and liquidation rights. The Class B Common Stock and Class C Common Stock are
subordinated to the Class A Common Stock only with respect to dividends. See
"Distribution Policy . Collectively, the Class A Common Stock, the Class B
Common Stock, and the Class C Common Stock are referred to as Common Stock.
Upon completion of the Formation Transactions, 1,497,487 shares of Common
Stock will be issued and outstanding of which (i) 140,000 will be Class B
Common Stock, (ii) 140,000 will be Class C Common Stock, and (iii) the
remainder will be shares of the Company's Class A Common Stock. No Preferred
Stock will be outstanding. Under Maryland law, stockholders generally are
not liable for the corporation's debts or obligations.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Shareholders of Common Stock are entitled to receive
distributions on such stock if, as and when authorized and declared by the
Board of Directors out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to
its Shareholders in the event of its liquidation, dissolution or winding up
after payment of or adequate provision for all known debts and liabilities of
the Company.
Each outstanding Share of Common Stock entitles the holder to one vote
on all matters submitted to a vote of Shareholders, including the election of
Directors and, except as provided with respect to any other class or series
of stock, the holders of such shares of Class A 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 will not be able to elect
any Directors.
Shareholders of Common Stock have no preference, conversion, exchange,
sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any securities of the Company. Except for the subordination of
the Class B Common Stock and Class C Common Stock to the Company's Class A
Common Stock discussed above, all shares of Common Stock will have equal
distribution, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend
its charter, 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 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 charter. The
Company's Charter does not provide for a lesser percentage (i.e., 51%) in
such situations.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of classes of stock and
to establish the number of shares in each class or series and to set the
preferences,
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conversion and other rights, voting powers, restrictions, limitations as to
distributions/dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
PREFERRED STOCK
The Board of Directors is authorized to provide for the issuance of
shares of Preferred Stock in one or more series, to establish the number of
shares in each series and to fix the designation, powers, preferences and
rights of each such series and the qualifications, limitations or
restrictions thereof. Because the Board of Directors has the power to
establish the preferences and rights of each class or series of Preferred
Stock, the Board of Directors may afford the holders of any series or class
of Preferred Stock preferences, powers and rights, voting or otherwise,
senior to the rights of holders of Common Stock. The issuance of Preferred
Stock could have the effect of delaying or preventing a change in control of
the Company. The Company has no present intention to issue shares of
Preferred Stock.
EXCESS STOCK
For a description of Excess Stock, see "Restrictions on Transfer".
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock and to classify or
reclassify unissued shares of Common and thereafter to cause the Company to
issue such classified or reclassified shares of stock will provide the
Company with increased flexibility in structuring possible future financings
and acquisitions and in meeting other needs which might arise. The
additional classes or series, as well as the Common Stock, will be available
for issuance without further action by the Company's Shareholders, unless
such action is required by applicable law or the rules of any stock exchange
or automated quotation system on which the Company's securities may be listed
or traded. Although the Board of Directors has no intention at the present
time of doing so, it could authorize the Company to issue a class or series
that could, depending upon the terms of such class or series, delay, defer or
prevent a transaction or a change of control of the Company that might
involve a premium price for holders of Common Stock or otherwise be in their
best interest.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, its shares of
Common Stock must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of twelve months (other than the first year
for which an election to be a REIT has been made) or during a proportionate
part of a shorter taxable year. Also, not more than 50% of the value of the
outstanding shares of Common Stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities
such as qualified pension plans) during the last half of a taxable year
(other than the first year for which an election to be a REIT has been made).
Because the Board of Directors believes it is essential for the Company
to qualify as a REIT, the Charter, subject to certain exceptions, contains
certain restrictions on the number of shares of Common Stock of the Company
that a person may own. The Charter provides that no person may own, or be
deemed to own by virtue of the attribution provisions of the Code, more than
the lesser of 9.9% (the "Ownership Limit") of the number or value of the
outstanding shares of Common Stock of the Company. The Company's Board of
Directors, upon receipt of a ruling from the IRS, an opinion of counsel or
other evidence satisfactory to the Board and upon such other conditions as
the Board of Directors may establish, may exempt a proposed transferee from
the Ownership Limit. However, the Board may not grant an exemption from the
Ownership Limit to any proposed transferee whose ownership, direct or
indirect, of in excess of 9.9% of the value of the outstanding shares of
Common Stock of the Company would result in the termination of the Company's
status as a REIT. The Ownership Limit does not apply to the Common Stock
owned, directly or indirectly, by Mr. Hatfield. As a condition of such
exemption, the intended transferee must give written notice to the Company of
the proposed transfer no later than the fifteenth day prior to any transfer
which, if consummated, would
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result in the intended transferee owning shares in excess of the Ownership
Limit. The Board of Directors may require such opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary or advisable
in order to determine or ensure the Company's status as a REIT. Any transfer
of shares of stock that would (a) create a direct or indirect ownership of
shares of stock in excess of the Ownership Limit, (b) result in the shares of
stock being owned by fewer than 100 persons or (c) result in the Company
being "closely held" within the meaning of Section 856(h) of the Code, will
be null and void and the intended transferee will acquire no rights to the
shares. The foregoing restrictions on transferability and ownership will not
apply if the Board of Directors determines that it is no longer in the best
interests of the Company to attempt to qualify, or to continue to qualify, as
a REIT.
Any purported transfer of shares that would result in a person owning
shares in excess of the Ownership Limit or cause the Company to become
"closely held" under Section 856(h) of the Code that is not otherwise
permitted as provided above will constitute shares of Excess Stock, which
will be transferred by operation of law to the Company as trustee for the
exclusive benefit of the person or persons to whom the shares of Excess Stock
are ultimately transferred until such time as the intended transferee
retransfers the shares of Excess Stock. While these shares of Excess Stock
are held in trust, they will not be entitled to vote or to share in any
dividends or other distributions (except upon liquidation). Subject to the
Ownership Limit, the shares of Excess Stock may be retransferred by the
intended transferee to any person (if the shares of Excess Stock would not be
shares of Excess Stock in the hands of such person) at a price not to exceed
the price paid by the intended transferee or, if the intended transferee did
not give value for such shares of Excess Stock (e.g., a transfer by gift or
devise), the fair market value (as described below) at the time of the
proposed transfer that resulted in the shares of Excess Stock, at which point
the Excess Stock will automatically be exchanged for the stock to which the
shares of Excess Stock are attributable. In addition, such shares of Excess
Stock held in trust are subject to purchase by the Company at a purchase
price equal to the lesser of the price paid for the stock by the intended
transferee (or, in the case of a devise or gift, the fair market value at the
time of such devise or gift) and the fair market value of the shares of
Excess Stock on the date the Company exercises its right to purchase. Fair
market value shall be the last sales price reported on the American Stock
Exchange on the trading day immediately preceding the relevant date, or if
not then traded on the American Stock Exchange, the last sales price of such
shares of stock on the trading day immediately preceding the relevant date as
reported on any exchange or quotation system over which such shares of stock
may be traded, or if not then traded over any exchange or quotation system,
then the market price of such shares of stock on the relevant date as
determined in good faith by the Board of Directors of the Company. From and
after the intended transfer to the intended transferee of the shares of
Excess Stock, the intended transferee shall cease to be entitled to
distributions (except upon liquidation), voting rights and other benefits
with respect to such shares of the stock except the right to payment of the
purchase price for the shares of stock or the retransfer of shares as
provided above. Any dividend or distribution paid to a proposed transferee
on shares of Excess Stock prior to the discovery by the Company that such
shares of stock have been transferred in violation of the provisions of the
Charter shall be repaid to the Company upon demand. If the foregoing
transfer restrictions are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then the intended transferee of
any shares of Excess Stock may be deemed, at the option of the Company, to
have acted as an agent on behalf of the Company in acquiring such shares of
Excess Stock and to hold such shares of Excess Stock on behalf of the Company.
All certificates representing shares of Common Stock and Preferred Stock
will bear a legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions
of the Code, more than the lesser of 5% (or such other percentage between one
half of 1% and 5%, as provided in the rules and regulations promulgated under
the Code) of the number or value of the outstanding shares of Common Stock of
the Company must give a written notice to the Company by January 31 of each
year. In addition, each stockholder shall upon demand be required to
disclose to the Company in writing such information with respect to the
direct, indirect and constructive ownership of shares of Common Stock as the
Board of Directors deems reasonably necessary to comply with the provisions
of the Code applicable to a REIT, to comply with the requirements of any
taxing authority or governmental agency or to determine any such compliance.
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This Ownership Limit could delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interest of the Shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Chemical Mellon
Shareholder Services, Los Angeles, California.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Charter and Bylaws of the Company does not purport to be complete and is
subject to and qualified in its entirety by reference to Maryland law and the
Charter and Bylaws of the Company.
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 (3) nor
more than nine (9). Any vacancy will be filled, at any regular meeting or at
any special meeting called for that purpose, by a majority of the remaining
Directors, except that a vacancy resulting from an increase in the number of
Directors must be filled by a majority of the entire Board of Directors.
Pursuant to the Charter, the Board of Directors is divided into three
classes of Directors. The initial terms of the first and second classes will
expire in 1996 and 1997 respectively. Beginning in 1998, directors of each
class will be chosen for three-year terms upon the expiration of their
current terms and each year one class of Directors will be elected by the
Shareholders. The Company believes that classification of the Board of
Directors will help to assure the continuity and stability of the Company's
business strategies and policies as determined by the Board of Directors.
Shareholders will have no right to cumulative voting in the election of
directors. Consequently, at each annual meeting of Shareholders, the holders
of a majority of the shares of Common Stock 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. At
least two annual meetings of Shareholders, instead of one, will generally be
required to effect a change in a majority of the Board of Directors. Thus,
the classified board provision could increase the likelihood that incumbent
Directors will retain their positions. The staggered terms of Directors may
reduce the possibility of a tender offer or an attempt to change control of
the Company, even though a tender offer or change of control might be in the
best interests of the Shareholders.
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed only for cause (as
defined in the Charter) and only 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, precludes Shareholders from
removing incumbent Directors except upon the existence of cause for removal
and a substantial affirmative vote and filling the vacancies created by such
removal with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, 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 the corporation's shares or an affiliate of
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the 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 stock of the corporation (an "Interested
Stockholder") or an affiliate thereof are prohibited for five years after the
most recent date on which the Interested Stockholder becomes 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 shares of voting stock of the corporation and (b) two-thirds of
the votes entitled to be cast by holders of voting stock of the 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
conditions, the corporation's Common Shareholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested 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. Mr. Hatfield beneficially will own more than ten
percent of the Company's voting shares and would, therefore, be subject to
the business combination provision of the MGCL. However, pursuant to the
statute, the Company has exempted any business combinations involving Mr.
Hatfield and, consequently, the five-year prohibition and the super-majority
vote requirements will not apply to business combinations between Mr.
Hatfield and the Company. As a result, Mr. Hatfield may be able to enter
into business combinations with the Company, which may not be in the best
interest of the Shareholders, without compliance by the Company with the
super-majority vote requirements and the other provisions of the statute.
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 of stock owned by the acquirer, by officers or
by directors who are employees of the corporation. "Control Shares" are
voting shares of stock which, if aggregated with all other such shares of
stock previously acquired by the acquirer, or in respect of which the
acquirer is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquirer 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 Shareholders to be held within 50 days of demand to
consider the voting rights of the shares. If no request for a meeting is
made, the corporation may itself present the question at any Shareholders
meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the 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 acquirer or of any meeting of
Shareholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a Shareholders
meeting and the acquirer becomes entitled to vote a majority of the shares
entitled to vote, all other Shareholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquirer in the
control share acquisition.
The control share acquisition statute does not apply (a) to shares
acquired in a merger, consolidation or share exchange if the corporation is a
party to the transaction or (b) to acquisitions approved or exempted by the
charter or bylaws of the corporation.
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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 shares of stock. There can be no assurance that such provision
will not be amended or eliminated at any time in the future.
AMENDMENT TO THE CHARTER
The Charter, including its provisions on classification of the Board of
Directors and removal of Directors, may be amended only by the affirmative
vote of the holders of not less than two thirds of all of the votes entitled
to be cast on the matter.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote
of the holders of not less than two thirds of all of the votes entitled to be
cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual
meeting of Shareholders, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by Shareholders may
be made only (i) pursuant to the Company's notice of the meeting, (ii) by the
Board of Directors or (iii) by a Shareholder who is entitled to vote at the
meeting and has complied with the advance notice procedures set forth in the
Bylaws and (b) with respect to special meetings of Shareholders, only the
business specified in the Company's notice of meeting may be brought before
the meeting of Shareholders and nominations of persons for election to the
Board of Directors may be made only (i) pursuant to the Company's notice of
the meeting, (ii) by the Board of Directors or (iii) provided that the Board
of Directors has determined that Directors shall be elected at such meeting,
by a Shareholder who is entitled to vote at the meeting and has complied with
the advance notice provisions set forth in the Bylaws.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND BYLAWS
The business combination provisions and, if the applicable provision in
the Bylaws is rescinded, the control share acquisition provisions of the
MGCL, the provisions of the Charter on classification of the Board of
Directors and removal of Directors and the advance notice provisions of the
Bylaws could delay, defer or prevent a transaction or a change in control of
the Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interest.
SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
1,497,487 shares of Common Stock, of which 1,217,487 shares of Class A Common
Stock will be held by former Mission Bay Limited Partners, Directors, the
Public Offering purchasers, and the Hatfield Affiliates. Further, 140,000
shares of Class B Common Stock and 140,000 of Class C Common Stock will be
held by the Hatfield Affiliates. The shares of Common Stock issued in the
Mission Bay Offering to the Mission Bay Limited Partners and to the
purchasers of Common Stock in the Public Offering will be freely tradeable by
persons other than Affiliates of the Company without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), subject to certain
limitations on ownership set forth in the Charter. See "The Company's
Capital Stock -- Description of Securities -- Restrictions on Transfer."
Class A Common Stock , Class B Common Stock, and Class C Common Stock
issued to the AAG Partners in exchange for their Initial Shares which they
received pursuant to the Contribution and Assumption Agreement and Class A
Common Stock issued to the Independent Directors may 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
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Securities Act unless an exemption from registration is available, including
exemptions contained in Rule 144. As described below, the Company has
granted certain holders registration rights with respect to 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 acquirer or subsequent holder thereof is entitled to
sell within any three-month period a number of shares that does not exceed
the greater of 1% of the then outstanding Common 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 Securities and
Exchange Commission. Sales under Rule 144 also are subject to certain manner
of sale provisions, notice requirements and the availability of current
public information about the Company. If three years have elapsed since the
date of acquisition of restricted shares from the Company or from any
"Affiliate" of the Company, and the acquirer or subsequent holder thereof is
deemed not to have been an "Affiliate" of the Company at any time during the
90 days 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 granted the AAG Partners who will acquire Class A Common
Stock, Class B Common Stock, and Class C Common Stock pursuant to the
Formation Transactions "primary and "piggyback" registration rights with
respect to the Initial Shares of Common Stock issued to them. Such
registration rights, which become effective on the sixth month anniversary of
the closing of the Offering, grant the holders thereof, with certain
limitations, the right to have such shares registered under any registration
statement by the Company either separately or in conjunction with the
issuance of other Common Stock or securities substantially similar to Common
Stock. The Company will bear expenses incident to its registration
requirements, except that such expenses shall not include any underwriting
discounts or commissions, Securities and Exchange Commission or state
securities registration fees or transfer taxes relating to such shares.
Registration rights may be granted to future sellers of hotel properties to
the Company who elect to receive, in lieu of cash, Common Stock or other
securities convertible into Common Stock.
Prior to the date of this Statement, there has been no public market for
the Common Stock. The Company has applied for a listing of its shares of
class A Common Stock on the AMEX. Trading of the Common Stock on the
American Stock Exchange is expected to commence following the completion of
the Offering. If the AMEX does not list the shares of Class A Common Stock,
they will be listed on the NASDAQ National Market. The listing of the Class
A Common Stock on either the AMEX or the NASDAQ National Market is a condition
to the closing of the Formation Transactions. No prediction can be made as to
the effect, if any, that future sales of shares, or the availability of
shares for future sale, will have on the market price prevailing from time to
time. Sales of substantial amount of Common Stock, or the perception that
such sales could occur, may affect adversely prevailing market prices of the
Common Stock. See "Risk Factors -- No Prior Market for Common Stock" and
"The Company's Capital Stock -- Shares Available for Future Sale."
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of the material federal tax income tax
considerations relevant to a prospective Shareholder of the Common Stock.
The Company has obtained a tax opinion from its legal counsel, Peter G.
Aylward ("Aylward ), regarding the tax aspects of the Formation Transactions
and the Company's intent to elect REIT status.
The discussion does not purport to deal with all aspects of taxation
that may be relevant to particular Shareholders in light of their personal
investment or tax circumstances, or to certain types of shareholders
(including insurance companies, 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.
EACH PROSPECTIVE OFFEREE IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP,
AND SALE OF THE SHARES OF COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE
TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAX TREATMENT OF THE FORMATION TRANSACTIONS
The sale of the Mission Bay hotel by Mission Bay in exchange for the
Company's shares of Common Stock will be a taxable transaction which will
generate a taxable loss to Mission Bay. The extent to which a Mission Bay
Limited Partner may utilize its distributive share of the partnership loss
(and the character of such loss as a capital loss or an ordinary loss) will
depend on various factors, including the adjusted basis of the partnership
interest to such Mission Bay Limited Partner, whether such Mission Bay
Limited Partner is an individual, a pension plan or an individual retirement
account.
MISSION BAY LIMITED PARTNERS SHOULD CONSULT WITH THEIR TAX ADVISORS TO
DETERMINE THE PRECISE TAX TREATMENT TO THEM RESULTING FROM THIS TRANSACTION.
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, commencing with its taxable year
beginning January 1, 1996 and ending December 31, 1996. (During the
Company's initial taxable year ending December 31, 1995 the Company
anticipates little, if any, taxable income.) The Company believes that,
commencing with its 1996 taxable year, it will be organized and will operate
in such a manner so as to qualify for taxation as a REIT under the Code, and
the Company intends to continue to operate in such a manner, but no assurance
can be given that the Company will operate in a manner so as to qualify or
remain qualified as a REIT. In that connection, as described in greater
detail below, the Company has received an opinion of counsel that subject to
the satisfaction of certain procedural matters should be able to meet the
requirements for qualification and taxation as a REIT under the Code.
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 for federal income tax
treatment of a REIT and its stockholders. The discussion is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder ("Treasury Regulations"), and administrative and judicial
interpretations thereof, all of which are subject to change prospectively or
retrospectively.
The law office of Peter G. Aylward, of San Diego, California ("Aylward")
has acted as counsel to the Company
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in connection with the Offering and the Company's election to be taxed as a
REIT. In the opinion of Aylward, commencing with the Company's first taxable
year ending December 31, 1996, and assuming that the elections and other
procedural steps described in this discussion of "Federal Income Tax
Considerations" are completed by the Company in a timely fashion, the Company
will be organized in conformity with the requirements for qualification as a
REIT, and its proposed method of operation will enable it to meet the
requirements for qualification and taxation as a REIT under the Code.
Investors should be aware, however, that opinions of counsel are not binding
upon the IRS or any court. It must be emphasized that the opinion of Aylward
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 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
Aylward at the closing of the Offering. Moreover, such qualification and
taxation as a REIT depends upon (i) the Company's ability to meet on a
continuing basis, (ii) actual annual operating results, (iii) distribution
levels, (iv) stock ownership, and (v) various qualification tests imposed
under the Code discussed below. Accordingly, no assurance can be given that
the actual results of the Company's operation for any particular taxable year
will satisfy such requirements. For a discussion of the tax consequences of
failure to quality as a REIT, see "--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on its net income that is
distributed currently to the Shareholders. That treatment substantially
eliminates the "double taxation" (i.e., taxation at both the corporate and
stockholder levels) that generally results for 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 non-qualifying 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, 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 assets
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 Initial Hotels have built-in gain due to
the Company's tax free acquisition of those properties from AAG.
Accordingly, the Company may incur substantial tax liabilities in the future
if the Company sells some or all of the Hotels within the next ten years.
REQUIREMENTS FOR QUALIFICATION
REIT QUALIFICATIONS
The Code defines a REIT as a corporation, trust or association (i) that
is managed by one or more trustees or
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directors; (ii) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest;
(iii) that would be taxable as a domestic corporation, but for Sections 856
through 860 of the Code; (iv) that is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (v) the
beneficial ownership of which is held by 100 or more persons; (vi) not more
than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable years (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 IRS 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 record keeping 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 or 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 Common Stock in sufficient proportions pursuant to the
Offering to allow it to satisfy requirement (v). Upon the completion of the
Formation Transactions, the Company intends to issue sufficient Common Stock
so that by June 30, 1997 (i.e., the testing date for item (vi) above) the
ownership of the Company's Common Stock on such date will satisfy the
requirements of item (vi). However, no assurances can be given that the
actual ownership of the Company's Common Stock will satisfy such
requirements. In addition, the Company's Charter 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 Stock --Charter and Bylaw Provisions -- Restrictions
on Transfer."
For purposes of determining stock ownership under the 5/50 Rule, a
pension trust generally is considered an individual. However, for taxable
years beginning on or after January 1, 1994, beneficiaries of certain pension
trusts are treated as holding shares of a REIT in proportion to their
actuarial interests in the pension trust for purposes of the 5/50 Rule.
The Company does not currently have any subsidiaries, nor will it have
any subsidiaries immediately after completion 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.
Thus, in applying the requirements described herein, the Company's "qualified
REIT subsidiaries" will be ignored, and all assets liabilities, and items of
income, deduction, and credit of such subsidiaries will be treated as assets,
liabilities and items of income, deduction, and credit of the Company.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the Company and will be deemed to be entitled to the
gross income of the Company attributable to such share. In addition, the
character of the assets and gross income of the Company will retain the same
character in the hands of the REIT for purposes of Section 856 of the Code,
including satisfying the gross income and asset tests, described below.
Thus, the Company's proportionate share of the assets, liabilities and items
of income of any partnerships in which it holds an interest 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
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Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from such real property of temporary
investments, and from any combination of the foregoing. Third, not more than
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 of sales. Second, the Code provides
that rents received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if the Company 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" 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
Company the land, buildings, improvements, furnishing, and equipment
comprising the Hotels for a 15-year period. The Percentage Leases provide
that the Lessee will be obligated to pay to the Company (i) the Base Rent;
(ii) the Percentage Rent; and (iii) the Impositions (which exclude
property taxes -- the Company will pay the property taxes on the Hotels), and
(iv)the Additional Charges. The Percentage Rent is calculated by multiplying
fixed percentages by the gross room revenues and food and beverage rent
revenues for each of the Hotels in excess of certain levels. The Base Rent
accrues and is required to be paid monthly. Percentage Rent is due quarterly
and the Lessee will not be in default for non-payment of Percentage Rent due
to any quarter if the Lessee pays within 20 days of the end of the quarter,
the Percentage Rent due and unpaid with respect to such quarter.
In order for the Base Rent, the Percentage Rent, the Impositions, and
the Additional Charges to constitute "rents from real property," the
Percentage Leases must be respected as true leases for federal income tax
purposes and not treated as service contracts, joint ventures or some other
type of arrangement. The determination of whether the Percentage Leases are
true leases depends on an analysis of all the surrounding facts and
circumstances. In making such a determination, courts have considered a
variety of factors, including the following: (i) the intent of the parties,
(ii) the form of the agreement, (iii) the degree of control over the property
that is retained by the property owner (e.g., whether the lessee has
substantial control over the operation of the property or whether the lessee
was required simply to use its best efforts to perform its obligations under
the agreement), and (iv) the extent to which the property owner retains the
risk of loss with respect to the property (e.g., whether the lessee bears the
risk of increases in operating expenses or the risk of damage to the
property).
In addition, Code Section 7701(e) provides that a contract that purports
to be a service contract (or a partnership agreement) is treated instead as a
lease of property if the contract is properly treated as such, taking into
account all relevant factors, including whether or not: (i) the service
recipient is in physical possession of the property, (ii) the service
recipient controls the property, (iii) the service recipient has the
significant economic or possessory interest in the property (e.g., the
property's use could 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 cots, or the recipient
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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 entitles 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.
Aylward 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 Company 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 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 Hotels, other than
the cost of maintaining underground utilities and structural elements, and
will dictate how the Hotels are operated, maintained, and improved, (iv) the
Lessee will bear all of the costs and expenses of operating the Hotels
(including the cost of any inventory and supplies used in their operation)
during the term of the Percentage Leases (other than real and personal
property taxes, and the cost of replacement or refurbishment of furniture,
fixtures and equipment, to the extent such costs do not exceed the allowance
for such costs provided by the Company under each Percentage Lease), (v) the
Lessee will benefit from any savings in the costs of operating the Hotels
during the term of the Percentage Leases, (vi) in the event of damage or
destruction to any of the Hotels, 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 or (B)
purchase the Initial Hotels for an amount generally equal to the Company's
investment in the Property, (vii) the Lessee will indemnify the Company
against all liabilities imposed on the Company during the term of the
Percentage Leases by reason of (A) injury to persons or damage to property
occurring at the Hotels or (B) the Lessee's use, management, maintenance or
repair of the Hotels, (viii) the Lessee is obligated to pay substantial fixed
rent for the period of use of the Hotels, and (ix) the Lessee stands to incur
substantial losses (or reap substantial gains) depending on how successfully
it operates the Hotels.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether
such leases constitute true leases for federal income tax purposes.
Therefore, the opinion of Aylward with respect to the relationship between
the Company and the Lessee is based upon all of the facts and circumstances
and upon rulings and judicial decision involving situations that are
considered to be analogous. Opinions of counsel are not binding upon the IRS
or any court, and there can be no complete assurance that the IRS will not
assert successfully a contrary position. If the Percentage Leases are
recharacterized as service contracts or partnership agreement, rather than
true leases, part or all of the payments that the Company receives from the
Lessee may not be considered rent or may not otherwise satisfy the various
requirements for qualification as "rents from real property." In that case,
the Company likely would not be able to satisfy either the 75% or 95% gross
income tests and, as a result, would lose its REIT status.
In order for the Rents to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising an Initial Hotel must not be greater than 15% of the
Rents received under the Percentage Lease. The Rents attributable to the
personal property in an Initial Hotel is the amount that bears the same ratio
to total rent for the taxable year as the average of the adjusted basis of
the personal property in the Initial Hotel at the beginning and at the end of
the taxable years to the average of the aggregate adjusted basis of both the
real and personal property comprising the Initial Hotel at the beginning and
at the end of the such taxable year (the "Adjusted Basis Ratio"). The
initial adjusted basis of the personal property is each Initial Hotel (which
will be a carryover of the basis of AAG in the Initial Hotels as of January
1, 1995, and a basis equal to the aggregate Exchange Value of the Company's
shares of Class A Common Stock issuable for the Acquisition Hotel) will be
less than 15% of the initial adjusted basis of both the real and personal
property comprising such hotel. The basis of such personal property, to the
extent it was included in the Hotels will be based on appraisals. The
Company anticipates that any additional personal property that the Company
acquires with a portion of the proceeds of the Offering likewise will not
cause the Adjusted Basis Ratio under any
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Percentage Lease to exceed 15%. Further, in no event will the Company
acquire additional personal property for an Initial Hotel to the extent that
such acquisition would cause the Adjusted Basis Ratio for the hotel to exceed
15%. There can be no assurance, however, that the IRS would not assert that
the personal property originally acquired by AAG and Mission Bay had a value
in excess of the appraised value, or that a court would not uphold such
assertion. If such a challenge were successfully asserted, the Company would
fail the 15% Adjusted Basis Ratio 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 Hotels that are established in the Percentage
Leases, and the Company has represented that the percentages (i) will not be
renegotiated during the terms of the Percentage Leases in a manner that has
the effect of basing the Percentage Rent on income or profits and (ii)
conform with normal business practice, the Percentage Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company has represented that, with respect to other hotel
properties that it acquires in the future, it will not charge rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage of gross
revenues, as described above).
A third requirement for qualification of the Rents as "rents from real
Partnership" 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 stock of the Company is owned,
directly or indirectly, by or for any person, the Company is considered as
owning the stock owned, directly or indirectly, by or for such person. The
Company initially will not own, directly or constructively, stock of the
Lessee. Furthermore, the Company has represented that with respect to other
hotel properties 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 non-customary services
to the tenants of the Hotels, or manage or operate the Hotels, other than
through an independent contractor from whom the Company itself does not
derive or receive any income. Provided that the Percentage Leases are
respected as true leases, the Company should satisfy that requirement because
the Company is not performing any services other than customary ones for the
Lessee. Furthermore, the Company has represented that, with respect to other
hotel properties that it acquires in the future, it will not perform
non-customary services with respect to the tenant of the property. As
described above, however if the Percentage Leases are recharacterized as
service contracts or Company agreements, the Rents likely would be
disqualified as "rents from real property" because the Company would be
considered to furnish or render services to the occupants of the Hotels and
to manage or operate the Hotels other than through an independent contractor
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. Thus, if the Rents attributable to personal property,
plus any other non-qualifying income, during a taxable year exceeds 5% of the
Company's gross income during the year, the Company would lose its REIT
status. If, however, the Rents do not qualify as "rents from real property"
because either (i) the Percentage Rent is considered based on income or
profits of the Lessee, (ii) the Company owns, directly or constructively, 10%
or more of the Lessee, or (iii) the Company furnishes non-customary services
to the tenants of the Hotels, or manages or operates the Hotels, other than
through a qualifying independent contractor, none of the Rents would qualify
as "rents from real property." In that case, the Company likely would lose
its REIT
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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 Company
the Additional Charges. To the extent that the Additional Charges represent
either (i) reimbursements of amounts that the Lessee is obligated to pay to
third parties or (ii) penalties for nonpayment or late payment of such
amounts, the Additional Charges should qualify as "rents from real property."
To the extent, however, that the Additional Charges represent interest that
is accrued on the late payment of the Rents or the Additional Charges, the
Additional Charges should not qualify as "rents from real property," but
instead should be treated as interest that qualifies for the 95% gross income
test.
Based on the foregoing, Aylward 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 Aylward is
based upon an analysis of all the facts and circumstances and upon 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 tax opinion of Aylward, which is
attached as an Exhibit to this Prospectus. Opinions of counsel are not
binding upon the IRS or a court. Accordingly, there can be no complete
assurance that the IRS will not assert successfully a contrary position and,
therefore, prevent the Company from qualifying as a REIT.
The term "interest," as defined for purposes of the 75% gross income
test, generally does not include any amount received or accrued (directly or
indirectly) if the determination of such amount depends in whole or in part
on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "interest" solely by
reason of being based on a fixed percentage or percentages of receipts or
sales. Furthermore, to the extent that interest from a loan that is based on
the residual cash proceeds from sale of the property securing the loan
constitutes a "shared appreciation provision" (as defined in the Code),
income attributable to such participation feature will be treated as gain
from the sale of the secured property.
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. All inventory
required in the operation of the Hotels will be purchased by the Lessee or
its designee as required by the terms of the Percentage Leases. Accordingly,
the Company and the Lessee believe that no asset owned by the Company or the
Lessee is held for sale to customers and that a sale of any such asset will
not be in the ordinary course of business of the Company or the Lessee.
Whether property is held "primarily for sale to customers in the ordinary
course of a trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those related to the
particular property. Nevertheless, the Company and the Lessee 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 Lessee
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.
It is possible that, from time to time, the Company or the Lessee 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 Lessee 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 income or gain from the disposition of such contract should be
qualifying income for purposes of the 95% 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 Lessee
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
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intends to structure any hedging transactions in a manner that does not
jeopardize its status as 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 those relief
provisions. As discussed above in "-- Taxation of the Company," even if
those relief provisions apply, a tax would be imposed with respect to the net
income attributable to the excess of 75% or 95% of the Company's gross income
over its qualifying income in the relevant category, whichever is greater.
No such relief is available for violations of the 30% income test.
ASSETS 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 receivable), government securities, "real
estate assets," or, in cases where the Company raises new capital through
stock or long-term (at least five-year) debt offerings, temporary investments
in stock or debt instruments during the 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
requirement, the term "interest in real property" includes an interest in
land and improvements thereon, such as buildings or other inherently
permanent structures (including items that are structural components of such
buildings or structures), a leasehold in real property, and an option to
acquire real property (or a leasehold in real property). Second, of the
investments not included in the 75% asset class, the value of any other
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 the stock of a
subsidiary with respect to which it has held 100% of the stock at all times
during the subsidiary's existence).
For purposes of the asset requirements, the Company will be deemed to
own its proportionate share of the assets of any partnership of which it owns
an interest, rather than its general partnership interest in the Company.
The Company has represented that, as of the date of the Offering, (i) at
least 75% of the value of its total assets will be represented by real estate
assets, cash and cash items (including receivables), and government
securities and (ii) it will not own any securities that do not satisfy the
75% asset requirement (except for the stock of subsidiaries with respect to
which it has held 100% of the stock at all times during the subsidiary's
existence). In addition, the Company has represented that it will not
acquire or dispose, or cause the Company to acquire or dispose, of assets in
the future in a way that would cause it to violate either asset requirement.
Based on the foregoing, Aylward is of the opinion that the Company will
satisfy both asset requirements for REIT status.
If the Company should fail inadvertently to satisfy the asset
requirements 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 its standards imposed by 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 arouse 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 calendar
quarter in which it arose.
DISTRIBUTION REQUIREMENTS
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its Shareholders in an
amount at least equal to (i) the sum of (A) 95% of its "REIT taxable income"
(computed
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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
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
intends to make timely distributions sufficient to satisfy all annual
distribution requirements.
It is possible that, from time to time, the Company may experience
timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of that income and
deduction of such expenses in arriving at its REIT taxable income. For
example, under the Percentage Leases, the Lessee may defer payment of the
excess of the Percentage Rent over the Base Rent for a period of up to 90
days after the end of the calendar year in which such payment was due. In
that case, the Company 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 which exceeds its allocable share of cash
attributable to that sale. Therefore, the Company may have less cash
available for distribution than is necessary to meet its annual distribution
requirements 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 shares of common or preferred
stock.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to its Shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the IRS interest based upon the
amount of any deduction taken for deficiency dividends.
Pursuant to applicable Treasury regulations, in order to be able to
elect to be taxed as a REIT, the Company must maintain certain records and
request on an annual basis certain information from its Shareholders designed
to disclose the actual ownership of its outstanding stock. The Company
intends to comply with such requirements.
PARTNERSHIP ANTI-ABUSE RULE
The Treasury Department recently issued a proposed regulation (the
"Proposed Regulation") which would authorize the IRS, in the case of a
certain abusive transaction involving partnerships, to disregard the form of
the transaction and recast it for federal tax purposes as appropriate. The
Proposed Regulation would apply only where a partnership is formed or availed
of 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 that is inconsistent
with the intent of the tax provisions that govern the taxation of
partnerships and partners under the Code. The Proposed Regulation states that
such partnership tax provisions are intended to permit taxpayers to conduct
business for joint economic profit through a flexible arrangement that
accurately reflects the partners' economic agreement without incurring an
entity-level tax, but are not intended to permit taxpayers to (i) structure
transactions using partnerships to achieve tax results that are inconsistent
with the underlying economic arrangements of the parties or the substance of
the transactions, or to (ii) use the existence of the partnerships to avoid
the purposes of other provisions of the Code.
If the conditions of the Proposed Regulation are met, the IRS is
authorized to take appropriate remedial action, including disregarding the
partnership for federal tax purposes or treating one or more partners as
non-partners. The Proposed Regulation is proposed to be effective for all
transactions relating to a partnership occurring on or after May
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12, 1994. Subsequent to the issuance of the Proposed Regulation,
representatives of the IRS and the Treasury Department have stated publicly
that the Proposed Regulation is not intended to affect a corporation, such as
the Company, that is seeking to qualify as a REIT and whose Affiliates own an
interest in a partnership. Based on the foregoing, Aylward is of the opinion
that such Proposed Regulation, if it were to be issued as a final regulation
in its present form, would not adversely affect the Company's qualification
as a REIT.
DEPRECIATION
For tax purposes, the Company's hotel properties will generally be
depreciated on a straight line basis over 40 years and personal property
owned by the Company generally will be depreciated over nine years.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to
tax (including any applicable alternative minimum tax) on its taxable income
at regular corporate rates. Distributions to the Shareholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current
and accumulated earnings and profits, all distributions to Shareholders will
be taxable as ordinary income and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions,
the Company also will be disqualified from taxation as a REIT for the four
taxable years following the year during which the Company ceased to qualify
as a REIT. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. Shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by such U.S. Shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. Shareholder" means a holder of Common 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 Shareholder has held his Common Stock. However, corporate
Shareholders may be required to treat up to 20% of certain capital gains
dividends as ordinary income. Distributions in excess of current and
accumulated earnings and profits will not be taxable to a Shareholder to the
extent that they do not exceed the adjusted basis of the Shareholder's Common
Stock, but rather will reduce the adjusted basis of such stock. To the
extent that distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a Shareholder's Common Stock, such
distributions will be included in income as long-term capital gain (or
short-term capital gain if the Common Stock has been held for one year or
less) assuming the Common Stock is a capital asset in the hands of the
Shareholder. In addition, any distribution declared by the Company in
October, November, or December of any year and payable to a Shareholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the Shareholder on December 31 of such year,
provided that the distribution is actually paid by the Company during January
of the following calendar year.
Shareholders may not include in their individual income tax returns any
net operating losses or capital losses of the Company. Instead, such losses
would be carried over by the Company for potential offset against its future
income (subject to certain limitations). Taxable distribution from the
Company and gain from the disposition of the Common Stock will not be treated
as passive activity income and, therefore, Shareholders generally will not be
able to apply any "passive activity losses" (such as losses from certain
types of limited partnerships in which the Shareholder is a limited
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partner) against such income. In addition, taxable distributions from the
Company and gain from the disposition of Common Stock generally will be
treated as investment income for purposes of the investment interest
limitations. The Company will notify the Shareholders after the close of the
Company's taxable year as to the portions of the distributions attributable
to the year that constitute ordinary income, return of capital, and capital
gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a Shareholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the Common Stock has been held
for more than one year and otherwise as short-term capital gain or loss.
However, any loss upon a sale or exchange of Common Stock by a Shareholder
who has held such stock for six months or less (after applying certain
holding period rules), will be treated as a long-term capital loss to the
extent of distributions from the Company required to be treated by such
Shareholder as long-term capital gain. All or a portion of any loss realized
upon a taxable disposition of the Common Stock may be disallowed if other
shares of the Common Stock are purchased within 30 days before or after the
disposition.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. Shareholders and the IRS the amount
of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a Shareholder may be
subjected to backup withholding at the rate of 31% with respect to
distributions paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact,
or (ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with the applicable
requirements of the backup withholding rules. A Shareholder who does not
provide the Company with his correct taxpayer identification number also may
be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the Shareholder's income tax
liability. In addition, the Company may be required to withhold a portion of
capital gain distribution to any Shareholders who fail to certify their
non-foreign status to the Company. See "Federal Income Tax Considerations --
Taxation of Foreign Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject
to taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the IRS has issued a published
ruling that dividend distributions by a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee
pension trust. Based on that ruling and on the intention of the Company to
invest its assets in a manner that will avoid the recognition of UBTI by the
Company, amounts distributed by the Company to Exempt Organizations generally
should not constitute UBTI. However, if an Exempt Organization finances its
acquisition of 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 benefits associations,
supplemental unemployment benefit trust, 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, for taxable years beginning on or after
January 1, 1994, a pension trust that owns more than 10% of the Company is
required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage") in certain circumstances. 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
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Company's stock or (B) a group of pension trusts individually holding more
than 10% of the value of the Company's stock collectively own more than 50%
of the value of the Company's stock.
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 gross UBTI that does arise from such an
investment will be combined with all other gross UBTI of the Exempt
Organization for a taxable year and reduced by all deductions attributable to
the UBTI plus $1,000. Any amount then remaining will constitute UBTI on which
the Exempt Organization 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 an 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. Generally, IRS Form 990-T must be filed with the IRS by
April 15 of the year following the year to which it relates.
CAPITAL GAIN 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 Omnibus Budget Reconciliation Act of 1993
increased the highest marginal individual income tax rate to 39.6%, but
generally did not change the tax rate on net capital gains applicable to
individuals. 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.
TAXATION OF FOREIGN SHAREHOLDERS
UNITED STATES TAXATION RULES
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no
attempt will be made herein to provide more than a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS
TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH
REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and
are not designated by the Company as capital gains dividends 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. Shareholder's
conduct of a U.S. trade or business, the Non-U.S. Shareholder generally will
be subject to federal income tax at graduated rates, in the same manner as
U.S. Shareholders are taxed with respect to such distributions (and also may
be subject to the 30% branch profits tax in the case of a Non-U.S.
Shareholder that is a foreign corporation). The Company expects to withhold
U.S. income tax at the rate of 30% of the gross amount of any such
distributions made to a Non-U.S. Shareholder unless (i) a lower treaty rate
applies and any required form evidencing eligibility for that reduced rate is
filed with the Company or (ii) the Non-U.S. Shareholder files an IRS Form
4224 with the Company claiming that the distribution is effectively connected
income. Distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a Shareholder to the extent
that such distributions do not exceed the adjusted basis of the Shareholder's
Common Stock, but rather will reduce the adjusted basis of such stock. To
the extent that distributions in excess of
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current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Shareholder's Common Stock, such distributions will give rise to tax
liability if the Non-U.S. Shareholder would otherwise be subject to tax on
any gain from the sale or disposition of his 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. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
U.S. real property interests are taxed to a Non-U.S. Shareholder as if such
gain were effectively connected with a U.S. business. Non-U.S. Shareholders
thus would be taxed at the normal capital gain rates applicable to U.S.
Shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions also may be subject to a 30% branch profits tax in the hands of
a foreign corporate Shareholder not entitled to treaty relief or exemption.
The Company is required by currently applicable Treasury Regulations to
withhold 34% of any distribution that is designated by the Company as a
capital gains dividend. However, because of Omnibus Budget Reconciliation
Act of 1993 provides for an increase in the rate of withholding for
distributions made by certain domestic partnerships, trust, and estates to
35%, the Treasury Regulations could be amended to impose a similar
withholding rate on REIT capital gain dividends. The amount withheld is
creditable against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his Common
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. Shareholder if (i) investment in the Common Stock is effectively
connected with the Non-U.S. Shareholder's U.S. trade or business, in which
case the Non-U.S. Shareholder will be subject to the same treatment as U.S.
Shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is a
nonresident alien individual who was present in the United States for 183
days or more during the taxable and certain other conditions apply, in which
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of the Common Stock were
to be subject to taxation under FIRPTA, the Non-U.S. Shareholder will be
subject to the same treatment as U.S. Shareholders with respect to such gain
(subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals). IN ADDITION,
NON-U.S. SHAREHOLDERS 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 and its Shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of
the Company and its Shareholders may not conform to the federal income tax
consequences discussed above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX
LAWS ON AN INVESTMENT IN THE COMPANY.
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SALE OF THE COMPANY'S PROPERTY
Generally, any gain realized by the Company on the sale of property by
the Company 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. However, as indicated above, a sale by the Company of
any of the Hotels will also generate the "built-in gain" inherent in the
Initial Hotels as of January 1, 1995, and in the Acquisition Hotel at the
date of the Company's acquisition of the Acquisition Hotel. The Board of
Directors has adopted a policy that any decision to sell the Hotels will be
made by a majority of the Independent Directors. See "Risk Factors --
Conflicts of Interest."
The Company's share of any gain realized by the Company on the sale of
any property held by the Company as inventory or other property held
primarily for sale to customers in the ordinary course of the Company's trade
or business, however, will be treated as income from a prohibited transaction
that is subject to a 100% penalty tax. Such prohibited transaction income
also may have an adverse effect upon the Company's ability to satisfy the
income test for REIT status. See "Federal Income Tax Considerations --
Requirements for Qualification -- Income Tests."
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UNDERWRITING
The Company will not use an underwriter with respect to the issuance of
shares of its Class A Common Stock to Mission Bay. However, the Company has
entered into an Underwriting Agreement with respect to the issuance and sale
of the 500,000 shares of its Class A Common Stock in the Public Offering.
The Underwriting Agreement (between the Company and La Jolla Securities
Corporation) provides for an "all or none" underwriting. Thus, if all
500,000 shares are not sold for $10.00 per share (for a gross consideration
of $5 million), the Public Offering will not occur. The Underwriter has
conditioned the closing of the underwritten Public Offering upon the prior
receipt of an opinion from the Company's counsel stating that the Mission Bay
Acquisition will be statutorily exempt from the Federal Roll-Up Rules. In
order to fall within this statutory exemption, limited partners holding at
least 67% of the limited partner interests of Mission Bay must approve of the
Mission Bay Acquisition. The Underwriter has also conditioned the closing of
the Public Offering upon the receipt by the Company of a when issued listing
for its shares of Class A Common Stock on either the American Stock Exchange
or the NASDAQ National Market.
Prior to this Offering, there has been no public market for the
Company's Common Stock. The initial Exchange Value of the Common Stock being
offered in the Formation Transactions will be $10 per share. Once the shares
are listed and traded on either the AMEX or the NASDAQ National Market, the
value of the Common Stock will be established by a market mechanism. Since
this traded value could be lower (or possibly higher) than the Exchange
Value, the value of the Common Stock after trading commences most likely
would be different than the Exchange Value. The factors which will underlie
this traded value, in addition to prevailing market conditions, will be cash
distribution yields and certain financial characteristics of publicly traded
REITs that are comparable to the Company, the expected results of operations
of the Company (which are based on the results of operations of the Hotels in
recent periods), the current state of the hotel industry and an assessment of
the Company's management.
The Company has applied for a listing of its shares of Class A Common
Stock on the AMEX. While the Company expects this AMEX listing to occur, if
for any reason the shares of Class A Common Stock are not listed on the AMEX,
the shares of Class A Common Stock will be listed on the NASDAQ. If the
shares of Class A Common Stock are not approved for listing on either the
AMEX or the NASDAQ National Market, the Mission Bay Acquisition will not
close. Notwithstanding the listing of the Company's Class A Common Stock on
the AMEX or the NASDAQ, there can be no assurance that an active public
market for the Common Stock will develop and continue after the Offering.
Should the Company be successful with the completion of the Public
Offering, the Underwriter will be issued a warrant to purchase a minimum of
50,000 and a maximum of 75,000 shares of Common Stock at a price of $13.00
per share, which warrant is exercisable over a five year term from the date
of issuance.
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EXPERTS
The Financial Statements of the Initial Hotels as of December 31, 1994
and 1993 and for the years ended December 31, 1994, 1993, and 1992 included
in this Statement have been audited by William H. Ling, Certified Public
Accountant, San Diego, California, an independent accountant, as set forth in
his reports thereon included elsewhere herein and in the Registration
Prospectus. Such Financial Statements are included in reliance upon such
reports given on his authority as an expert in accounting and auditing. The
Balance Sheet of Host Funding, Inc. as of April 1, 1995 included in this
Statement has been audited by William H. Ling, Certified Public Accountant,
San Diego, California, an independent accountant, as set forth in his reports
thereon included elsewhere herein and in the Registration Prospectus. Such
Balance Sheet is included in reliance upon such reports given on his
authority as an expert in accounting and auditing.
The Financial Statements of Mission Bay as of December 31, 1994, 1993,
and 1992 and for the years ended December 31, 1994, 1993, and 1992 included
in this Statement have been audited by Levitz, Zacks & Ciceric, Certified
Public Accountants, San Diego, California, independent accountants, as set
forth in their reports thereon included elsewhere herein and in the
Registration Prospectus. Such Financial Statements are included in reliance
upon such reports given on their authority as an expert in accounting and
auditing.
The results of the appraisals of the Hotels by Arthur Andersen LLP are
included herein on the authority of said firm as an expert in valuations and
appraisals of hotel properties.
REPORTS TO SHAREHOLDERS
The Company intends to furnish its Shareholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three
quarters of each fiscal year.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by attorney Peter G. Aylward, San Diego, California. In
that connection, Mr. Aylward is relying upon an opinion of Ballard Spahr
Andrews & Ingersoll of Baltimore, Maryland as to certain matters of Maryland
law. 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 attorney Peter G. Aylward, San
Diego, California.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-4
under the Securities Act with respect to the securities offered hereby as
well as a Form S-11 with respect to the securities issued in the Public
Offering. 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. Descriptions and
summaries 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 Common Stock offered
hereby, reference is hereby made to the Registration Statements and such
exhibits and schedules. The Registration Statements described above 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. 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
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus.
"AAG" means All American Group, Ltd. a Delaware limited partnership.
"AAG AFFILIATES" means Guy and Dorothy Hatfield and their respective
Affiliates.
"AAG PARTNERS" means the partners of AAG who have received Common Stock
of the Company upon the consummation of the Contribution and Assumption
Agreement.
"ACQUISITION CO." means Host Acquisition Group, LLC, a Delaware limited
liability company.
"ACQUISITION HOTEL" means the Super 8 hotel located in San Diego,
California which the Company will acquire from Mission Bay Super 8, Ltd., a
California limited partnership, pursuant to the Mission Bay Acquisition.
"ADDITIONAL CHARGES" means certain other amounts, including interest
accrued on any late payments or charges, due under the Percentage Leases.
"ADJUSTED APPRAISED VALUE" means the appraised value of Mission Bay
determined by Arthur Andersen, LLP as adjusted for outstanding indebtedness,
security deposits, prepayment penalties and selling costs.
"ADVISOR" means Host Funding Advisors, Inc., a Delaware corporation.
"ADVISORY AGREEMENT" means an Advisory Agreement between the Company and
the Advisor pursuant to which the Advisor will provide management and
investment services to the Company.
"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 stock, shares or equity interests of
such person, or (iii) any officer, director, employee, partner or trustee of
such person or any person controlling, controlled by or under common control
with such person (excluding trustees and persons serving in similar
capacities who are not otherwise an Affiliate of such person). The term
"person" means and includes individuals, corporations, general and limited
partnerships, stock companies or associations, joint ventures, associations,
companies, trusts, banks trust companies, land trusts, business trusts, or
other entities and governments and agencies and political subdivisions
thereof. For the purposes of this definition, "control" (including the
correlative meanings of the terms "controlled by" and "under common control
with"), as used with respect to any person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such person, through the ownership of voting
securities, partnership interests or other equity interests.
"AMEX" means the American Stock Exchange.
"APPLICATION" means the Applications for Qualification of Securities, as
amended (of which this Prospectus/Consent Solicitation is a part) under the
California Corporate Securities Law of 1968, with respect to the shares of
Class A Common Stock to be issued in the Mission Bay Acquisition and shares
of Class A Common Stock which are issuable in exchange for Limited
Partnership Interests. See "Description of Shares - Exchange of Shares.
"APPRAISER" means Arthur Andersen, LLP, an independent real estate
appraiser.
"BASE RENT" means the fixed obligation of the Lessee to pay a sum
certain in monthly rent under each of the Percentage Leases.
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"BOARD OF DIRECTORS" means the Board of Directors of the Company, as
constituted from time to time.
"BYLAWS" means the Bylaws of the Company, as in effect from time to
time, including the proposed Restated Bylaws to be effective prior to the
consummation of the Mission Bay Acquisition.
"CAPITAL EXPENDITURE RESERVE ACCOUNT" means the reserve account in which
the Lessee must make quarterly deposits of an amount equal to a minimum of
$125 per room per quarter (increased by an inflation factor for future years)
to fund replacements of furniture, fixtures and equipment in the Hotels which
replacements must be generally approved by the Company.
"CASH AVAILABLE FOR DISTRIBUTION" means the pro forma net income
increased by amortization and depreciation and decreased by estimated
non-development related capital expenditures and estimated debt repayments
plus adjustments for certain known events occurring after December 31, 1994
that are not reflected in the pro forma results of operations. Cash
available for distribution should not be considered as an alternative to net
income (determined in accordance with generally accepted accounting
principles) as an indication of performance or to cash flow from operating
activities as a measure of liquidity, nor is it necessarily indicative of
sufficient cash flow to fund all the Company's needs.
"CHARTER" means the Articles of Incorporation of the Company, together
with the proposed Articles of Amendment and Restatement to be effective prior
to the consummation of the Mission Bay Acquisition.
"CLASS A COMMON STOCK" means the Company's shares of Class A Common
Stock, $.01 par value.
"CLASS B COMMON STOCK" means the Company's shares of Class B Common
Stock, $.01 par value.
"CLASS C COMMON STOCK" means the Company's shares of Class C Common
Stock, $.01 par value.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Common Stock of the Company, par value, $.01
per share, including the shares of Class A Common Stock, Class B Common
Stock, and Class C Common Stock.
"COMPANY" means Host Funding, Inc., a Maryland corporation.
"CONSENT FORM" means the Transmittal Letter, the Partner Consent, the
Statement of Election and the Power of Attorney, which, together with the
Prospectus/Consent Solicitation Statement and partner information schedule
constitute the Solicitation Materials. A form of Consent Form is attached
hereto as Appendix A.
"CONTRIBUTION AND ASSUMPTION AGREEMENT" means the agreement entered into
by and between AAG and the Company effective as of April 1, 1995, whereby the
Company acquired the Initial Hotels and the Hatfield Note from AAG in
exchange for 100 Initial Shares of Common Stock in the Company.
"CPI" means the United States Consumer Price Index.
"CROSSROADS PARENT" means Crossroads Hospitality Company, LLC, a
Delaware limited liability company, which owns 75% of the voting interests
in the Lessee and a 99% interest in the profits, losses, and distributions of
the Lessee.
"DEPARTMENT" means the California Department of Corporations.
"DIRECTORS" means the members of the Company's Board of Directors.
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"DISINTERESTED DIRECTORS" means, with respect to any transaction
proposed between the Company and another party (the "Contracting Party"),
those directors who:
(a) do not serve as directors, officers, partners or trustees of, or in
any similar capacity of control with respect to, the Contracting Party;
(b) do not own, directly or indirectly, have a beneficial interest in,
or have the right to vote, any of the equity and/or debt security of the
Contracting Party; provided, however, that the ownership, control or interest
in less than 1% of the outstanding debt and/or equity securities of the
Contracting Party shall not cause a director to lose his status as a
Disinterested Director is the Contracting Party is a public company and the
director's interest is disclosed to the Board of Directors before any action
is taken with respect to the proposed transaction;
(c) are not otherwise affiliated with the Contracting Party; and
(d) have not received, and have no expectations or understanding with
respect to the future receipt of compensation, fees, remuneration,
commissions or other financial gain from the Contracting Party with respect
to the proposed transaction or as to any other transaction if such financial
gain is or could be construed as a reciprocal business arrangement.
"DISSENTING PARTNER" means a Mission Bay limited partner who casts a
vote against the Mission Bay Acquisition (and Mission Bay ultimately approves
and closes said Mission Bay Acquisition), and elects to receive cash in lieu
of shares of Class A Common Stock in accordance with "Voting
Procedures--Dissenters' Rights."
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCESS STOCK" means Common Stock owned directly or indirectly by a
person in excess of the 9.9% Ownership Limit as set forth in the Company's
Articles of Incorporation, with such Excess Stock being transferred by
operation of law to the Company as trustee for the exclusive benefit of the
transferee of the original holder of said excess shares; and while held in
trust, the shares of Excess Stock will not be entitled to vote or share in
any dividends.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and applicable regulations thereunder.
"EXCHANGE VALUE" means the constant dollar value of $10 per share based
on which the Company will issue its Common Stock in the Formation
Transactions.
"EXEMPT ORGANIZATIONS" means tax-exempt entities, including qualified
employee pension and profit sharing trusts and individual retirement accounts.
"FINANCIAL ASSET ACQUISITION AGREEMENT" means the agreement entered into
by and between AAG and the Lessee effective as of January 1, 1995, whereby
the Lessee acquired the financial assets of the Initial Hotels from AAG in
exchange for the Lessee's assumption of liabilities and transfer of a
promissory note to AAG in the amount of $60,135.
"FINANCING AGREEMENT" means the agreement entered into by and between
the Hatfield Affiliates and the Company effective April 1, 1995 whereby the
Hatfield Affiliates promised to maintain real property security for the
Hatfield Note.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980,
as amended.
"FORMATION TRANSACTIONS" means the principal transactions in connection
with the formation of the Company as a REIT, the Mission Bay Acquisition
(including the Mission Bay Offering in connection therewith), and the Public
Offering of shares of Common Stock of the Company for cash.
133
<PAGE>
"GOVERNING DOCUMENTS" means the Charter and Bylaws of the Company.
"GUARANTEE" means the personal guarantee delivered to the Company by Guy
and Dorothy Hatfield as security for the Hatfield Note pursuant to the
amendment to the Financing Agreement effective September 30, 1995.
"HATFIELD AFFILIATES" means (i) any person that, directly or indirectly,
controls or is controlled by or is under common control with Guy E. Hatfield
or his Affiliates, (ii) any other person that owns, beneficially, directly or
indirectly, five percent (5%) or more of the outstanding capital stock,
shares or equity interests of any person in which Guy E. Hatfield owns
capital stock, shares or equity interests, (iii) any officer, director,
employee, partner or trustee of any entity in which Guy E. Hatfield controls
or is under common control with Guy E. Hatfield (excluding trustees and
persons serving in similar capacities who are not otherwise an Affiliate of
Guy E. Hatfield), or (iv) any and all of the immediate family members of Guy
E. Hatfield. The term "person" means and includes individuals, corporations,
general and limited partnerships, stock companies or associations, joint
ventures, associations, companies, trusts, banks trust companies, land
trusts, business trusts, or other entities and governments and agencies and
political subdivisions thereof. For the purposes of this definition,
"control" (including the correlative meanings of the terms "controlled by"
and "under common control with"), as used with respect to any person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of any entity in which Guy E.
Hatfield or his Affiliates own , through the ownership of voting securities,
partnership interests or other equity interests.
"HATFIELD AFFILIATES' Contribution Gain" means the difference of
$9,012,000 between the book value of the net assets contributed by AAG to the
Company pursuant to the Contribution and Assumption Agreement and the fair
value of the Initial Shares received by the Hatfield Affiliates.
"HATFIELD NOTE" means the secured promissory note for the amount of
$1,805,675 of Guy Hatfield and certain of his Affiliates to AAG which was
assigned by AAG to the Company as part of the Contribution and Assumption
Agreement.
"HOTELS" means collectively the (i) four Initial Hotels, and (ii) the
Acquisition Hotel.
"IHCM" means IHC Member Corporation, a Delaware corporation, that owns
25% of the voting interests in the Lessee and a 1% interest in the profits,
losses, and distributions of the Lessee. IHCM also owns 25% of the voting
interests and a 1% interest in the profits, losses, and distributions in
Crossroads Parent.
"IMPOSITIONS" means, other than the property taxes on the Hotels (the
Company will pay such property taxes), all taxes, assessments, ground rents,
water, sewer or other rents and charges, excises, tax inspection,
authorization or similar fees and all other governmental charges.
"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.
"INFORMATION AGENT" means the Company or such other person or persons
that have been engaged by the Company to solicit and/or tabulate Partner
Consents from the Partners and to perform certain consulting, administrative
and clerical work in connection with the Mission Bay Acquisition.
"INITIAL HOTELS" means the four hotel properties acquired by the Company
from AAG pursuant to the Contribution and Assumption Agreement; specifically
the Poplar Bluff Super 8 located in Poplar Bluff, Missouri, the Rock Falls
Super 8 located in Rock Falls, Illinois, the Miner Super 8 located in Miner,
Missouri, and the Somerset Super 8 located in Somerset, Kentucky.
134
<PAGE>
"INITIAL SHARES" means the 100 shares of the Company's Common Stock
presently held by the Hatfield Affiliates.
"IRS" means the Internal Revenue Service.
"INTERSTATE" means Interstate Hotels Corporation, a Pennsylvania
corporation, which owns 75% of the voting interests and a 99% interest in the
profits, losses, and distributions of the Lessee.
"LESSEE" means Crossroads Hospitality Tenant Company, LLC, a Delaware
limited liability company which will lease the Hotels from the Company
pursuant to the Percentage Leases.
"LIMITED PARTNERS" means the all of the limited partners of Mission Bay
Super 8, Ltd, sometimes referred to as the Mission Bay Limited Partners.
"MASTER AGREEMENT" means the agreement which will be entered into by and
between (i) the Company, (ii) the Lessee, and (iii) Crossroads Parent,
whereby the Lessee is required to, and Crossroads Parent guaranties that the
Lessee will, subject to certain terms and conditions, maintain certain net
worths during the first five years of the Percentage Leases.
"MGCL" means the General Corporation Law of Maryland.
"MISSION BAY" means Mission Bay Super 8 Ltd., a California limited
partnership, sometimes referred to as the "Partnership".
"MISSION BAY ACQUISITION AGREEMENT" means the asset acquisition
agreement by and between Mission Bay and the Company upon the consummation of
which the Company will acquire the assets of Mission Bay (i.e., the
Acquisition Hotel) in exchange for shares of Common Stock of the Company and
after which the shares of Common Stock of the Company will be distributed to
the Limited Partners of Mission Bay in a final liquidating distribution of
Mission Bay.
"MISSION BAY OFFERING" means the stock offering made by the Company in
connection with this Prospectus/Consent Solicitation Statement in which the
Company will issue 277,487 shares of Class A Common Stock in the Company
(assuming 1.25% Dissenting Partners) to the Mission Bay Limited Partners in
exchange for the Acquisition Hotel.
"NAREIT" means National Association of Real Estate Investment Trusts.
"NON-COMPETITION AGREEMENT" means the agreement entered into by and
between the Company, on one hand, and Guy and Dorothy Hatfield, on the other,
dated September , 1995, whereby Mr. Hatfield has agreed, except for the
Hatfield Inn located in Sikeston, Missouri, not to develop, own, operate or
manage any hotel properties within a five (5) mile radius of any hotel
property owned by the Company.
"NONQUALIFYING INCOME" means income not described in Section 856(c)(2)
of the Code, or any successor provisions.
"NON-U.S. SHAREHOLDERS" means nonresident alien individuals, foreign
corporations, foreign partnership and foreign trusts and estates.
"OFFERING" means the Mission Bay Offering, the offerings of shares of
Common Stock to the purchasers in the Public Offering, as well as the
issuance of the Class A Common Stock, Class B Common Stock, and Class C
Common Stock to the Hatfield Affiliates in exchange for the Initial Shares in
the Formation Transactions.
"OWNERSHIP LIMITATION" means the direct or constructive ownership by any
stockholder or group of affiliated stockholders of more than 9.9% of the
outstanding shares of Class A Common Stock.
135
<PAGE>
"OWNERSHIP LIMITATION PROVISION" means a provision of the Articles of
Incorporation restricting the ownership of share of Common Stock to the
Ownership Limitation.
"PARTICIPATING PARTNER" means a Partner of Mission Bay who participates
in the Mission Bay Acquisition and who is not a Dissenting Partner.
"PARTNERS" means the general partners and the limited partners of
Mission Bay and reference to a "Partner" shall be to any one of the Partners.
"PARTNERSHIP AGREEMENT" means the partnership agreement of Mission Bay
as amended and restated.
"PERCENTAGE LEASES" means the operating leases between the Lessee and
the Company pursuant to which the Lessee will leases the Hotels from the
Company and which the Lessee will lease the Acquisition Hotel from the
Company.
"PERCENTAGE RENT" means rent based on percentages of revenue payable by
the Lessee pursuant to the Percentage Leases.
"POST-FORMATION ACQUISITION AGREEMENT" means the agreement which the
Company and the Acquisition Co. will enter into upon the closing of the
Offering whereby the Acquisition Co. will acquire additional hotel properties
on behalf of the Company and subject to the investment criteria of the
Company in exchange for a 6% placement fee.
"PREFERRED STOCK" means the preferred stock, par value $.01 per share,
of the Company.
"PRO FORMA DISTRIBUTION" means the pro forma distribution rate the
Company has established of $0.895 per share for 1996.
"PROSPECTUS/CONSENT SOLICITATION STATEMENT" means this
Prospectus/Consent Solicitation Statement of the Company, as it may be
further supplemented or amended from time to time.
"PUBLIC OFFERING" means the offering of shares of Common Stock by the
Company with a minimum required gross cash offering proceeds of $5,000,000.
"QUALIFIED PLANS" means qualified pension, profit-sharing and other
employee retirement benefit plans (including Keogh plans) and trusts, bank
commingled trust funds for such plans and individual retirement accounts.
"QUALIFYING DISTRIBUTIONS" means distributions made by the Company
attributable to any calendar year to the extent they do not exceed 100% of
REIT Taxable Income for such year.
"REIT" means a real estate investment trust as defined in Section 856 of
the Code or any successor provisions.
"REIT QUALIFYING INCOME" means income described in Section 856(c)(3) of
the Code, or any successor provision.
"REIT QUALIFYING INVESTMENT" means an investment in assets described in
Section 856(c)(5) of the Code, or any successor provision.
"REIT TAXABLE INCOME" means "real estate investment trust taxable
income" as computed under Section 857 of the Code.
"RENTS" mean the Base Rent and the Percentage Rent, collectively.
"REVPAR" means revenue per available room.
136
<PAGE>
"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.
"SEC" means the United State Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and
applicable regulations thereunder.
"SHAREHOLDERS" mean the holders of the Company's Common Stock.
"SOLICITATION MATERIALS" means the Prospectus/Consent Solicitation
Statement together with the Consent Form and any other materials approved for
use in the solicitation, which will be used by the Company to solicit the
votes of the Partners to the Mission Bay Acquisition.
"SOLICITATION PERIOD" means the period during which the Mission Bay
Partners may vote "for" or "against" the Mission Bay Acquisition which
commences upon the delivery of the Prospectus to the Mission Bay Limited
Partners (on or about , 1995) and will continue until the later of thirty
(30) calendar days after the initial delivery of the Prospectus or such later
date as may be selected by the Company and as to which notice is given to the
Partner.
"TREASURY REGULATIONS" means the United States Treasury Regulations
promulgated under the Code, as such Treasury Regulations may be amended from
time to time (including corresponding provisions of succeeding regulations)
whether in final, temporary or proposed form.
"UBTI" means unrelated business taxable income under the Code.
"UNDERWRITER" means La Jolla Securities Corporation, a California
corporation.
"UNDERWRITING AGREEMENT" means the agreement entered into by and between
the Company and the Underwriter dated August 22, 1995, as amended, whereby
the Company has retained the Underwriter to conduct an "all or none"
underwriting for the 500,000 shares of Class A Common Stock to be issued in
the Public Offering.
"VOTING STOCK" means, at any time, all of the then outstanding stock of
the Company entitled to vote generally in the election of Directors.
137
<PAGE>
INDEX TO FINANCIAL STATEMENTS
I. HOST FUNDING, INC. FINANCIAL STATEMENTS
Introduction to Estimated Pro Forma Financial Statements. . . . . . . .F-3
Unaudited Estimated Pro Forma Balance Sheet as of September 30, 1995. .F-4
Unaudited Estimated Pro Forma Statement of Income for the year ended
December 31, 1994, the twelve months ended September 30,
1995 and the nine months ended September 30, 1995 and
September 30, 1994. . . . . . . . . . . . . . . . . . . .F-5 - F-8
Notes to Unaudited Estimated Pro Forma Financial Statements. . . F-9 - F-12
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . . . .F-14
Balance Sheet as of April 1, 1995 and September 30, 1995 (unaudited). .F-15
Statement of Income for the nine months ended September 30, 1995
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Cash Flows for the nine months ended September 30, 1995
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . .F-17
Notes to Financial Statements . . . . . . . . . . . . . . . . . F-18 - F-24
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . F-25
Schedule III -- Real Estate and Accumulated Depreciation . . . . . . . F-26
II. CROSSROADS HOSPITALITY TENANT COMPANY, LLC
Introduction to Estimated Pro Forma Financial Statements. . . . . . . .F-27
Unaudited Estimated Pro Forma Balance Sheet as of September 30, 1995. .F-28
Unaudited Estimated Pro Forma Statement of Operations for the year
ended December 31, 1994, the twelve months ended
September 30, 1995 and the nine months ended September 30,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . .F-29 - F-32
Notes to Unaudited Estimated Pro Forma Financial Statements . . F-33 - F-35
III. INITIAL HOTELS FINANCIAL STATEMENTS
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . . . .F-37
Statements of Assets, Liabilities and Net Investment and
Advances as of December 31, 1994 and
December 31, 1993. . . . . . . . . . . . . . . . . . . .F-38 - F-44
Combined Statements of Revenues and Expenses Excluding Income Taxes
for the calendar years ended December 31, 1994, 1993 and
1992 and the nine months ended September 30, 1994
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . .F-39
Statements of Cash Flows for the calendar years ended
December 31, 1994, 1993, and 1992 the nine months ended
September 30, 1994 (unaudited). . . . . . . . . . . . . . . . .F-40
Notes to Combined Financial Statements. . . . . . . . . . . . . F-41 - F-47
IV. INN FUND, LLC FINANCIAL STATEMENTS (UNAUDITED)
Unaudited Balance Sheet as of September 30, 1995 . . . . . . . . . . . F-48
Unaudited Statements of Operations for the nine months ended
September 30, 1995 . . . . . . . . . . . . . . . . . . . . . .F-49
Unaudited Statement of Cash Flows for the nine months ended
September 30, 1995 . . . . . . . . . . . . . . . . . . . . . .F-50
Notes to Unaudited Financial Statements . . . . . . . . . . . . F-51 - F-53
F-1
<PAGE>
V. MISSION BAY SUPER 8, LTD.
(A) Mission Bay's Financial Statements for the fiscal years ended December
31, 1993 and 1994 (included in Mission Bay's previously filed Form 10-K (SB) for
the fiscal year ended December 31, 1994).
Independent Auditor's Report on Financial Statements. . . . . . . . . .F-54
Balance Sheet as of December 31, 1994 and 1993 . . . . . . . . .F-55 - F-56
Statements of Operations Years Ended December 31, 1994,
and 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . .F-57
Statements of Partners' Capital Years Ended December 31, 1994,
and 1993. . . . . . . . . . . . . . . . . . . . . . . . F-58 - F-59
Statements of Cash Flows Years Ended December 31, 1994,
and 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . .F-60
Notes to Financial Statements Years Ended December 31, 1994,
1993. . . . . . . . . . . . . . . . . . . . . . . . . . F-61 - F-64
(B) Mission Bay's Financial Statements for the fiscal years ended December
31, 1992 and 1993 (included in Mission Bay's previously filed Form 10-K (SB) for
the fiscal year ended December 31, 1993).
Independent Auditor's Report on Financial Statements. . . . . . . . . .F-65
Balance Sheet as of December 31, 1993 and 1992. . . . . . . . . . . . .F-66
Statements of Operations Years Ended December 31, 1993, and
1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-67
Statements of Partners' Capital Years Ended December 31,
1993, and 1992. . . . . . . . . . . . . . . . . . . . . . . . .F-68
Statements of Cash Flows Years Ended December 31, 1993,
and 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . .F-69
Notes to Financial Statements Years Ended December 31, 1993,
1992. . . . . . . . . . . . . . . . . . . . . . . . . . F-70 - F-72
(C) Mission Bay's Form-10Q (SB) for the quarter ended
September 30, 1995 (including third quarter, unaudited
financial information for Mission Bay) . . . . . . . . . . F-73 - F-85
F-2
<PAGE>
HOST FUNDING, INC.
UNAUDITED ESTIMATED PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1995
AND UNAUDITED ESTIMATED PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
THE TWELVE MONTHS ENDED SEPTEMBER 30, 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995
The following unaudited estimated pro form balance sheet gives effect to:
(i) the completion of the Stock Offering; (ii) the acquisition of the Initial
Hotels; (iii) the acquisition of Mission Bay; (iv) the commencement of the
New Leases; and (v) certain other transactions described in the notes hereto
as though such transactions described in the notes hereto as though such
transactions occurred on September 30, 1995.
The following unaudited estimated pro forma statements of income give
effect to: (i) the completion of the Stock Offering: (ii) the acquisition of
the four Initial Hotels; (iii) the acquisition of Mission Bay; (vi) the
commencement of the New Leases with Crossroads; and (v) certain other
transactions described in the notes hereto as though such transactions
occurred at January 1, 1994.
The estimated pro forma information is based in part upon the historical
statements of income or operations and historical balance sheet of the
Company, the Initial Hotels, and Mission Bay. Such information should be
read in conjunction with all of the financial statements and notes thereto
included in this Prospectus. In the opinion of management, all adjustments
necessary to reflect the effects of the transactions discussed above have
been reflected in the estimated pro forma data.
The following unaudited estimated pro forma data is not necessarily
indicative of what the actual financial position or results of operations for
the Company would have been as of the date or for the period indicated, or
does it purport to represent the financial position or results of operations
for the Company for future periods.
F-3
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
As of September 30, 1995
---------------------------------------------------
Pro Forma
Historical (A) Adjustments Pro Forma
-------------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Land, Property and equipment, net $ 2,672,368 $ 2,810,000 (B) $ 5,482,368
Rent Receivable 408,088 408,088
Interest Receivable 90,532 90,532
Loan commitment fees, net 23,624 (8,624)(C) 15,000
Cash -- 245,870 (D) 245,870
----------- -----------
Total $ 3,194,612 $ 6,241,858
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Long-term debt $ 4,266,272 $(3,804,000)(E) $ 462,272
Deferred income taxes 166,000 (166,000)(F) 0
Accrued interest payable 71,085 71,085
Accounts payable -- related parties 360,000 360,000
Accounts payable -- stock issuance costs 400,000 (400,000)(G) 0
Income taxes payable 10,718 10,718
----------- -----------
Total liabilities 5,274,075 904,075
----------- -----------
Shareholders' Equity (Deficit)
Class A Common Stock, $.01 par value;
authorized 50,000,000 shares; issued
and outstanding 1,221,000 shares. 1 12,209 (H) 12,210
Class B Common Stock, $.01 par value;
authorized 4,000,000 shares; issued
and outstanding 140,000 shares. -- 1,400 (I) 1,400
Class C Common Stock, $.01 par value;
authorized 1,000,000 shares; issued
and outstanding 140,000 shares. -- 1,400 (J) 1,400
Additional paid in capital -- 7,419,953 (K) 7,419,953
Accumulated deficit (273,789) 282,319 (L) (8,530)
Less: Mortgage note receivable --
related parties (1,805,675) (1,805,675)
Less: Share purchase notes -- (300,000)(M) (300,000)
----------- -----------
Total shareholders' equity (deficit) (2,079,463) 5,337,783
----------- -----------
Total $ 3,194,612 $ 6,241,858
============ ===========
</TABLE>
See notes to estimated pro forma financial statements.
F-4
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Year Ended December 31,1994
---------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Revenues:
Base rent $ -- $1,029,800 $1,029,800
Percentage rent -- 174,207 174,207
---------- ---------- ----------
Total rental income 1,204,007(N) 1,204,007
Interest income -- 237,681(N) 237,681
---------- ---------- ----------
Total revenues -- 1,441,688 1,441,688
---------- ---------- ----------
Expenses:
Interest -- 40,585(O) 40,585
Property taxes -- 113,734(P) 113,734
Depreciation and amortization -- 183,778(Q) 183,778
Advisory fees -- 30,000(R) 30,000
General and administrative -- 150,000(S) 150,000
Amortization of share purchase plan costs -- 54,000(T) 54,000
Provision for income taxes -- -- (U) --
---------- ---------- ----------
Total expenses -- 572,097 572,097
---------- ---------- ----------
Estimated Net income $ -- $ 869,591 $ 869,591
========== ========== ==========
Estimated Net income per share $ 0.58
==========
Estimated Weighted average shares outstanding 1,497,487
==========
</TABLE>
See notes to estimated pro forma financial statements.
F-5
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Twelve Months Ended September 30, 1995
-----------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Base rent $514,900 $ 514,900 $1,029,800
Percentage rent 81,314 115,026 196,340
-------- ---------- ----------
Total rental income 596,214 629,926 (N) 1,226,140
Interest income 90,532 147,149 (N) 237,681
-------- ---------- ----------
Total revenues 686,746 777,075 1,463,821
-------- ---------- ----------
Expenses:
Interest 209,808 (169,223)(O) 40,585
Property Taxes -- 112,292 (P) 112,292
Depreciation and amortization 74,066 109,712 (Q) 183,778
Advisory fees -- 30,000 (R) 30,000
General and administrative 360,000 (210,000)(S) 150,000
Amortization of share purchase plan costs -- 54,000 (T) 54,000
Provision for income taxes 10,718 (10,718)(U) --
-------- ---------- ----------
Total expenses 654,592 (83,937) 570,655
-------- ---------- ----------
Estimated Net income $ 32,154 $ 861,012 $ 893,166
======== ========== ==========
Estimated Net income per share $ 0.60
==========
Estimated Weighted average shares outstanding $1,497,487
==========
</TABLE>
See notes to estimated pro forma financial statements.
F-6
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1995
----------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Base rent $514,900 $ 257,450 $ 772,350
Percentage rent 81,314 129,702 211,016
-------- --------- ----------
Total rental income 596,214 387,152 (N) 983,366
Interest income 90,532 87,729 (N) 178,261
-------- --------- ----------
Total revenues 686,746 474,881 1,161,627
-------- --------- ----------
Expenses:
Interest 209,808 (179,369)(O) 30,439
Property taxes -- 84,889 (P) 84,889
Depreciation and amortization 74,066 63,768 (Q) 137,834
Advisory fees -- 22,500 (R) 22,500
General and administrative 360,000 (247,500)(S) 112,500
Amortization of share purchase plan costs -- 40,500 (T) 40,500
Provision for income taxes 10,718 (10,718)(U) --
-------- --------- ----------
Total expenses 654,592 (225,930) 428,662
-------- --------- ----------
Estimated Net income $ 32,154 $ 700,811 $ 732,965
======== ========= ==========
Estimated Net income per share $ 0.49
==========
Estimated Weighted average shares outstanding 1,497,487
==========
</TABLE>
See notes to estimated pro forma financial statements.
F-7
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1994
----------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ----------
<S> <C> <C>
Revenues:
Base rent $ -- $722,350 $772,350
Percentage rent -- 159,940 159,940
-------- -------- --------
Total rental income -- 932,290(N) 932,290
Interest income -- 178,261(N) 178,261
-------- --------- ---------
Total revenues -- 1,110,551 1,110,551
-------- --------- ---------
Expenses:
Interest -- 30,439(O) 30,439
Property taxes -- 86,331(P) 86,331
Depreciation and amortization -- 137,834(Q) 137,834
Advisory fees -- 22,500(R) 22,500
General and administrative -- 112,500(S) 112,500
Amortization of share purchase plan costs -- 40,500(T) 40,500
Provision for income taxes -- -- (U) --
-------- -------- --------
Total expenses -- 430,104 430,104
-------- -------- --------
Estimated Net income $ -- $680,447 $680,447
======== ======== ========
Estimated Net income per share $ 0.45
========
Estimated Weighted average shares outstanding 1,497,487
=========
</TABLE>
See notes to estimated pro forma financial statements.
F-8
<PAGE>
HOST FUNDING, INC.
NOTES TO ESTIMATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(A) Represents the historical balance sheet of the company as of September
30, 1995.
(B) Represents the proposed acquisition of the Acquisition Hotel on a pro
forma basis on September 30, 1995.
(C) Represents the proposed pro forma change in Loan Commitment Fees on
September 30, 1995 upon the payoff, paydown and restructuring of certain
mortgages upon completion of the Mission Bay acquisition and Stock Offering.
<TABLE>
<S> <C>
Write-off of remaining unamortized loan fees $ (23,624)
New loan fee on restructured mortgage 15,000
-----------
$ (8,624)
-----------
-----------
</TABLE>
(D) Net change represents the following proposed transactions:
<TABLE>
<S> <C>
Proceeds from sale of 500,000 Class A Common shares in the Stock $ 5,000,000
Offering Remainining expenses of the Stock Offering. First $100,000
of expenses of the Stock Offering were paid via New Second Mortgage
in July 1995 (400,000)
Sales commission for Stock Offering (500,000)
Payment to Mission Bay Dissenters (35,130)
Loan fees (15,000)
Payments to reduce principal on long-term debt (3,804,000
-----------
$ 245,870
===========
</TABLE>
(E) Represents proposed payments to reduce principal on long-term debt from
the proceeds from the Stock Offering.
(F) Represents the proposed elimination of the deferred income tax liability
upon the completion of the Possible Formation Transactions. The deferred tax
liability is proposed to be eliminated upon the election of Host Funding to
be taxed as a REIT under the Code.
(G) Represents the proposed payment from the Stock Offering of accounts
payable for stock issuance costs.
(H) Represents the issuance of Class A par value ($.01) of shares expected to
be issued in the following transactions:
<TABLE>
<S> <C>
Issuance of 277,487 Shares to Mission Bay Partners in exchange for
100% of Mission Bay Super 8 $ 2,775
Issuance of Shares to AAG 4,099
Sale of 500,000 Shares in the Stock Offering 5,000
Issuance of 30,000 Shares to Directors in exchange for
Unsecured Directors' Compensation 300
-------
$12,174
=======
</TABLE>
(I) Represents the issuance of Class B par value ($.01) of shares expected to
be issued to AAG in the Possible Formation Transactions.
(J) Represents the issuance of Class C par value ($.01) of shares expected to
be issued to AAG in the Possible Formation Transactions.
F-9
<PAGE>
(K) Represents the Additional Paid-in-Capital from shares expected to be
issued in the following transactions:
<TABLE>
<S> <C>
Issuance of 277,487 Shares to Mission Bay Partners in exchange for
100% of Mission Bay Super 8 $2,772,095
Issuance of Shares to AAG (6,899)
Sale of 500,000 Shares in the Stock Offering 4,995,000
Issuance of 30,000 Shares to Directors in exchange for
Share Purchase Notes 299,700
Commissions on stock issuance costs (500,000)
Stock Issuance Costs were estimated to total $500,000 of which
$360,057 were charged against paid-in capital to reduce
it to $0 with the remainder of $139,943 charged against
accumulated deficit. This entry reclasses the portion
of stock issuance costs originally charged to accumulated
deficit upon recapitalization of Host Funding
(139,943)
----------
$7,419,953
==========
</TABLE>
(L) Net change represents the following proposed adjustments to accumulated
deficit:
<TABLE>
<S> <C>
Reversal of deferred tax liability $166,000
Stock Issuance Costs were estimated to total $500,000 of which
$360,057 were charged against paid-in capital to reduce
it to $0 with the remainder of $139,943 charged against
accumulated deficit. This entry reclasses the portion
of stock issuance costs originally charged to accumulated
deficit upon recapitalization of Host Funding
139,943
Write off of remaining loan fees paid upon payoff of mortgages
upon completion of the Possible Formation Transactions (23,624)
--------
$282,319
========
</TABLE>
(M) Represents Unearned Directors' Compensation issued to directors
upon completion of the Possible Formation Transactions.
(N) Represents the effect of the New Leases, Unsecured Directors'
Compensation Notes and Related Party Note Receivable on revenues. Rent is
derived from annual base rent of $1,029,800 and percentage rent calculated
based upon various revenue and percentage levels for individual leases on
individual motels as follows:
<TABLE>
<CAPTION>
Twelve Mos. Nine Mos. Nine Mos.
Year Ended Ended Ended Ended
December 31, Sept. 30, Sept. 30, Sept. 30,
1994 1995 1994 1995
------------ ---------- -------- --------
<S> <C> <C> <C> <C>
Base Rent $1,029,800 $1,029,800 $772,350 $772,350
Percentage Rent 174,207 196,340 159,940 211,016
Less: Amounts included in unaudited
historical operating results from
January 1 to September 30, 1995 0 (596,214) 0 (596,214)
---------- ---------- -------- ---------
$1,204,007 $ 629,926 $932,290 $387,152
========== ========== ======== =========
Interest income - related parties is as follows:
Unearned directors' compensation $ 21,000 $ 21,000 $ 15,750 $ 15,750
Related party note receivable 216,681 216,681 162,511 162,511
Less: Amounts included in unaudited
historical operating results from
January 1 to September 30, 1995 0 (90,532) 0 (90,532)
---------- ----------- -------- ---------
$ 237,681 $ 147,149 $178,261 $ 87,729
========== =========== ======== =========
</TABLE>
F-10
<PAGE>
(O) Represents the effects of payments due on remaining debt after the
Possible Formation Transactions as follows:
<TABLE>
<CAPTION>
Twelve Mos. Nine Mos. Nine Mos.
Year Ended Ended Ended Ended
December 31, Sept. 30, Sept. 30, Sept. 30,
1994 1995 1994 1995
------------ ---------- -------- --------
<S> <C> <C> <C> <C>
Interest Expense $40,585 $ 40,585 $30,439 $ 30,439
Less: Amounts included in unaudited
historical operating results from
January 1 to September 30, 1995 0 (209,808) 0 (209,808)
------- --------- ------- ---------
$40,585 $(169,223) $30,439 $(179,369)
======= ========= ======= =========
</TABLE>
(P) Represents the estimated property taxes due after the Possible Formation
Transactions as follows:
<TABLE>
<CAPTION>
Twelve Mos. Nine Mos. Nine Mos.
Year Ended Ended Ended Ended
December 31, Sept. 30, Sept. 30, Sept. 30,
1994 1995 1994 1995
------------ ---------- -------- --------
<S> <C> <C> <C> <C>
Property Taxes $113,734 $112,292 $86,331 $84,889
Less: Amounts included in unaudited historical operating results from
January 1 to September 30, 1995 0 0 0 0
-------- -------- ------- -------
$113,734 $112,292 $86,331 $84,889
======== ======== ======= =======
</TABLE>
(Q) Represents the effect of the acquisition of the Initial Hotels and
Mission Bay as a result of the Possible Formation Transactions on
depreciation expense. Depreciation expense is calculated on a straight line
basis over the estimated lives of buildings, improvements and equipment of up
to 35 years.
<TABLE>
<CAPTION>
Twelve Mos. Nine Mos. Nine Mos.
Year Ended Ended Ended Ended
December 31, Sept. 30, Sept. 30, Setp. 30,
1994 1995 1994 1995
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Depreciation $ 183,778 $ 183,778 $ 137,834 $ 137,834
Less: Amounts included in unaudited
historical operating results from
January 1 to September 30, 1995 0 (74,066) 0 (74,066)
----------- ----------- ---------- ----------
$ 183,778 $ 109,712 $ 137,834 $ 63,768
=========== =========== ========== ==========
</TABLE>
(R) Under the terms of the Advisory Agreement, Advisors is paid its fee for
providing investment, management and administrative services to Host Funding.
The advisory fee is fixed at $30,000 annually.
<TABLE>
<CAPTION>
Twelve Mos. Nine Mos. Nine Mos.
Year Ended Ended Ended Ended
December 31, Sept. 30, Sept. 30, Sept. 30,
1994 1995 1994 1995
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Advisory fee $ 30,000 $ 30,000 $ 22,500 $ 22,500
=========== ============ ============ ==========
</TABLE>
F-11
<PAGE>
(S) Represents estimated general and administrative expenses of Host
Funding related to independent trustee fees, legal, accounting and other
administrative expenses as detailed below.
<TABLE>
<CAPTION>
Twelve Mos. Nine Mos. Nine Mos.
Year Ended Ended Ended Ended
December 31, Sept. 30, Sept. 30, Sept. 30,
1994 1995 1994 1995
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Independent trustee fees $ 20,000 $ 20,000 $ 15,000 $ 15,000
Legal fees 20,000 20,000 15,000 15,000
Accounting fees 30,000 30,000 22,500 22,500
Other administrative expense 80,000 80,000 60,000 60,000
Less: Amounts included in unaudited
historical operating results from
January 1 to September 30, 1995 0 (360,000) 0 (360,000)
----------- ------------ ------------ ----------
$ 150,000 $ (210,000) $ 112,500 $ (247,500)
----------- ------------ ------------ ----------
----------- ------------ ------------ ----------
</TABLE>
These amounts have been estimated by Host Funding based on management's
experience and/or discussions with service providers.
(T) Represents amortization of unearned director's compensation for
independent directors pursuant to vesting provisions in the share purchase plan
agreements and the assumption the directors will become fully vested.
(U) Represents reversal of federal tax provision due to election of Host
Funding to be taxed as a REIT under the Code.
F-12
<PAGE>
HOST FUNDING, INC.
FINANCIAL STATEMENTS
As of April 1, 1995 and September 30, 1995 (Unaudited)
and for the Nine Months Ended September 30, 1995 (Unaudited)
F-13
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholder and Directors of Host Funding, Inc.
I have audited the accompanying balance sheet of Host Funding, Inc., a
Developmental Stage Company, as of April 1, 1995. This financial statement is
the responsibility of the Company's management. My responsibility is to express
an opinion on this financial statement based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. I believe that my audit
of the balance sheet provides a reasonable basis for my opinion.
In my opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Host Funding, Inc., a Developmental
Stage Company, as of April 1, 1995, in conformity with generally accepted
accounting principles.
/s/William Ling
William H. Ling
July 11, 1995, except for paragraph 2 of note 4 and paragraphs 2 and 4 to 7 of
note 5, as to which the date is September 30, 1995
San Diego, California
F-14
<PAGE>
HOST FUNDING, INC.
(A Developmental Stage Company)
BALANCE SHEET
<TABLE>
<CAPTION>
As of As of
April 1, 1995 Sept. 30, 1995
------------- --------------
(Unaudited)
ASSETS
<S> <C> <C>
LAND, PROPERTY AND EQUIPMENT - At cost:
Building and improvements $ 1,813,261 $ 1,813,261
Furnishings and equipment 285,929 285,929
Less accumulated depreciation (69,109)
------------- ------------
2,099,190 2,030,081
Land 642,287 642,287
------------- ------------
Land, property and equipment - net 2,741,477 2,672,368
RENT RECEIVABLE-Related party - 408,088
INTEREST RECEIVABLE-Related parties - 90,532
LOAN COMMITMENT FEES 28,582 23,624
------------- ------------
Total $ 2,770,059 $ 3,194,612
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
LIABILITIES:
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,245,213 $ 1,340,000
Accrued interest payable - 71,085
Accounts payable - stock issuance costs 500,000 400,000
Accounts payable - related parties - 360,000
Income taxes payable - 10,718
------------- ------------
Total Current Liabilities 1,745,213 2,181,803
LONG-TERM DEBT (NET OF CURRENT PORTION) 2,970,463 2,926,272
DEFERRED INCOME TAXES 166,000 166,000
------------- ------------
Total liabilities 4,881,676 5,274,075
------------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S DEFICIT:
Common stock, $.01 par value; authorized
1,000 shares; issued and outstanding 100 shares 1 1
Accumulated deficit (305,943) (273,789)
Mortgage note receivable - related parties (1,805,675) (1,805,675)
------------- ------------
Total shareholder's deficit (2,111,617) (2,079,463)
------------- ------------
Total $ 2,770,059 $ 3,194,612
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
HOST FUNDING, INC.
(A Developmental Stage Company)
STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
Sept. 30, 1995
--------------
<S> <C>
REVENUES:
Lease revenue - related party $ 596,214
Interest income - related parties 90,532
-------------
Total revenue 686,746
-------------
EXPENSES:
Interest expense 209,808
Depreciation and amortization 74,066
Administrative expenses - related parties 360,000
-------------
Total expenses 643,874
-------------
INCOME BEFORE INCOME TAXES 42,872
PROVISION FOR INCOME TAXES 10,718
-------------
NET INCOME $ 32,154
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
HOST FUNDING, INC.
(A Developmental Stage Company)
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
Sept. 30, 1995
--------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 32,154
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 74,066
Changes in operating assets and liabilities
Rent receivable - related parties (408,088)
Interest receivable - related parties (90,532)
Accrued interest payable 71,085
Accounts payable - stock issuance costs (100,000)
Accounts payable - related parties 360,000
Income taxes payable 10,718
----------
Net cash used in operating activities (50,597)
----------
FINANCING ACTIVITIES:
Payments on long-term debt (49,403)
Borrowings on long-term debt 100,000
----------
Net cash provided by financing activities 50,597
----------
NET CHANGE IN CASH 0
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 0
----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 0
----------
----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ 138,723
----------
----------
Cash paid during the period for income taxes $ 0
----------
----------
Non-cash investing activities:
Contribution of net assets and liabilities for common stock
and accumulated deficit
Land, property and equipment 2,741,477
Loan commitment fees 28,582
Related party note receivable 1,805,675
Long-term debt (4,215,676)
Common Stock (1)
----------
360,057
----------
Less: Liabilities and accumulated deficit resulting from
the contribution of net assets and liabilities
Accounts payable stock issuance costs (500,000)
Deferred income taxes (166,000)
Accumulated deficit 305,943
----------
(360,057)
----------
Net non-cash investing activities $ 0
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
HOST FUNDING, INC.
(A Developmental Stage Company)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
The accompanying balance sheet includes the accounts of Host Funding, Inc.,
a Maryland corporation ("Host Funding"). Host Funding was formed on
December 22, 1994 to engage in any lawful act or activity (including,
without limitation or obligation, engaging in business as a Real Estate
Investment Trust ("REIT") under the Internal Revenue Code of 1986, as
amended, or any successor statute (the "Code") for which corporations may
be organized under the general laws of the State of Maryland as now or
hereafter in force. Host Funding's fiscal year end is December 31. Host
Funding was inactive from inception, December 22, 1994 to April 1, 1995.
On April 1, 1995, Host Funding and All American Group, Ltd., a Delaware
limited partnership ("AAG") entered into a Contribution and Assumption
Agreement (the "Contribution and Assumption Agreement"). Under the
Contribution and Assumption Agreement AAG transferred, assigned and
conveyed to Host Funding all of the real property, including land and
personal property, and Host Funding agreed to assume all real property
debt, at historical cost, of four (4) Super 8 motels located and doing
business in Somerset, Kentucky; Miner, Missouri; Poplar Bluff, Missouri;
and Rock Falls, Illinois. In addition, AAG contributed a note receivable
(the "Related Party Note"). In accordance with generally accepted
accounting principles, the Related Party Note is included in shareholder's
deficit as the Related Party Note was originally issued for equity in AAG.
As collections are made on the Related Party Note, equity will be
recognized (see Note 4). As consideration to AAG, Host Funding issued 100
shares of common stock. As of April 1, 1995, all of the outstanding stock
of Host Funding is owned by AAG (see note 4). The balance sheet is for
Host Funding only and has not been consolidated with Host Funding's parent,
AAG. As of April 1, 1995, AAG's principal asset is the stock of Host
Funding with no significant liabilities.
Host Funding is a "Developmental Stage Company," as defined under generally
accepted accounting principles, and, as such, is exposed to the inherent
risks of a company of this type. Reference should be made to note 5,
"Possible Formation Transactions," for additional information regarding
Host Funding.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Buildings and improvements are being depreciated over useful lives of 35
years using the straight-line method. Hotel furnishings and equipment are
being depreciated using primarily straight-line methods over useful lives
ranging from 3 to 7 years. On April 1, 1995, Host Funding's net assets for
federal tax reporting purposes totalled approximately $2,370,000.
F-18
<PAGE>
Host Funding assesses impairment of its real estate properties based upon
whether it is probable that undiscounted future cash flows from each
individual property will be less than its net book value. No impairment
has occurred as of April 1, 1995, or would be required to be recorded upon
the effective date in December 1995 of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to Be Disposed Of."
The loan commitment fees are amortized over the terms of the loans.
Host Funding has adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires
the use of the liability method of accounting for deferred income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and income tax purposes and operating loss and tax
credit carryforwards. Host Funding, as a result of the Contribution and
Assumption Agreement, has a timing difference regarding depreciation
methods used for financial reporting and income tax purposes. On April 1,
1995, the deferred income taxes resulting from the timing difference
regarding depreciation methods totalled $166,000, as Host Funding is
presently taxed as a C Corporation (see note 5).
Stock issuance costs (the "Issuance Costs") have been capitalized and
charged to shareholder's deficit. Should the transaction described in note
5 as "Possible Formation Transactions" not occur, the expenses will be
charged to current period income.
The accompanying interim period financial statements are unaudited but, in
the opinion of management, reflect all adjustments (consisting principally
of normal recurring adjustments) necessary for a fair presentation of the
results for the interim periods presented. The results for the interim
periods are not necessarily indicative of the results to be obtained for
the full fiscal year due to the seasonal nature of the business.
NOTE 2. REAL ESTATE INVESTMENTS
As described in note 1, on April 1, 1995, Host Funding acquired fee
interests in four motels. The motel properties are leased to Inn Fund,
LLC, a Delaware limited liability company ("Inn Fund"). Guy E. Hatfield,
the controlling partner of AAG, sole shareholder of Host Funding, owns 7.5%
and Ian Gardner-Smith owns 92.5% of Inn Fund. The four motels are operated
for Inn Fund by All American Group, Inc., an entity 100% owned by Guy
Hatfield and his wife ("AAG, Inc.") (See note 5).
The individual motel leases are for a term of 15 years, expiring on
December 31, 2011, at combined total annual base rents of $931,000, or
percentage rentals ranging from 35% to 55% for each individual property
based upon gross revenue levels, whichever is greater. The leases are
"triple net" in that Inn Fund is generally responsible for paying all
operating expenses of the properties, including maintenance, insurance and
property taxes. Further, Inn Fund is required to set aside in a
replacement reserve 4% of gross room revenue to be used for capital
additions to the properties.
Minimum future rents at April 1, 1995 due under non-cancelable operating
leases for the period April 1 to December 31, 1995, and for the years
ending December 31 and thereafter are as follows:
F-19
<PAGE>
<TABLE>
<CAPTION>
Year/Period Amount
----------- ------
<S> <C>
1995 $ 617,666
1996 931,000
1997 931,000
1998 931,000
1999 931,000
Thereafter 9,310,000
-----------
Total $13,651,666
-----------
-----------
</TABLE>
NOTE 3. LONG-TERM DEBT
A summary of Host Funding's long-term debt as of April 1, 1995
follows:
First mortgage note payable; 8.5% interest until
March 1994, prime plus 1.5% but not less than
8.5% thereafter, adjusted annually; payments of
$11,823 monthly, due March 1998; personal
guarantees of Guy E. and Dorothy Hatfield. $1,113,144
First mortgage note payable; 8.75% interest;
payments of $11,244 monthly; due February 1998. 1,043,915
First mortgage note payable; prime plus 2%,
adjusted quarterly; payments of $9,174 monthly,
due March 1998. 898,617
First mortgage note payable; prime plus 1/2%
interest rate adjustable daily; accrued interest
plus principal are due on December 31, 1995 1,160,000
----------
4,215,676
Less current portion 1,245,213
----------
$2,970,463
----------
----------
Aggregate principal payments for the period April 1 to December 31,
1995 and the next three calendar years ended December 31, subsequent
to April 1, 1995 are as follows:
1995 $1,245,213
1996 118,810
1997 129,831
1998 2,721,822
---------
Total $4,215,676
----------
----------
Substantially all of the assets of the Partnership are pledged as
security for the above debt (see note 5).
F-20
<PAGE>
NOTE 4. COMMON STOCK, RELATED PARTY NOTE RECEIVABLE, STOCK PLEDGE
AGREEMENT AND RELATED PARTY CONSULTING AGREEMENT
COMMON STOCK:
Host Funding is authorized to issue 1,000 shares of common stock, $.01
par value per share. As of April 1, 1995, 100 shares of Host Funding
common stock are outstanding, and solely owned by AAG (see notes 1 and
5).
RELATED PARTY NOTE RECEIVABLE:
As described in note 1, on April 1, 1995, AAG, as part of the
Contribution and Assumption Agreement, contributed the Related Party
Note to Host Funding. The Related Party Note is due from Guy and
Dorothy Hatfield and their two children, sole limited partners, and
AAG, Inc., sole general partner (the "AAG Partners"), of AAG. The
principal balance of the Related Party Note dated March 31, 1995, is
$1,805,675, with interest payable quarterly, commencing November 15,
1995, at 10% per annum, adjusted to 12% per annum upon completion of
the Possible Formation Transactions, with remaining outstanding
principal and unpaid accrued interest due and payable on March 31,
2000. The Related Party Note was secured by second trust deeds on
properties located in Central City, Kentucky; Lebanon, Kentucky;
Miner, Missouri; and Dexter, Missouri. The collateral for the Related
Party Note was provided via a Lent Collateral Agreement from Hatfield
Inn, Inc., a Delaware corporation ("Hatfield Inn") 100% owned by Guy
and Dorothy Hatfield. In September 1995, the Related Party Note was
amended to remove the obligation of AAG to maintain real property
security, conditioned upon the delivery to Host Funding of an
unconditional guarantee by Guy and Dorothy Hatfield. The Related
Party Note is classified in the Shareholder's Deficit section of the
balance sheet as it was contributed to AAG and, in turn, Host Funding
to provide equity to AAG and Host Funding, respectively.
STOCK PLEDGE AGREEMENT:
Further, on April 1, 1995, the AAG Partners entered into a Stock
Pledge Agreement (the "Stock Pledge Agreement") with Host Funding.
Pursuant to the Stock Pledge Agreement, the AAG Partners agreed to
pledge a security investment in 26.2 fraction shares, together with
all additional shares issued to the AAG Partners by reason of stock
split or stock dividend, of common stock in Host Funding to secure the
Related Party Note.
RELATED PARTY CONSULTING AGREEMENT:
Host Funding has entered into a consulting agreement (The "Related
Party Consulting Agreement") with AAG effective April 1, 1995 to
provide advisory, accounting and other consulting services to Host
Funding for a monthly fee of $60,000 plus annual additional
compensation as mutually agreed upon. The Related Party Consulting
Agreement is cancelable upon thirty days written notice from either
party.
NOTE 5. SUBSEQUENT EVENT, POSSIBLE FORMATION TRANSACTIONS, AND
COMMITMENTS AND CONTINGENCIES
SUBSEQUENT EVENTS:
In July 1995, Host Funding entered into a second mortgage secured by
the Poplar Bluff, Missouri and Rock Falls, Illinois motels totalling
$100,000 at an interest rate of prime plus 2% payable interest only on
August 15, 1995 and, thereafter, in monthly installments of $12,000,
including principal and interest, commencing September 15, 1995 (the
"New Second Mortgage"). The due date of the New Second Mortgage is
April 15, 1996, unless the "Possible Formation Transactions" as
described below occur, at which time the entire amount is due and
payable.
F-21
<PAGE>
POSSIBLE FORMATION TRANSACTIONS AND COMMITMENTS AND CONTINGENCIES:
Host Funding intends to acquire certain assets of Mission Bay Super 8,
Ltd., a California limited partnership ("Mission Bay"), the owner of a 117
room Super 8 motel located in San Diego, California, pursuant to an asset
acquisition agreement (the "Mission Bay Acquisition Agreement") by which
Host Funding will acquire the hotel assets of Mission Bay. Upon the
acquisition of Mission Bay, Host Funding intends to lease the property
under similar terms as described in note 2, "Real Estate Investments,"
to Inn Fund or to a similarly qualified third party hotel company.
The Mission Bay Acquisition Agreement will exchange a minimum of
277,487 shares of common stock in Host Funding at a stated value of
$10.00 per share plus a minimum reserve for dissenters rights of 1.25%
or $35,130 based upon an appraisal of Mission Bay for limited and
general partnership interest in a final liquidating distribution by
Mission Bay. Since the Mission Bay acquisition is conditioned upon
the consent of the limited partners of Mission Bay, no assurance can
be given that the Mission Bay asset acquisition will be consummated.
Further, Host Funding intends to raise additional capital via an
initial public offering of common stock (the "Stock Offering")
concurrent with the Mission Bay asset acquisition. The Stock Offering
Host Funding intends to complete will offer at least 500,000 common
shares at $10.00 per share. Should Host Funding be successful with
the completion of the Stock Offering, the underwriter will be issued a
warrant to purchase a minimum of 50,000 and maximum of 75,000 shares
at a price of $13.00 per share, which warrant is exercisable over a
five year term from date of issuance. Host Funding plans to use the
capital raised from the Stock Offering to pay down long-term debt, to
pay expenses of the formation of Host Funding, and for working capital
purposes. No assurance can be given that the Stock Offering will be
consummated.
In addition, in September 1995, Host Funding has agreed to enter into
new motel leases for the four existing motel properties and Mission
Bay (the "New Leases") with a limited liability company of a
nationally recognized hotel management company and operator,
Crossroads Hospitality Tenant Company, a Delaware limited liability
company ("Crossroads"), subject to completion of the Mission Bay
Acquisition Agreement and the Stock Offering. The New Leases are for
a term of 15 years from the final effective date of completion of the
Mission Bay Acquisition and the Stock Offering. Combined total annual
base rentals of $1,029,800 are due, plus percentage rentals ranging
from 28.75% to 40% of year to date revenues less varying break even
thresholds adjusted annually by defined percentages for each motel.
The New Leases generally require Crossroads to pay all operating
expenses of the properties, including maintenance and insurance, while
Host Funding is responsible for property taxes. In addition,
Crossroads is required to set aside in a replacement reserve $125 per
room, per quarter, increased annually by inflation factors, to be
used for capital additions which generally must be approved by Host
Funding. Further, Crossroads will also be provided a 30 day right of
first refusal to purchase any hotel property under the New Leases
equal to the price offered Host Funding.
Crossroads may terminate any one lease within the first five years
without damages. Should two leases be terminated within the first
five years, Crossroads has agreed to pay a termination fee equal to
the previous twelve months revenue for the hotel times 18% in years
one to three, 12% in year four and 6% in year five. If more than two
leases are terminated within the first five years, Host Funding has
the right to terminate all remaining leases or to collect the
termination fee as described above.
The parent company of Crossroads has agreed to provide a letter of
credit to secure the payment of rent due under the leases in the
amount of $264,000 during the first three years of the lease terms.
In addition, Crossroads has agreed to maintain a letter of credit
thereafter equal to annually calculated termination fees that would be
due on the lease anniversary dates throughout
F-22
<PAGE>
the remaining terms of the leases. After the first year, Crossroads parent
may substitute the letter of credit by guaranteeing the equivalent amounts
required by the letter of credit and providing to Host Funding a copy of
Crossroads parent's audited financial statements which indicate a net worth
of at least 2- 1/2 times the value of the letter of credit, with at least
40% of the net worth in cash or cash equivalent assets. In addition,
Crossroads parent makes certain negative covenants concerning maintenance
of its minimum net worth levels.
No assurance can be given that the New Leases will be consummated.
Upon completion of the Mission Bay acquisition, the Stock Offering and
execution of the New Leases, Host Funding intends to elect to be taxed
as a real estate investment trust under the Internal Revenue Code of
1986, as amended, or any successor statute (the "Possible Formation
Transactions").
Hatfield Inn is the owner and operator of a 40 room motel adjacent to
Host Funding's property located in Miner, Missouri. The motel owned
by Hatfield Inn was newly constructed and is secured by a $730,500
first deed of trust (the "Hatfield Inn Note"). The Host Funding motel
property located in Miner, Missouri serves as cross collateral under a
second deed of trust (the "Cross Collateral Agreement") to secure
payment of the Hatfield Inn Note. As the Hatfield Inn property is
completed and has operating history, Host Funding has requested the
Cross Collateral Agreement under the Hatfield Inn note be released.
No assurance can be given that the Cross Collateral Agreement will be
released by the lender, and Host Funding remains contingently liable
under the Hatfield Inn Note. Further, Host Funding and Hatfield Inn
have a shared parking agreement allowing cars to park in either
property's parking facilities, compete for similar business, and are
managed by the general partner of AAG.
AAG has been granted license agreements by Super 8 Motels, Inc.
("Super 8") for 20-year terms expiring in 2005. Pursuant to the terms
of the agreement, AAG is required to pay a royalty fee and an
advertising fee equal to 4% and 1%, respectively, of gross room
revenue. As part of, and only upon occurrence of, the Possible
Formation Transactions, AAG intends to assign the franchise
agreements to Crossroads. Mission Bay has a similar license agreement
with Super 8, which likely will be assigned to the lessee. Super 8
has expressed a willingness to allow the assignments, but may require
Crossroads to pay a higher royalty and advertising fee.
Host Funding, as indicated in note 1, is a "Developmental Stage
Company." Various Possible Formation Transactions, described above,
must occur to assure the continued existence of Host Funding.
Issuance Costs of the Possible Formation Transactions are expected to
total approximately $500,000, which have been accrued for in their
financial statements. Funding for the Issuance Costs has principally
been provided by certain AAG Partners; Ian Gardner-Smith; and GHG
Hospitality, Inc., the general partner of Mission Bay (the "Related
Parties"). Should the Possible Formation Transactions occur, the
various Issuance Costs will be reimbursed to the Related Parties.
The deferred income tax liability will be reversed and credited to
accumulated deficit upon consummation of the Possible Formation
Transactions. The reason for the reversal of the deferred tax
liability is that upon completion of the Possible Formation
Transactions, Host Funding will have elected REIT status and intends
to meet the Code requirements and be taxed as a REIT. As a result, no
future deferred tax liability will be required.
Upon the proposed amendment and restatement of the charter, Host
Funding will have authority to issue 75,000,000 shares of stock,
consisting of 50,000,000 shares of Class A common stock,
F-23
<PAGE>
$.01 par value per share, and 4,000,000 shares of Class B common stock,
$.01 par value per share and 1,000,000 shares of Class C common
stock, $.01 par value per share. Upon completion of the Possible
Formation Transactions, Host Funding will issue additional Class
A, B and C shares to AAG in exchange for 100 initial shares now
held by AAG based upon appraised values of Host Funding's assets
net of liabilities prior to the Possible Formation Transactions.
The initial common shares to be issued upon completion of the
Possible Formation Transactions include 410,000 Class A, 140,000
Class B and 140,000 Class C, which number of shares were
determined based upon the net appraised value of assets net of
liabilities of $6,900,000 or $10.00 per share. The Class B and C
shares will include certain restrictions as to the future payment of
dividends and are convertible to Class A common shares at certain
times and under certain circumstances as defined in the charter.
Upon the amendment and restatement of the charter and completion of
the Possible Formation Transactions, Host Funding will have 20,000,000
authorized preferred shares, $.01 par value, none of which are issued
or outstanding.
Immediately after consummation of the Possible Formation Transactions,
Host Funding intends to sell to each director then in office 10,000
shares of Class A common stock at a price per share equal to $10 per
share. The purchase price will be paid by them through delivery of a
five year promissory note executed in favor of Host Funding by each
purchaser, which shall bear interest, payable quarterly, at a fixed
rate equal to 7% per annum. Principal payments totalling 2% of the
original principal will be due annually. The shares of common stock
purchased by each independent director will be pledged to Host Funding
to secure payment of the promissory note, which shall be non-recourse
to the maker, except to 10% of the principal amount due from
directors. Host Funding has agreed to forgive the promissory notes
issued in exchange for the shares of common stock in increments of 18%
of the principal amount per annum for each year that the maker remains
a director of Host Funding. The estimated annual amortization of
unearned director's compensation is expected to total $54,000 based
upon the issuance of a total of 30,000 shares to three directors.
Host Funding intends to enter into an Advisory Agreement (the
"Advisory Agreement") with Host Funding Advisors, Inc., a Delaware
corporation (the "Advisor") on the close of the Possible Formation
Transactions. The Advisor was formed on June 23, 1994. Pursuant to
the Advisory Agreement, the Advisor will provide information, advice,
assistance, and facilities to Host Funding in connection with Host
Funding's future investment in hotel properties. Additionally, the
Advisor will administer the daily operations of Host Funding,
negotiate on Host Funding's behalf, act as agent for Host funding in
collecting funds and paying debts, and generally manage and operate
Host Funding. In consideration for such services, Host Funding will
compensate the Advisor in the amount of $30,000 per year. Ian
Gardner-Smith is Chief Executive Officer, Vice President and Secretary
and owns 100% of the Advisor.
Host Funding intends to enter into a Post-Formation Acquisition
Agreement (the "Post-Formation Acquisition Agreement") with Host
Acquisition Group, a proposed Delaware limited liability company (the
"Acquisition Company") on the close of the Possible Formation
Transactions. Pursuant to the Post-Formation Acquisition Agreement,
the Acquisition Company will manage, coordinate, and supervise Host
Funding's acquisition program for the acquisition of additional hotel
properties. The Acquisition company will have authority to negotiate
for and prepare acquisition documentation for Host Funding's
acquisition of additional hotel properties. In exchange for such
services, Host Funding will pay the Acquisition Company six percent
(6%) of the gross purchase price of any hotel properties acquired by
Host Funding during the term of the Post-Formation Acquisition
Agreement. Ian Gardner-Smith is the proposed President and Secretary
of the Acquisition Company and owns controlling interest in HMR, the
proposed owner of 99% of the Acquisition Company.
F-24
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Directors of Host Funding, Inc.
I have audited in accordance with generally accepted auditing standards the
financial statements of Host Funding, Inc., a Developmental Stage Company,
included in this prospectus and have issued my report thereon dated July 11,
1995, except for paragraph 2 of note 4 and paragraphs 2 and 4 to 7 of note
5, as to which the date is September 30, 1995. My audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
schedule on page F-26 is the responsibility of Host Funding, Inc's management
and is presented for the purpose of complying with the Securities and Exchange
Commissions's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in my opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
/s/ William Ling
William H. Ling
July 11, 1995, except for paragraph 2 of note 4 and paragraphs 2 and 4 to 7
of note 5, as to which the date is September 30, 1995
San Diego, California
F-25
<PAGE>
<TABLE>
SCHEDULE III
HOST FUNDING, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
APRIL 1, 1995
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Initial Cost to Company Costs Subsequent to Acquisition
----------------------- -------------------------------
(1) (1)
Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements
- ----------- ------------ --------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Hotel Assets:
Super 8, Rock Falls, IL $ 1,043,915 $ 131,627 $ 491,711 $ -- $ --
Super 8, Somerset, KY 1,160,000 170,000 449,541 -- --
Super 8, Miner, MO 1,113,144 187,660 461,494 -- --
Super 8, Poplar Bluff, MO 898,617 153,000 410,515 -- --
------------ --------- ------------- ------- -------------
$ 4,215,676 $ 642,287 $ 1,813,261 $ -- $ --
------------ --------- ------------- ------- -------------
------------ --------- ------------- ------- -------------
<CAPTION>
Gross amount at which
carried at close of period
-------------------------- (1)
(1) (1) Accumulated
Buildings and Depreciation Year of Date
Description Land Improvements Amortization Construction Acquired Life
- ----------- --------- ------------- ------------ ------------ -------- ----
<S> <C> <C> <C> <C> <C> <C>
Hotel Assets:
Super 8, Rock Falls, IL $ 131,627 $ 491,711 $ -- 1985 4/1/95 35
Super 8, Somerset, KY 170,000 449,541 -- 1985 4/1/95 35
Super 8, Miner, MO 187,660 461,494 -- 1985 4/1/95 35
Super 8, Poplar Bluff, MO 153,000 410,515 -- 1985 4/1/95 35
--------- ------------- ------------ ------------ -------- ----
$ 642,287 1,813,261 --
---------
---------
Land 642,287 --
Furniture and equipment 285,929 --
------------ ----------
Total hotels and land under lease $ 2,741,477 $ --
------------ ----------
------------ ----------
- ---------------------
(1) Land, buildings and improvements have been recorded at the historical
costs net of accumulated depreciation of AAG upon execution of the
Contribution and Assumption Agreement as described in Note 1 to the
Financial Statements.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------------------------------
</TABLE>
F-26
<PAGE>
CROSSROADS HOSPITALITY TENANT COMPANY, LLC (CROSSROADS)
UNAUDITED ESTIMATED PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1995
AND UNAUDITED ESTIMATED PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
THE TWELVE MONTHS ENDED SEPTEMBER 30, 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995
The following unaudited estimated pro forma balance sheet gives effect the
transfer of certain assets to Crossroads related to the acquisition of the
Initial Hotels and Mission Bay by Host Funding as though such transactions
occurred on September 30, 1995.
The following unaudited estimated pro forma statements of income give
effect at January 1, 1994 to (i) the acquisition of four Initial Hotels by Host
Funding; (ii) the acquisition of Mission Bay by Host Funding; and (iii) the
commencement of the New Leases with Crossroads.
The estimated pro forma information is based in part upon the historical
statements of revenues and expenses excluding income taxes of the Initial Hotels
and Mission Bay and certain pro forma balance sheet adjustments for Crossroads.
Such information should be read in conjunction with all of the financial
statements and notes thereto included in the Prospectus. In the opinion
of management, all adjustments necessary to reflect the effects of the
transactions discussed above have been reflected in the pro forma data.
The following unaudited estimated pro forma data is not necessarily
indicative of what the actual financial position or results of operations for
Crossroads would have been as of the date or for the period indicated, nor
does it purport to represent the financial position or results of operations of
Crossroads for future periods.
F-27
<PAGE>
<TABLE>
CROSSROADS HOSPITALITY TENANT COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
ESTIMATED PRO FORMA BALANCE SHEET
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------
<CAPTION>
As of September 30, 1995
--------------------------------------------------
Pro Forma
Historical (A) Adjustments Pro Forma
---------------- ----------- ---------
ASSETS
<S> <C> <C> <C>
Accounts receivable $ - $ 87,000 (B) $ 87,000
Prepaid expenses - 100,000 (B) 100,000
Cash - 13,000 (B) 13,000
---------------- ----------- ---------
Total $ - $200,000 $200,000
---------------- ----------- ---------
---------------- ----------- ---------
LIABILITIES AND MEMBERS' EQUITY
Advances from Inn Fund and Mission Bay $ - $200,000 (B) $200,000
Members' Equity - - -
---------------- ----------- ---------
Total $ - $200,000 $200,000
---------------- ----------- ---------
---------------- ----------- ---------
See notes to estimated pro forma financial statements.
- ---------------------------------------------------------------------------------------------------
</TABLE>
F-28
<PAGE>
<TABLE>
CROSSROADS HOSPITALITY TENANT COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
ESTIMATED PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, 1994
----------------------------------------------------------------------
Historical (C) Pro Forma
Initial Hotels Mission Bay Adjustments Pro Forma
-------------- -------------- ---------------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Room Sales $ 2,610,496 $ 989,703 $ - $ 3,600,199
Telephone 79,999 41,459 - 121,458
Other - principally vending 43,971 23,657 - 67,628
-------------- -------------- ---------------- -----------
Total 2,734,466 1,054,819 - 3,789,285
-------------- -------------- ---------------- -----------
EXPENSES:
Rent - - 1,204,007 (D) 1,204,007
Rooms 562,350 301,504 - 863,854
Interest 400,003 - (400,003)(E) -
Administrative and general 317,192 133,567 - 450,759
Management fee 135,478 63,215 (198,693)(F) -
Franchise 130,553 59,391 62,107 (G) 252,051
Repairs and maintenance 121,545 56,895 - 178,440
Energy cost 114,536 64,488 - 179,024
Property taxes 69,286 44,448 (113,734)(H) -
Telephone 43,748 11,263 - 55,011
Insurance 42,795 23,444 - 66,239
Marketing 51,889 57,478 - 109,367
Depreciation and amortization 139,112 85,204 (224,316)(I) -
Replacement reserve - - 184,500 (J) 184,500
Provision for loss - 1,534,950 (1,534,950)(K) -
-------------- -------------- ---------------- -----------
Total 2,128,487 2,435,847 (1,021,082) 3,543,252
-------------- -------------- ---------------- -----------
ESTIMATED NET INCOME (LOSS) $ 605,979 $ (1,381,028) $ 1,021,082 $ 246,033
-------------- -------------- ---------------- -----------
-------------- -------------- ---------------- -----------
See notes to estimated pro forma financial statements.
F-29
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
CROSSROADS HOSPITALITY TENANT COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
ESTIMATED PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------
<CAPTION>
Twelve Months Ended September 30, 1995
----------------------------------------------------------------------
Historical (C)
--------------------------------- Pro Forma
Initial Hotels Mission Bay Adjustments Pro Forma
-------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Room Sales $ 2,606,488 $ 1,064,136 $ - $ 3,670,624
Telephone 76,063 37,246 - 113,309
Other - principally vending 41,779 34,732 - 76,511
-------------- -------------- --------------- ------------
Total 2,724,330 1,136,114 - 3,860,444
-------------- -------------- --------------- ------------
EXPENSES:
Rent 832,944 - 393,196 (D) 1,226,140
Rooms 560,368 315,496 - 875,864
Interest 94,639 86 (94,725)(E) -
Administrative and general 311,704 139,664 - 451,368
Management fee 93,643 68,008 (161,651)(F) -
Franchise 130,368 63,823 62,771 (G) 256,962
Repairs and maintenance 101,711 53,453 - 155,164
Energy cost 114,337 62,522 - 176,859
Property taxes 73,456 38,836 (112,292)(H) -
Telephone 40,901 9,671 - 50,572
Insurance 48,606 22,625 - 71,231
Marketing 42,846 57,225 - 100,071
Depreciation and amortization 55,476 91,629 (147,105)(I) -
Replacement reserve - - 184,500 (J) 184,500
Provision for loss - 1,534,950 (1,534,950)(K) -
-------------- -------------- --------------- ------------
Total 2,500,999 2,457,988 (1,410,256) 3,548,731
-------------- -------------- --------------- ------------
ESTIMATED NET INCOME (LOSS) $ 223,331 $ (1,321,874) $ 1,410,256 $ 311,713
-------------- -------------- --------------- ------------
-------------- -------------- --------------- ------------
See notes to estimated pro forma financial statements.
- ---------------------------------------------------------------------------------------------------
</TABLE>
F-30
<PAGE>
<TABLE>
CROSSROADS HOSPITALITY TENANT COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
ESTIMATED PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended September 30, 1995
---------------------------------------------------------------------------
Historical (C)
---------------------------------- Pro Forma
Initial Hotels Mission Bay Adjustments Pro Forma
----------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Room Sales $ 1,992,183 $ 873,478 $ - $ 2,865,661
Telephone 57,489 27,379 - 84,868
Other - principally vending 29,586 29,540 - 59,126
----------------- -------------- -------------- ---------------
Total 2,079,258 930,397 - 3,009,655
----------------- -------------- -------------- ---------------
EXPENSES:
Rent 832,944 - 150,422 (D) 983,366
Rooms 422,226 237,837 - 660,063
Interest - 298 (298)(E) -
Administrative and general 231,052 106,072 - 337,124
Management fee 61,802 55,699 (117,501)(F) -
Franchise 99,638 52,384 48,578 (G) 200,600
Repairs and maintenance 77,728 39,424 - 117,152
Energy cost 92,686 47,186 - 139,872
Property taxes 53,010 31,879 (84,889)(H) -
Telephone 30,682 7,421 - 38,103
Insurance 36,663 17,586 - 54,249
Marketing 30,867 45,359 - 76,226
Depreciation and amortization - 5,288 62,838 (68,126)(I) -
Replacement reserve - - 138,375 (J) 138,375
Provision for loss - - - (K) -
----------------- -------------- -------------- ---------------
Total 1,974,586 703,983 66,561 2,745,130
----------------- -------------- -------------- ---------------
ESTIMATED NET INCOME (LOSS) $ 104,672 $ 226,414 $ (66,561) $ 264,525
----------------- -------------- -------------- ---------------
----------------- -------------- -------------- ---------------
See notes to estimated pro forma financial statements.
- ---------------------------------------------------------------------------------------------------
</TABLE>
F-31
<PAGE>
<TABLE>
CROSSROADS HOSPITALITY TENANT COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
ESTIMATED PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended September 30, 1994
----------------------------------------------------------------------------
Historical (C)
------------------------------------- Pro Forma
Initial Hotels Mission Bay Adjustments Pro Forma
----------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Room Sales $ 1,996,191 $ 799,045 $ - $ 2,795,236
Telephone 61,424 31,592 - 93,016
Other - principally vending 31,778 18,465 - 50,243
----------------- ---------------- --------------- --------------
Total 2,089,393 849,102 - 2,938,495
----------------- ---------------- --------------- --------------
EXPENSES:
Rent - - 932,290 (D) 932,290
Rooms 424,208 223,845 - 648,053
Interest 305,364 212 (302,576)(E) -
Administrative and general 236,540 99,975 - 336,515
Management fee 103,637 50,906 (154,543)(F) -
Franchise 99,823 47,952 47,914 (G) 195,689
Repairs and maintenance 97,562 42,866 - 140,428
Energy cost 92,885 49,152 - 142,037
Property taxes 48,840 37,491 (86,331)(H) -
Telephone 33,529 9,013 - 42,542
Insurance 30,852 18,405 - 49,257
Marketing 39,910 45,612 - 85,522
Depreciation and amortization 88,924 56,413 (145,337)(I) -
Replacement reserve - - 138,375 (J) 138,375
Provision for loss - - - (K) -
----------------- ---------------- --------------- --------------
Total 1,602,074 681,842 426,792 2,710,708
----------------- ---------------- --------------- --------------
ESTIMATED NET INCOME (LOSS) $ 487,319 $ 167,260 $ (426,792) $ 227,787
----------------- ---------------- --------------- --------------
----------------- ---------------- --------------- --------------
See notes to estimated pro forma financial statements.
- ---------------------------------------------------------------------------------------------------
</TABLE>
F-32
<PAGE>
CROSSROADS HOSPITALITY TENANT COMPANY, LLC
(A Limited Liability Company)
NOTES TO ESTIMATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(A) Crossroads Hospitality Tenant Company, LLC, a Delaware Limited
Liability Company, was formed on September 30, 1995. Crossroads was inactive
upon Formation and, therefore, no historical balance sheet of Crossroads exists
at September 30, 1995.
(B) Reflects the effects of the operating assets that are expected
to be contributed Crossroads by Inn Fund and Mission Bay as a result of the
Commencement of the New Leases between Crossroads and Host Funding.
(C) Reflects the combined historical operating results of the
Initial Hotels, Inn Fund and Mission Bay for periods prior to the commencement
date of the New Leases. Certain reclassifications have been made to the Mission
Bay historical data to conform with the Initial Hotels, Inn Fund and the Pro
Forma Statement of Operations.
(D) Represents the adjusted base and percentage rent to be paid by
Crossroads to Host Funding under the New Leases. The New Leases require
Crossroads to pay an aggregate minimum annual base rent of $1,029,800 plus
percentage rentals ranging from 28.75% to 40% of year to date revenues less
varying break-even thresholds adjusted annually by defined percentages for each
hotel as follows:
<TABLE>
<CAPTION>
Super 8 Super 8 Super 8 Super 8 Super 8
Mission Bay Rock Falls Somerset Miner Poplar Bluff
----------- ---------- -------- ----- ------------
<S> <C> <C> <C> <C> <C>
Summary Terms
Base rent $250,000 $200,500 $112,000 $265,300 $202,000
Percentage rent
First level:
Revenue over $1,050,000 $580,000 $410,000 $660,000 $555,000
Revenue under $1,150,000 $780,000 $610,000 $860,000 $655,000
Percentage 30% 28.75% 32% 35% 35%
Second level:
Revenue over $1,150,000 $780,000 $610,000 $860,000 $655,000
Percentage 40% 35% 35% 40% 37%
Adjustment factors: Revenue Revenue Revenue Revenue Revenue
threshold threshold threshold threshold threshold
increases 3% increases 3%remains increases 2% increases 2%
per year per year consistent per year per year
F-33
<PAGE>
<CAPTION>
Super 8 Super 8 Super 8 Super 8 Super 8
Mission Bay Rock Falls Somerset Miner Poplar Bluff Totals
---------- --------- -------- ---- ----------- ------
Rental Due:
Year ended 12/31/94:
Gross revenue $1,054,819 $708,126 $561,459 $846,019 $618,862 $3,789,285
Base rent $250,000 $200,500 $112,000 $265,300 $202,000 $1,029,800
Percentage rent $1,445 $36,836 $48,467 $65,107 $22,352 $174,207
Twelve months ended 9/30/95:
Gross revenue $1,136,117 $690,315 $555,491 $831,256 $647,265 $3,860,444
Base rent $250,000 $200,500 $112,000 $265,300 $202,000 $1,029,800
Percentage rent $25,834 $31,716 $46,557 $59,940 $32,293 $196,340
Nine months ended 9/30/95:
Gross revenue $930,397 $535,568 $422,116 $625,502 $496,072 $3,009,655
Base rent $187,500 $150,375 $84,000 $198,975 $151,500 $772,350
Percentage rent $70,028 $28,913 $36,677 $45,676 $29,722 $211,016
Nine months ended 9/30/94:
Gross revenue $849,102 $553,378 $428,084 $640,265 $467,666 $2,938,495
Base rent $187,500 $150,375 $84,000 $198,975 $151,500 $772,350
Percentage rent $18,481 $34,034 $38,587 $50,843 $17,995 $159,940
</TABLE>
Crossroads may terminate any one lease within the first five
years without damages. Should two leases be terminated within the first five
years, Crossroads has agreed to pay a termination fee equal to the previous
twelve months revenue for the hotel times 18% in years one to three, 12% in year
four and 6% in year five. If more than two leases are terminated within the
first five years, Host Funding has the right to terminate all remaining leases
or to collect the termination fee as described above.
The parent company of Crossroads has agreed to provide a letter
of credit to secure the payment of rent due under the leases in the amount of
$264,000 during the first three years of the lease terms. In addition,
Crossroads has agreed to maintain a letter of credit thereafter equal to
annually calculated termination fees that would be due on the lease anniversary
dates throughout the remaining terms of the leases. After the first year,
Crossroads parent may substitute the letter of credit by guaranteeing the
equivalent amounts required by the letter of credit and providing to Host
Funding a copy of Crossroads parent's audited financial statements which
indicate a net worth of at least 2-1/2 times the value of the letter of credit,
with at lease 40% of the net worth in cash or cash equivalent assets. In
addition, Crossroads parent makes certain negative covenants concerning
maintenance of its minimum net worth levels.
(E) Represents the reversal of interest expense by Crossroads as
Host Funding will either pay off or be responsible for long-term debt payments.
(F) Represents the reversal of management fees by Crossroads as
Crossroads is the lessee and operator of the Hotels.
F-34
<PAGE>
(G) Represents the estimated pro forma increase in franchise fees
for Crossroads that is anticipated to allow Super 8 to assign the License
Agreements.
(H) Represents the reversal of property taxes by Crossroads as the
lessor, Host Funding, is responsible for paying the property taxes.
(I) Crossroads has no ownership interest in the real estate related
to the Initial Hotels and, as such, there is no depreciation expense on a pro
forma basis. The Replacement Reserve described in note (J) is treated as a
current expense for pro forma purposes in each period projected.
(J) Represents a replacement reserve equal to $125 per room, per
quarter which the New Leases require Crossroads to set aside in a replacement
reserve escrow bank account (the "Replacement Reserve") to be available for the
cost of replacements and renovations to the Hotels which are treated as a period
expense for pro forma purposes.
(K) Represents the reversal of the provision for loss for Mission
Bay established to write down the Mission Bay investment in Land, Property and
Equipment to the appraised value of the property as of December 1, 1994.
F-35
<PAGE>
INITIAL HOTELS
FINANCIAL STATEMENTS
Years Ended December 31, 1994, 1993 and 1992
and For the Nine Months Ended September 30, 1994 (Unaudited)
F-36
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Owners of the Initial Hotels (as defined in Note 1):
I have audited the accompanying combined statements of assets, liabilities and
net investment and advances of the Initial Hotels, as defined in Note 1, as of
December 31, 1994 and 1993, and the related combined statements of revenues and
expenses excluding income taxes, and cash flows for each of the three calendar
years in the period ended December 31, 1994. These financial statements are the
responsibility of All American Group Limited Partnership, Host Funding, Inc. and
Inn Fund, LLC. My responsibility is to express an opinion on these financial
statements based on my audit.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I 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 balance sheet presentation. I
believe that my audits provide a reasonable basis for my opinion.
The accompanying financial statements have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the registration statement on Form S-4 and S-11 of
Host Funding, Inc.) as described in Note 1 and are not intended to be a complete
presentation of the Initial Hotels' assets, liabilities and net investment and
advances, revenues and expenses or cash flows.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the assets, liabilities and net investment and advances of
the Initial Hotels as of December 31, 1994 and 1993, and their revenues and
expenses excluding income taxes, and their cash flows for each of the three
calendar years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
/s/ William H. Ling
William H. Ling
April 4, 1995, except for paragraphs 2 and 8 to 11 of note 6 as to which the
date is September 30, 1995 San Diego, California
F-37
<PAGE>
INITIAL HOTELS
COMBINED STATEMENTS OF ASSETS, LIABILITIES,
AND NET INVESTMENT AND ADVANCES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------
1994 1993
- --------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable $ 49,475 $ 40,907
Prepaid expenses 33,553 33,823
------------- -------------
Total current assets 83,028 74,730
------------- -------------
LAND, PROPERTY AND EQUIPMENT - At cost:
Building and improvements 2,545,951 2,533,390
Hotel furnishings and equipment 1,754,437 1,628,191
Less accumulated depreciation (2,164,708) (2,035,510)
------------- -------------
2,135,680 2,126,071
Land 642,287 659,627
------------- -------------
Land, property and equipment - net 2,777,967 2,785,698
------------- -------------
OTHER ASSETS:
Loan commitment fees - net 31,060 40,974
Restricted cash 18,950 18,950
Due from related parties 582,873 463,437
------------- -------------
Total other assets 632,883 523,361
------------- -------------
Total $ 3,493,878 $ 3,383,789
------------- -------------
------------- -------------
LIABILITIES AND NET INVESTMENTS AND ADVANCES
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 234,341 $ 221,792
Current portion of long-term debt 1,246,462 288,112
------------- -------------
Total current liabilities 1,480,803 509,904
LONG-TERM DEBT (net of current portion) 3,132,088 4,378,551
------------- -------------
Total liabilities 4,612,891 4,888,455
------------- -------------
COMMITMENTS AND CONTINGENCIES (notes 4, 5 and 6)
NET INVESTMENT AND ADVANCES (1,119,013) (1,504,666)
------------- -------------
Total $ 3,493,878 $ 3,383,789
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
- -------------------------------------------------------------------------------
F-38
<PAGE>
INITIAL HOTELS
COMBINED STATEMENTS OF REVENUES AND EXPENSES EXCLUDING INCOME TAXES
FOR THE CALENDAR YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Ended Sept. 30, Years Ended December 31,
1994 --------------------------------------------
(Unaudited) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Room Sales $ 1,996,191 $ 2,610,496 $ 2,441,913 $ 2,255,483
Telephone 61,424 79,999 66,983 36,337
Other - principally vending 31,778 43,971 46,714 32,827
------------- ------------- ------------- -------------
Total 2,089,393 2,734,466 2,555,610 2,324,647
------------- ------------- ------------- -------------
EXPENSES:
Rooms 424,208 562,350 519,762 476,569
Interest 305,364 400,002 516,116 631,489
Administrative and general 236,540 317,192 327,038 313,432
Depreciation and amortization 88,924 139,112 122,575 287,303
Management fee 103,637 135,478 127,061 68,483
Franchise 99,823 130,554 122,112 112,790
Repairs and maintenance 97,562 121,545 129,770 132,528
Energy cost 92,885 114,536 109,721 106,641
Property taxes 48,840 69,286 64,584 58,731
Telephone 33,529 43,748 46,775 46,296
Insurance 30,852 42,794 28,716 35,700
Marketing 39,910 51,890 51,335 45,287
Rent - - - -
Loan restructuring costs - - 101,883 59,528
------------- ------------- ------------- -------------
Total (includes reimbursed costs and
payments for services to related parties
of $261,841 for the nine months ended
September 30, 1994 and $298,045, $311,933,
and $281,986, for calendar years 1994,
1993 and 1992, respectively)
1,602,074 2,128,487 2,267,448 2,374,777
------------- ------------- ------------- -------------
NET REVENUES OVER EXPENSES
(EXPENSES OVER REVENUES) $ 487,319 $ 605,979 $ 288,162 $ (50,130)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
F-39
<PAGE>
INITIAL HOTELS
STATEMENTS OF CASH FLOWS
FOR THE CALENDAR YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Ended Sept. 30, Years Ended December 31,
1994 -------------------------------------------
(Unaudited) 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 487,319 $ 605,979 $ 288,162 $ (50,130)
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 88,924 139,112 122,575 287,303
Changes in operating assets and liabilities
Accounts receivable (16,704) (8,568) (10,145) 7,158
Prepaid expenses 17,345 270 (923) 4,471
Accounts payable and accrued expenses 18,651 12,549 31,602 7,794
---------- ---------- ---------- ----------
Net cash provided by
operating activities 595,535 749,342 431,271 256,596
---------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment (132,204) (138,807) (209,008) (79,686)
Loan commitment fees - - (49,570) -
Restricted cash - - (18,950) -
Due from related parties - net (95,721) (119,436) 42,056 (452,149)
---------- ---------- ---------- ----------
Net cash used in investing activities (227,925) (258,243) (235,472) (531,835)
---------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Changes in net investment and advances (144,139) (220,326) (220,411) 287,003
Borrowings on long-term debt - - 3,456,156 -
Payments on long-term debt (223,471) (288,113) (3,431,544) (11,764)
Other - 17,340 - -
---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities (367,610) (491,099) (195,799) 275,239
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH - - - -
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD - - - -
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ - $ - $ - $ -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
F-40
<PAGE>
INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. PROPOSED INITIAL PUBLIC OFFERING AND BASIS OF PRESENTATION
ORGANIZATION:
Host Funding, Inc. ("Host Funding") is a Maryland corporation which
has been recently established to acquire, own and lease hotel properties.
Host Funding intends to operate as real estate investment trust under the
Internal Revenue Code and is currently a wholly owned subsidiary of All
American Group Limited Partnership, a Delaware Limited Partnership ("AAG").
Host Funding plans to issue shares in an initial public stock offering (the
"Stock Offering").
BASIS OF PRESENTATION:
AAG or a subsidiary or a predecessor thereof designed, constructed and
acquired Super 8 Motels, including the 4 properties listed below
(collectively, the "Initial Hotels" and, individually, the "Hotel" or
"Hotels") as follows:
Miner, Missouri
Poplar Bluff, Missouri
Somerset, Kentucky
Rock Falls, Illinois
All of the Initial Hotels are included in the accompanying financial
statements for all periods presented.
The Initial Hotels include the land, property and equipment for each
of the Hotels. Assets and liabilities of the Initial Hotels have been
stated at AAG's historical cost basis.
The accompanying combined financial statements have been prepared for
the propose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form
S-4 and S-11 of Host Funding. The Initial Hotels, for the periods
presented, were a component of AAG or a subsidiary of a predecessor. AAG
has not historically allocated or charged individual units for interest on
net advances and no such expenses are reflected in the accompanying
financial statements. The accompanying financial statements also include
no provision or assets or liabilities related to federal or state income
taxes because the Initial Hotels did not pay income taxes and AAG does not
allocate or charge these expenses to its individual units. Accordingly,
the accompanying financial statements are not intended to be a complete
presentation of the Initial Hotel's assets, liabilities and net investment
and advances, revenues and expenses or cash flows.
Changes in net investment and advances represent the revenues over
expenses or expenses over revenue excluding income taxes, of the Initial
Hotels adjusted for cash transferred between AAG and the Initial Hotels.
F-41
<PAGE>
An analysis of the activity in this balance for the three calendar
years ended December 31, 1994 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance January 1, 1992. . . . . . . . . . . . . . . . .$(1,809,290)
Expenses over revenue excluding income taxes . . . . . . . .(50,130)
Net cash transferred from AAG. . . . . . . . . . . . . . . .287,003
-------
Balance December 31, 1993. . . . . . . . . . . . . . . . (1,572,417)
Revenues over expenses excluding income taxes. . . . . . . 288,162
Net cash transferred to AAG. . . . . . . . . . . . . . . . (220,411)
---------
Balance December 31, 1993. . . . . . . . . . . . . . . . (1,504,666)
Revenues over expenses excluding income taxes. . . . . . . .605,979
Net cash transferred to AAG. . . . . . . . . . . . . . . . (220,326)
---------
Balance December 31, 1994. . . . . . . . . . . . . . . .$(1,119,013)
------------
------------
</TABLE>
The average net investment and advances for calendar years 1992, 1993
and 1994 was approximately $(1.3) million, $(1.5) million and $(1.7)
million, respectively.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR:
The Initial Hotels' calendar year ends on December 31.
CASH AND CASH EQUIVALENTS:
Cash equivalents, which equivalents have a maturity date of three
months or less at date of purchase, represent the Initial Hotel's undivided
interest in cash accounts managed by All American Group, Inc., a Delaware
Corporation owned 100% by Guy and Dorothy Hatfield and the General Partner
of AAG (the "General Partner") on behalf of General Partner managed
properties. Funds transferred to the cash account are held primarily in
business checking and merchant credit card accounts. The cash accounts are
used to pay substantially all outstanding bills and to accumulate
substantially all receipts on behalf of the Initial Hotels.
LAND, PROPERTY AND EQUIPMENT:
Buildings and improvements are being depreciated over useful lives of
35 years using the straight-line method. Hotel furnishing and equipment
are being depreciated using primarily straight-line methods over useful
lives ranging from 3 to 7 years.
The Initial Hotels assess impairment of their real estate properties
based upon whether it is probable that undiscounted future cash flows from
each individual property will be less than its net book value. No such
impairments have occurred through December 31, 1994.
LOAN COMMITMENT FEES:
Loan commitment fees are net of accumulated amortization. No loan
commitment fees were outstanding in 1992. The amortization periods are the
terms of the loans.
RESTRICTED CASH:
Restricted cash represents a certificate of deposit held by a bank as
security for the State of Missouri to assure sales tax is timely paid.
F-42
<PAGE>
INTERIM FINANCIAL STATEMENTS:
The accompanying interim period financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
principally of normal recurring adjustments) necessary for a fair
presentation of the results for the interim periods presented. The results
for the interim periods are not necessarily indicative of the results to be
obtained for the full fiscal year due to the seasonal nature of the Initial
Hotels' business.
NEW STATEMENT OF FINANCIAL ACCOUNT STANDARDS:
The Initial Hotels are required to adopt Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" no later
than their Calendar year ending December 31, 1996. Management anticipates
that adoption of SFAS No. 121 will not have a material effect on the
Initial Hotels' financial statements.
NOTE 3. MANAGEMENT AND RELATED PARTY TRANSACTIONS
AAG had entered into a Management Agreement (the "Management
Agreement") with the General Partner, for a term of ten (10) years from
January 1, 1992, with three (3) successive ten (10) year options to extend,
to manage the motel operations. The Management Agreement could be
terminated early upon the occurrence of certain events as specified in the
Management Agreement. On January 1, 1995, in connection with the leasing
of the motel properties described in note 6, AAG terminated the Management
Agreement with the General Partner.
Under the Management Agreement, the General Partner was paid a
management fee equal to 5% of motel revenues, as defined. In 1992, the
General Partner agreed to accept a reduced management fee equal to 3% of
motel revenues as defined. Management fees paid in 1994, 1993 and 1992
totalled $135,478, $127,061 and $68,483.
The Partnership has reimbursed or accrued a payable to the General
Partner (based on actual costs incurred by the General Partner) for certain
costs paid on behalf of the Partnership. These costs include insurance and
workmen's compensation premiums, travel, legal costs and other expenses.
The total of such costs reimbursed in 1994, 1993 and 1992 totalled
$163,567, $184,872 and $213,503. In addition, the General Partner provided
bookkeeping, refurbishment and capital addition advisory and partnership
administration services to AAG, which services were provided as part of the
Management Agreement.
In February 1994, AAG sold land adjacent to the motels located in
Miner, Missouri to an entity substantially owned by Guy and Dorothy
Hatfield for $17,340, which was equal to its cost.
NOTE 4. FRANCHISE AGREEMENTS
AAG has been granted license agreements by Super 8 Motels, Inc. for
20-year terms expiring in 2005. Pursuant to the terms of the agreement,
AAG is required to pay a royalty fee and an advertising fee equal to 4% and
1%, respectively, of gross room revenue (See Note 6).
F-43
<PAGE>
NOTE 5. LONG-TERM DEBT, LOAN RESTRUCTURING COSTS AND CONTINGENCY
A summary of the Initial Hotels long-term debt as of December 31, 1994 and
1993 follows:
<TABLE>
<CAPTION>
<S> <C> <C>
First mortgage note payable; 8.5% interest until
March 1994, prime plus 1.5% but not less than
8.5% thereafter, adjusted annually; payments of
$11,823 monthly, due March 1998; personal
guarantees of Guy E. and Dorothy Hatfield $1,121,406 $1,165,914
First mortgage note payable; 8.75% interest;
payments of $11,244 monthly; due February 1998. 1,051,351 1,091,098
First mortgage note payable; prime plus 2%,
adjusted quarterly; payments of $9,174 monthly,
due March 1998. 898,617 930,167
Modified first mortgage note payable; interest
at greater of prime or six (6) month commercial
paper rates plus 3%, but not less than 9%;
variable monthly payment of interest plus
principal to amortize over ten (10) years from
July 1993; due August 1995 (see below). 1,061,656 1,154,871
Three (3) modified second mortgage notes payable;
interest at greater of prime or six (6) month
commercial paper rate plus 3%, but not less than
9%, variable monthly payments of interest plus
principal to amortize over five (5) years from
July 1993; due July 1998 (see below). 242,835 324,613
------- -------
4,378,550 4,666,663
Less current portion 1,246,462 288,112
--------- -------
$3,132,088 $4,378,551
---------- ----------
</TABLE>
Aggregate principal payments for the next four calendar years ended
December 31, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $1,246,462
1996 209,867
1997 200,400
1998 2,721,821
---------
Total $4,378,550
----------
----------
</TABLE>
Substantially all of the assets of the Initial Hotels are pledged as
security for the above debt.
The Initial Hotels were in default under their Loan Agreement ("Loan
Agreement") with the lender that held first mortgage notes payable on all
of the motel properties in 1992, with a
F-44
<PAGE>
combined balance outstanding of $4,642,051 as of December 31, 1992. In
August 1992, March 1993 and July 1993, the Partnership entered into
agreements to modify the original Loan Agreement. Under the Loan Agreement,
as modified, the Partnership was required to refinance or sell the property
located in Somerset, Kentucky by August 1995 and retire the debt
outstanding. In March 1995, the modified first mortgage note payable
totalling $1,061,656 and the three modified second mortgage notes payable
totalling $242,835 were refinanced into a first mortgage note payable
totalling $1,160,000 at an annual interest rate of prime plus 1/2%,
adjusted daily and payable monthly with the outstanding principal and any
remaining accrued interest due December 31, 1995.
As part of the Loan Agreement, the Initial Hotels agreed to pay costs
and expenses of the lenders totalling $101,883 and $59,528, which amounts
were expensed as loan restructuring costs in 1993 and 1992, respectively.
Hatfield Inn, Inc., a Delaware Corporation 100% owned by Guy E.
Hatfield and his wife (the "Hatfield Inn"), is the owner and operator of a
motel adjacent to the Partnership's property located in Miner, Missouri.
The motel owned by Hatfield Inn was newly constructed and is secured by a
$730,500 first deed of trust (the "Hatfield Inn Note"). The Initial Hotel
property located in Miner, Missouri serves as cross collateral under a
second deed of trust (the "Cross Collateral Agreement") to secure payment
of the Hatfield Inn Note. As the Hatfield Inn property is completed and
has operating history, the Initial Hotels have requested the Cross
Collateral Agreement under the Hatfield Inn note be released. No assurance
can be given that the Cross Collateral Agreement will be released by the
lender, and the Initial Hotels remain contingently liable under the
Hatfield Inn Note. Further, the Initial Hotels and Hatfield Inn have a
shared parking agreement allowing cars to park in either property's parking
facilities, compete for similar business, and are commonly managed by the
General Partner of AAG.
NOTE 6. SUBSEQUENT EVENTS
On January 1, 1995, AAG agreed to lease the four motel properties
located in Somerset, Kentucky; Rock Falls, Illinois; and Poplar Bluff and
Miner, Missouri to Inn Fund, LLC a Delaware limited liability company ("Inn
Fund"). Guy and Dorothy Hatfield and Ian Gardner-Smith own 7.5% and 92.5%,
respectively, of Membership Interest in Inn Fund. The lease terms are for
a period of 15 years at combined total annual base rents of $931,000 or
percentage rentals ranging from 35% to 55% for each individual property
based upon gross revenue levels, whichever is greater.
On March 31, 1995, Guy and Dorothy Hatfield and their two children,
via a capital contribution, contributed a note receivable (the "Related
Party Note") in the amount of $1,805,675 to AAG. This Related Party Note
was secured by four (4) motel properties located in Central City and
Lebanon, Kentucky; Miner, Missouri; and Dexter, Missouri, which collateral
was provided by Hatfield Inns, via a Lent Collateral Agreement. In
September 1995, the Related Party Note was amended to remove the obligation
of AAG to maintain real property security, conditioned upon the delivery to
Host Funding of an unconditional guarantee by Guy and Dorothy Hatfield.
The Related Party Note bears interest at 10% per annum, adjusted to 12% per
annum upon completion of the Possible Formation Transactions, payable
quarterly commencing on November 15, 1995, with remaining outstanding
principal and unpaid interest due and payable on March 31, 2000.
F-45
<PAGE>
On April 1, 1995, AAG entered into an agreement with Host Funding to
contribute certain assets of AAG's four motel properties located in
Somerset, Kentucky; Rock Falls, Illinois; and Poplar Bluff and Miner,
Missouri; and the Related Party Note (the "Contribution and Assumption
Agreement") for 100% of the common stock in Host Funding. Host Funding
assumed AAG's leases with Inn Fund concurrent with the transfer.
The non-cash investing activity of AAG which resulted in the
contribution of certain assets to Host funding was as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Contribution of net assets and liabilities for
common stock and accumulated deficit
Land, property and equipment $ 2,741,477
Loan Commitment fees 28,582
Related Party Note receivable 1,805,675
Long-term debt (4,215,676)
Common stock (1)
-----------
Net investment in Host Funding, Inc. $ 360,057
----------
----------
</TABLE>
Further, on April 1, 1995, the Partners of AAG entered into a Stock
Pledge Agreement (the "Stock Pledge Agreement") with Host Funding.
Pursuant to the Stock Pledge Agreement, the General and Limited Partners
agreed to pledge a security investment in 26.2 fraction shares, together
with all additional shares issued to the General and Limited Partners by
reason of stock split or stock dividend, of common stock in Host Funding to
secure the Related Party Note.
In addition, Host Funding intends to acquire certain assets of Mission
Bay Super 8, Ltd., a California limited partnership ("Mission Bay"), the
owner of a 117 room Super 8 motel located in San Diego, California,
pursuant to an asset acquisition agreement (the "Mission Bay Acquisition
Agreement") by which Host Funding will acquire the hotel assets of Mission
Bay. The Mission Bay Acquisition Agreement will exchange common stock in
Host Funding for limited and general partnership interest in a final
liquidating distribution by Mission Bay. Since the Mission Bay acquisition
is conditioned upon the consent of the limited partners of Mission Bay, no
assurance can be given that the Mission Bay asset acquisition will be
consummated.
Further, Host Funding intends to raise additional capital via the
Stock Offering, concurrent with the Mission Bay asset acquisition. Host
Funding plans to use the capital raised from the Stock Offering to pay down
long-term debt, to pay expenses of the formation of Host Funding, and for
working capital purposes. No assurance can be given that the Stock
Offering will be consummated.
In addition, in September 1995, Host Funding agreed to enter into new
motel leases for the four existing motel properties and Mission Bay (the
"New Leases") with a limited liability company of a nationally recognized
hotel management company and operator, Crossroads Hospitality Tenant
Company, a Delaware Limited Liability Company ("Crossroads"), subject to
completion of the Mission Bay Acquisition Agreement and the Stock Offering.
The New Leases are for a term of 15 years from the final effective date of
completion of the Mission Bay Acquisition and the Stock Offering. Combined
total annual base rentals of $1,029,800 are due, plus percentage rentals
ranging from 28.75% to 40% of year to date revenues less varying break even
thresholds adjusted annually by defined percentages for each motel. The
New Leases generally require Crossroads to pay all operating expenses of
the properties, including
F-46
<PAGE>
maintenance and insurance, while Host Funding is responsible for property
taxes. In addition, Crossroads is required to set aside in a replacement
reserve $125 per room, per quarter, increased annually by inflation
factors, to be used for capital additions which generally must be approved
by Host Funding. Further, Crossroads will also be provided a 30 day right
of first refusal to purchase any hotel property under the New Leases equal
to the price offered Host Funding.
Crossroads may terminate any one lease within the first five years
without damages. Should two leases be terminated within the first five
years, Crossroads has agreed to pay a termination fee equal to the previous
twelve months revenue for the hotel times 18% in years one to three, 12% in
year four and 6% in year five. If more than two leases are terminated
within the first five years, Host Funding has the right to terminate all
remaining leases or to collect the termination fee as described above.
The parent company of Crossroads has agreed to provide a letter of
credit to secure the payment of rent due under the leases in the amount of
$264,000 during the first three years of the lease terms. In addition,
Crossroads has agreed to maintain a letter of credit thereafter equal to
annually calculated termination fees that would be due on the lease anniversary
dates throughout the remaining terms of the leases. After the first year,
Crossroads parent may substitute the letter of credit by guaranteeing the
equivalent amounts required by the letter of credit and providing to Host
Funding a copy of Crossroads parent's audited financial statements which
indicate a net worth of at least 2-1/2 times the value of the letter of credit,
with at least 40% of the net worth in cash or cash equivalent assets. In
addition, Crossroads parent makes certain negative covenants concerning
maintenance of its minimum net worth levels.
No assurance can be given that the New Leases will be consummated.
Upon completion of the Mission Bay acquisition, the Stock Offering and
execution of the New Leases, Host Funding intends to elect to be taxed as a
real estate investment trust under the Internal Revenue Code of 1986, as
amended, or any successor statute (the "Possible Formation Transactions").
As part of, and only upon occurrence of, the Possible Formation
Transactions, AAG intends to assign the franchise agreements to Crossroads.
Mission Bay has a similar license agreement with Super 8, which likely will
be assigned to the lessee. Super 8 has expressed a willingness to allow
the assignments, but may require Crossroads to pay a higher royalty and
advertising fee.
F-47
<PAGE> INN FUND, LLC
(A LIMITED LIABILITY COMPANY)
INITIALS HOTELS AND LESSEE
BALANCE SHEET
SEPTEMBER 30, 1995
(UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 139,502
Accounts receivable 65,348
Prepaid expenses 33,137
------------
Total current assets 237,988
------------
PROPERTY AND EQUIPMENT - At cost:
Furnishings and equipment 51,823
Less accumulated depreciation (5,288)
------------
Property and equipment - net 46,535
------------
RESTRICTED CASH 18,950
------------
Total $ 303,472
------------
------------
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 182,160
Accounts payable - related parties 16,640
------------
Total current liabilities 198,800
MEMBERS' EQUITY 104,672
------------
Total $ 303,472
------------
------------
</TABLE>
See accompanying notes to unaudited financial statements.
- -----------------------------------------------------------------------------
F-48
<PAGE>
INN FUND, LLC
(A LIMITED LIABILITY COMPANY)
INITIAL HOTELS AND LESSEE
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
REVENUES:
Room Sales $ 1,992,183
Telephone 57,489
Other - principally vending 29,586
------------
Total 2,079,258
------------
EXPENSES:
Rooms 422,226
Rent-related party 832,944
Administrative and general 231,052
Depreciation 5,288
Management fee-related party 61,802
Franchise 99,638
Repairs and maintenance 77,728
Energy cost 92,686
Property taxes 53,010
Telephone 30,682
Insurance 36,663
Marketing 30,867
------------
Total (includes reimbursed costs and payments
for services to related parties of $1,094,786 1,974,586
------------
NET INCOME $ 104,672
------------
------------
</TABLE>
See accompanying notes to unaudited financial statements.
- ------------------------------------------------------------------------------
F-49
<PAGE>
INN FUND, LLC
(A LIMITED LIABILITY COMPANY)
INITIAL HOTELS AND LESSEE
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income $ 104,672
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,288
Changes in operating assets and liabilities
Accounts receivable (65,347)
Prepaid expenses (33,138)
Accounts payable and accrued expenses 182,160
Accounts payable - related parties 16,640
------------
Net cash provided by operating activities 210,275
------------
INVESTING ACTIVITIES:
Purchase of property and equipment (51,823)
Restricted Cash (70,733)
Net cash used in investing activities ------------
NET INCREASE IN CASH 139,502
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 0
------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 139,502
------------
------------
</TABLE>
See accompanying notes to unaudited financial statements.
- ------------------------------------------------------------------------------
F-50
<PAGE>
INN FUND, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inn Fund, LLC, a Delaware Limited Liability Company ("Inn Fund and
Initial Hotels and Lessee") was formed on December 30, 1994 for the
purpose of leasing four motel properties located in Somerset, Kentucky;
Rock Falls, Illinois; and Poplar Bluff and Miner, Missouri. Prior
to January 1, 1995, Inn Fund was inactive. Guy and Dorothy Hatfield
and Ian-Gardner Smith (the "Members") own 7.5% and 92.5%, respectively,
of Membership Interest ("Membership Interest") in Inn Fund.
Net profits, losses and cash flows from operations of Inn Fund are
allocated to the Members in proportion to their respective Membership
Interests as provided in the Membership Agreement.
Cash equivalents, which equivalents have a maturity date of three
months or less at date of purchase, represent Inn Fund's undivided
interest in cash accounts managed by All American Group, Inc., a
Delaware Corporation (the "Manager"), 100% owned by Guy and Dorothy
Hatfield of behalf of Manager operated properties. Funds transferred
to the cash account are held primarily in business checking and
merchant credit card accounts. The cash accounts are used to pay
substantially all outstanding bills and to accumulate substantially
all receipts on behalf of Inn Fund.
In accordance with the provisions of the Internal Revenue Code, Inn
Fund is not subject to the payment of income taxes, and no provision
therefore is required to be made herein.
NOTE 2. LEASES - RELATED PARTY
On January 1, 1995, Inn Fund leased four motels from All American
Group Limited Partnership, a Delaware Limited Partnership ("AAG") that
is 100% owned by Guy and Dorothy Hatfield and their children, which
leases, on April 1, 1995, were transferred to Host Funding, Inc., a
Maryland Corporation ("Host Funding"), 100% owned by AAG. The four
motels are operated for Inn Fund by the Manager.
The individual motel leases are for a term of 15 years, expiring on
December 31, 2011, at combined total annual base rents of $931,000, or
percentage rentals ranging from 35% to 55% for each individual
property based upon gross revenue levels, whichever is greater. The
leases are "triple net" in that Inn Fund is generally responsible for
paying all operating expenses of the properties, including
maintenance, insurance and property taxes. Further, Inn Fund is
required to set aside in a replacement reserve an amount equal to 4%
of gross room revenue to be used for capital additions to the
properties (see note 5).
F-51
<PAGE>
Minimum future rents at June 30, 1995 due under non-cancelable
operating leases for the period July 1 to December 31, 1995,and for the
four years ending December 31, 1996 to 1999 and thereafter are as follows:
<TABLE>
<CAPTION>
Year/Period Amount
----------- ------
<S> <C>
1995 $ 665,500
1996 931,000
1997 931,000
1998 931,000
1999 931,000
Thereafter 9,310,000
----------
Total $13,499,500
-----------
-----------
</TABLE>
NOTE 3. MANAGEMENT - RELATED PARTY
Inn Fund has entered into a Management Agreement
("Management Agreement") with the Manager for a term of
fifteen (15) years from January 1, 1995 to manage the motel
operations. The Management Agreement may be terminated
early upon the occurrence of certain events as specified in
the Management Agreement (see note 5).
Under the Management Agreement, the General Partner is paid
a management fee equal to 3% of motel revenues, as defined,
plus an incentive fee based upon a predetermined formula in
the Management Agreement.
NOTE 4. FRANCHISE AGREEMENTS
AAG has been granted License Agreements ("License
Agreements") by Super 8 Motels, Inc. ("Super 8") for 20-year
terms expiring in 2005. Pursuant to the terms of the
License Agreements, AAG is required to pay a royalty fee and
an advertising fee equal to 4% and 1%, respectively, of
gross room revenue, which obligation has been assigned to
Inn Fund without Super 8's permission. It is the intention
of Inn Fund to seek Super 8's permission to permanently
assign the License Agreements should Inn Fund continue to
lease the properties.
NOTE 5. POSSIBLE REORGANIZATION AND LIMITED LIABILITY COMPANY
LIQUIDATION AND SUBSEQUENT EVENTS
Host Funding, lessor of Inn Funds four motel properties,
intends to acquire certain assets of Mission Bay Super 8,
Ltd., a California limited partnership ("Mission Bay"), the
owner of a 117 room Super 8 motel located in San Diego,
California, pursuant to an asset acquisition agreement (the
"Mission Bay Acquisition Agreement") by which Host Funding
will acquire the hotel assets of Mission Bay. The Mission
Bay Acquisition Agreement will exchange common stock in Host
Funding for limited and general partnership interest in a
final liquidating distribution by Mission Bay. Since the
Mission Bay acquisition is conditioned upon the consent of
the limited partners of Mission Bay, no assurance can be
given that the Mission Bay asset acquisition will be
consummated.
Further, Host Funding intends to raise additional capital
via an initial public stock offering (the "Stock Offering")
concurrent with the Mission Bay asset acquisition. Host
Funding plans to use the capital raised from the Stock
Offering to pay down long-term debt, to pay expenses of the
formation of Host Funding, and for working capital purposes.
No assurance can be given that the Stock Offering will be
consummated.
F-52
<PAGE>
In addition, in September 1995, Host Funding has agreed
(with Inn Fund's consent) to enter into new motel leases
for the four existing motel properties and Mission Bay (the
"New Leases") with a limited liability company of a nationally
recognized hotel management company and operator, Crossroads
Hospitality Tenant Company, a Delaware Limited Liability Company
("Crossroads"), subject to completion of the Mission Bay
Acquisition Agreement and the Stock Offering.
The New Leases are for a term of 15 years from the final
effective date of completion of the Mission Bay Acquisition
and the Stock Offering. Combined total annual base rentals
of $1,029,800 will be due, plus percentage rentals ranging
from 28.75% to 40% of year to date revenues less varying
break even thresholds adjusted annually by defined
percentages for each motel. The New Leases generally
require Crossroads to pay all operating expenses of the
properties, including maintenance and insurance, while Host
Funding is responsible for property taxes. In addition,
Crossroads is required to set aside in a replacement reserve
$125 per room, per quarter, increased annually by inflation
factors, to be used for capital additions which generally
must be approved by Host Funding. Further, Crossroads will also be
provided a 30 day right of first refusal to purcase any hotel
property under the New Lease equal to the price offered Host
Funding.
Crossroads may terminate any one lease within the first five
years without damages. Should two leases be terminated
within the first five years, Crossroads has agreed to pay a
termination fee equal to the previous twelve months revenue
for the hotel times 18% in years one to three, 12% in year
four and 6% in year five. If more than two leases are
terminated within the first five years, Host Funding has the
right to terminate all remaining leases or to collect the
termination fee as described above.
The parent company of Crossroads has agreed to provide a
letter of credit to secure the payment of rent due under the
leases in the amount of $264,000 during the first three
years of the lease terms. In addition, Crossroads has
agreed to maintain a letter of credit thereafter equal to
annually calculated termination fees that would be due on
the lease anniversary dates throughout the remaining terms
of the leases. After the first year Crossroads parent may
substitute the letter of credit by guaranteeing the equivalent
amounts required by the letter of credit and providing
to Host Funding a copy of Crossroads parents audited financial
statements which indicate a net worth of at least 2 1/2 times the
value of the letter of credit with at least 40% of the net worth in
cash or cash equivalent assets. In addition, Crosroads parent
makes certain negative covenats concerning maintenance of its
minimum net worth levels.
No assurance can be given that the New Leases will be
consummated.
Upon completion of the Mission Bay acquisition, the Stock
Offering and the execution of the New Leases, Host Funding
intends to elect to be taxed as a real estate investment
trust under the Internal Revenue Code of 1986, as amended,
or any successor statute (the "Possible Formation
Transactions").
It is the present intention of management upon completion of
the Possible Formation Transactions to liquidate Inn Fund.
The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
F-53
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Partners
Mission Bay Super 8 Ltd.,
A California Limited Partnership
We have audited the balance sheets of Mission Bay Super 8 Ltd., A
California Limited Partnership, as of December 31, 1994 and 1993, and the
related statements of operations, partners' capital, and cash flows for the
years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mission Bay Super 8 Ltd., A
California Limited Partnership, as of December 31, 1994 and 1993, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/Levitz, Zacks & Ciceric
San Diego, California
February 3, 1995
F-54
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Balance Sheets
December 31, 1994 and 1993
...ASSETS...
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 43,260 $ 9,501
Accounts receivable 15,428 11,539
Operating supplies 19,204 18,521
Prepaid expenses 9,884 18,171
Due from affiliates 27,431 -0-
---------- ----------
Total current assets 115,207 57,732
---------- ----------
Investment property, at carrying value:
Land 1,212,000 2,620,612
Building and improvements 2,024,033 2,161,590
Furniture, fixtures and equipment 702,412 698,083
---------- ----------
3,938,445 5,480,285
Less accumulated depreciation 1,128,445 1,044,241
---------- ----------
Investment property, net 2,810,000 4,436,044
---------- ----------
Franchise fees, net 12,829 13,829
---------- ----------
Total assets $2,938,036 $4,507,605
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE>
...LIABILITIES AND PARTNERS' CAPITAL...
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 20,782 $ 10,943
Accrued expenses 11,264 8,618
Due to affiliates -0- 1,026
---------- ----------
Total current liabilities 32,046 20,587
---------- ----------
Partners' Capital:
General partner:
Cumulative net income 7,953 146,056
Cumulative cash distributions (286,197) (266,197)
---------- ----------
(278,244) (120,141)
---------- ----------
Limited partners (6,600 interests):
Capital contributions, net of
offering costs 5,761,115 5,761,115
Cumulative net income 71,565 1,314,490
Cumulative cash distributions (2,648,446) (2,468,446)
---------- ----------
3,184,234 4,607,159
---------- ----------
Total partners' capital 2,905,990 4,487,018
---------- ----------
Total liabilities and partners' capital $2,938,036 $4,507,605
---------- ----------
---------- ----------
</TABLE>
F-56
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Statements of Operations
Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
----------- ----------
<S> <C> <C>
Revenues:
Room revenues $ 989,703 $ 960,166
Phone revenues 41,459 27,649
Interest income 1,207 2,618
Other 22,450 31,352
----------- ----------
Total revenues 1,054,819 1,021,785
----------- ----------
Expenses:
Unrealized loss due to decline in value of
investment property (Note 5) 1,534,950 -0-
Property operating expenses 377,255 391,470
General and administrative 133,567 156,769
Depreciation 84,204 89,706
Management fees 63,215 61,150
Royalties and advertising 59,391 57,610
Marketing 57,478 59,936
Repairs and maintenance 56,895 58,924
Real estate taxes 44,448 45,588
Property and liability insurance 23,444 25,872
Amortization 1,000 1,000
----------- ----------
Total expenses 2,435,847 948,025
----------- ----------
Net income (loss) $(1,381,028) $ 73,760
----------- ----------
----------- ----------
Net income (loss) per interest $ (188.32) $ 10.06
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Statements of Partners' Capital
Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
General Partner
-------------------------------------
Cumulative
Cumulative Cash
Net Income Distributions Total
---------- ------------- --------
<S> <C> <C> <C>
Balance, December 31, 1992 $ 138,680 $(248,197) $(109,517)
Net income, year ended December 31, 1993 7,376 -0- 7,376
Cash distributions ($24.55 per interest) -0- (18,000) (18,000)
--------- --------- ---------
Balance, December 31, 1993 146,056 (266,197) (120,141)
Net loss, year ended December 31, 1994 (138,103) -0- (138,103)
Cash distributions ($27.27 per interest) - 0- (20,000) (20,000)
--------- --------- --------
Balance, December 31, 1994 $ 7,953 $(286,197) $(278,244)
--------- --------- --------
--------- --------- --------
</TABLE>
F-58
<PAGE>
<TABLE>
<CAPTION>
Limited Partners
- --------------------------------------------------------
Cumulative Total
Capital Cumulative Cash Partners'
Contributions Net Income Distributions Total Capital
- ------------- ---------- ------------- -------- ----------
<S> <C> <C> <C> <C>
$5,761,115 $1,248,106 $(2,306,446) $4,702,775 $4,593,258
-0- 66,384 -0- 66,384 73,760
-0- -0- (162,000) (162,000) (180,000)
- ---------- ---------- ----------- ----------- ----------
5,761,115 1,314,490 (2,468,446) 4,607,159 4,487,018
-0- (1,242,925) -0- (1,242,925) (1,381,028)
-0- -0- (180,000) (180,000) (200,000)
- ---------- ---------- ----------- ----------- -----------
$5,761,115 $ 71,565 $(2,648,446) $3,184,234 $2,905,990
- ---------- ---------- ----------- ---------- ----------
- ---------- ---------- ----------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Statements of Cash Flows
Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,381,028) $ 73,760
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Unrealized loss due to decline in value of
investment property 1,534,950 -0-
Depreciation and amortization 85,204 90,706
(Increase) decrease in:
Accounts receivable (3,889) 3,228
Operating supplies (683) (1,223)
Prepaid expenses 8,287 7,272
Due from affiliates (3,931) -0-
Increase (decrease) in:
Accounts payable 9,839 (7,431)
Accrued expenses 2,646 (4,381)
Due to affiliates (1,026) (1,098)
----------- -----------
Net cash provided by operating
activities 250,369 160,833
----------- -----------
Cash flows from investing activities:
Investment property expenditures (16,610) (93,265)
----------- -----------
Net cash used in investing activities (16,610) (93,265)
----------- -----------
Cash flows from financing activities:
Cash distributions to partners (200,000) (180,000)
----------- -----------
Net cash used in financing activities (200,000) (180,000)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 33,759 (112,432)
Cash and cash equivalents, beginning of year 9,501 121,933
----------- -----------
Cash and cash equivalents, end of year $ 43,260 $ 9,501
----------- -----------
----------- -----------
</TABLE>
Schedule of noncash investing and financing activities:
Sale of carpeting to related party (Note 4).
See accompanying notes to financial statements.
F-60
<PAGE>
MISSION BAY SUPER 8 LTD..
A Californial Limited Partnership
Notes to Financial Statements
Note 1. THE PARTNERSHIP AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mission Bay Super 8 Ltd., A California Limited Partnership (the
Partnership), formerly Motels of America Series IX, A California
Limited Partnership, was formed on February 5, 1987 pursuant to the
California Revised Uniform Limited Partnership Act. The purpose of
the Partnership is to construct, own, and operate a 117-room "economy"
motel under a Super 8 franchise. The motel was opened in November
1987.
The following is a summary of the Partnership's significant accounting
policies:
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid instruments purchased with
an original maturity of three months or less to be cash equivalents.
INVESTMENT PROPERTY
Investment property is recorded at cost. Writedowns to fair value are
recorded when investment property has been permanently impaired based
on comparing carrying value to the undiscounted sum of future cash
flows expected from the property. Depreciation is computed
using the straight-line method based on estimated useful lives of 5 to
35 years. Maintenance and repairs costs are expensed as incurred,
while significant improvements, replacements, and major renovations
are capitalized.
FRANCHISE FEES
Franchise fees are amortized over the 20-year life of the franchise
agreement.
INCOME TAXES
No provision for income taxes has been made as any liability for such
taxes would be that of the partners rather than the Partnership.
F-61
<PAGE>
MISSION BAY SUPER 8 LTD..
A Californial Limited Partnership
Notes to Financial Statements
(Continued)
NET INCOME (LOSS) PER INTEREST
Net income (loss) per interest is based upon the 90% allocated to
limited partners divided by 6,600 limited partner interests
outstanding throughout the year.
Note 2. PARTNERSHIP AGREEMENT
Net income or loss and cash distributions from operations of the
Partnership are allocated 90% to the limited partners and 10% to the
general partner. Profits from the sale or other disposition of
Partnership property are to be allocated to the general partner until
its capital account equals zero; thereafter, to the limited partners
until their capital accounts equal their capital contributions reduced
by prior distributions of cash from sale or refinancing plus an amount
equal to a cumulative but not compounded annual 8% return thereon
which cumulative return shall be reduced (but not below zero) by the
aggregate amount of prior distributions of cash available for
distribution; thereafter, gain shall be allocated 15% to the general
partner and 85% to the limited partners. Loss from sale shall be
allocated 1% to the general partner and 99% to the limited partners.
Note 3. FRANCHISE AGREEMENT
The Partnership has entered into a twenty-year franchise agreement
with Super 8 Motels, Inc. to provide the Partnership with consultation
in the areas of design, construction, and operation of the motel. The
agreement required the payment of initial franchise fees of $20,000
and requires ongoing royalties equal to 4% of gross room revenues and
chain-affiliated advertising fees equal to 2% of gross room revenues.
F-62
<PAGE>
MISSION BAY SUPER 8 LTD..
A Californial Limited Partnership
Notes to Financial Statements
(Continued)
Note 4. RELATED PARTY TRANSACTIONS
The motel is operated pursuant to a management agreement with the
general partner, GHG Hospitality, Inc. (GHG). The agreement provides
for the payment of monthly management fees of 6% of gross revenues.
The Partnership has agreed to reimburse GHG for certain expenses
related to services performed in maintaining the books and
administering the affairs of the Partnership.
GHG and an affiliate, Grosvenor Management Services, Inc. (GMS),
allocate to the Partnership certain marketing, accounting, and
maintenance salaries and certain other expenses directly related to
the operation of the Partnership.
Note 4. RELATED PARTY TRANSACTIONS (continued)
Fees, reimbursements, salaries, and other expenses paid to GHG and GMS
and included in total expenses for the years ended December 31, 1994
and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Management fees $ 63,215 $ 61,150
Reimbursement for partnership
administration expenses 40,423 50,987
Salaries and other allocated
expenses 108,740 131,466
-------- --------
$212,378 $243,603
-------- --------
-------- --------
</TABLE>
In addition, all motel employees are paid by GMS. The Partnership
reimbursed GMS $232,629 in 1994 and $210,693 in 1993, including a one
percent processing fee, for the wages of these employees.
During 1994, the Partnership transferred carpeting to GMS at the
Partnership's cost of $23,500 and recorded a receivable from GMS.
F-63
<PAGE>
MISSION BAY SUPER 8 LTD..
A Californial Limited Partnership
Notes to Financial Statements
(Continued)
Note 5. PROPOSED EXCHANGE OF INVESTMENT PROPERTY AND
WRITEDOWN TO APPRAISED VALUE
Management is presently considering the possibility of exchanging
substantially all of the Partnership's investment property for common
stock in a real estate investment trust (REIT). Under this proposal,
the common stock in the REIT would be distributed to the limited
partners and the Partnership would be dissolved. The proposed
transaction is contingent upon management reaching a satisfactory
agreement with the REIT and is subject to the approval of the limited
partners.
In connection with this proposed transaction, an independent appraiser
valued the Partnership's investment property at $2,810,000 as of
August 1, 1994. Because of the significant decrease in the market
value of investment property, and the proposed exchange of investment
property for common stock in a REIT, management has elected to
writedown the Partnership's investment property to its appraised value
of $2,810,000 as of December 31, 1994.
Prior to December 1994, management expected that the undiscounted sum
of future cash flows from the property would be sufficient to recover
its carrying value and no writedown was recorded. In December 1994,
management signed a letter outlining certain terms of the proposed
transaction. Because of the proposed transaction, management believed
as of December 1994, that it was no longer reasonable to expect that
the undiscounted sum of future cash flows from the property would be
sufficient to recover its carrying value and therefore management
decided to writedown investment property to its appraised value.
F-64
<PAGE>
[Levitz, Zacks & Ciceric Letterhead]
INDEPENDENT AUDITOR'S REPORT
The Partners
Mission Bay Super 8 Ltd.,
A California Limited Partnership
We have audited the balance sheets of Mission Bay Super 8 Ltd., A
California Limited Partnership, as of December 31, 1993 and 1992, and the
related statements of operations, partners' capital, and cash flows for the
years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Mission Bay Super
8 Ltd., A California Limited Partnership, as of December 31, 1993 and 1992,
and the results of its operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles.
/s/ Levitz, Zacks & Ciceric
San Diego, California
February 21, 1994
F-65
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Balance Sheets
December 31, 1993 and 1992
<TABLE>
<CAPTION>
...ASSETS... ...LIABILITIES AND PARTNERS' CAPITAL...
1993 1992 1993 1992
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Current Assets: Current Liabilities:
Cash and cash equivalents $ 9,501 $ 121,933 Accounts payable $ 10,943 $ 16,302
Accounts receivable 11,539 14,767 Accrued expenses 8,618 12,999
Operating supplies 18,521 17,298 Due to affiliates 1,026 2,124
Prepaid expenses 18,171 25,443 ---------- ----------
---------- ----------
Total current assets 57,732 179,441 Total current liabilities 20,587 31,425
---------- ---------- ---------- ----------
Partners' Capital:
Investment property, at cost: General partner:
Land 2,620,612 2,620,612 Cumulative net income 146,056 138,680
Building and improvements 2,161,590 2,087,536 Cumulative cash distributions (266,197) (248,197)
Furniture, fixtures and equipment 698,083 676,800 ---------- ----------
---------- ---------- (120,141) (109,517)
---------- ----------
5,480,285 5,384,948
Limited partners (6,600 interests):
Less accumulated depreciation 1,044,241 954,535 Capital contributions, net of
---------- ---------- offering costs 5,761,115 5,761,115
Cumulative net income 1,314,490 1,248,106
Investment property, net 4,436,044 4,430,413 Cumulative cash distributions (2,468,446) (2,306,446)
---------- ---------- ---------- ----------
4,607,159 4,702,775
Franchise fees, net 13,829 14,829 ---------- ----------
---------- ----------
Total partners' capital 4,487,018 4,593,258
---------- ----------
Total liabilities and
Total assets $4,507,605 $4,624,683 partners' capital $4,507,605 $4,624,683
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Statements of Operations
Years Ended December 31, 1993 and 1992
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Revenues:
Room revenues $ 960,166 $1,201,412
Phone revenues 27,649 29,964
Interest income 2,618 5,460
Other 31,352 14,426
MOA settlement -0- 10,354
---------- ----------
Total revenues 1,021,785 1,261,616
---------- ----------
Expenses:
Property operating expenses 391,470 383,784
General and administrative 156,769 171,233
Depreciation 89,706 193,152
Management fees 61,150 75,459
Marketing 59,936 69,796
Repairs and maintenance 58,924 37,536
Royalties and advertising 57,610 72,085
Real estate taxes 45,588 42,504
Property and liability insurance 25,872 20,625
Amortization 1,000 1,245
---------- ----------
Total expenses 948,025 1,067,419
---------- ----------
Net income $ 73,760 $ 194,197
---------- ----------
---------- ----------
Net income per interest $ 10.06 $ 26.48
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Statements of Partners' Capital
Years Ended December 31, 1993 and 1992
<TABLE>
<CAPTION>
General Partner
----------------------------------------
Cumulative
Cumulative Cash
Net Income Distributions Total
---------- ------------- -----------
<S> <C> <C> <C>
Balance, December 31, 1991 $ 319,259 $ (214,101) $ (91,842)
Net income, year ended December 31, 1992 19,421 -0- 19,421
Cash distributions ($46.50 per interest) -0- (34,096) (34,096)
--------- ---------- ----------
Balance, December 31, 1992 138,680 (248,197) (109,517)
Net income, year ended December 31, 1993 7,376 -0- 7,376
Cash distributions ($24.55 per interest) -0- (18,000) (18,000)
--------- ---------- ----------
Balance, December 31, 1993 $ 146,056 $ (266,197) $ (120,141)
--------- ---------- ----------
--------- ---------- ----------
<CAPTION>
Limited Partners
-------------------------------------------------------
Cumulative Total
Capital Cumulative Cash Partners'
Contributions Net Income Distributions Total Capital
------------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1991 $5,761,115 $1,073,330 $(1,999,546) $4,834,899 $4,740,057
Net income, year ended December 31, 1992 -0- 174,776 -0- 174,776 194,197
Cash distributions ($46.50 per interest) -0- -0- (306,900) (306,900) (340,996)
---------- ---------- ----------- ---------- ----------
Balance, December 31, 1992 5,761,115 1,248,106 (2,306,446) 4,702,775 4,593,258
Net income, year ended December 31, 1993 -0- 66,384 -0- 66,384 73,760
Cash distributions ($24.55 per interest) -0- -0- (162,000) (162,000) (180,000)
---------- ---------- ----------- ---------- ----------
Balance, December 31, 1993 $5,761,115 $1,314,490 $(2,468,446) $4,607,159 $4,487,018
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Statements of Cash Flows
Years Ended December 31, 1993 and 1992
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 73,760 $ 194,197
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 90,706 194,397
(Increase) decrease in:
Accounts receivable 3,228 9,887
Operating supplies (1,223) (495)
Prepaid expenses 7,272 (8,246)
Increase (decrease) in:
Accounts payable (7,431) (2,548)
Accrued expenses (4,381) (2,314)
Due to affiliates (1,098) (9,150)
--------- ---------
Net cash provided by operating activities 160,833 375,728
--------- ---------
Cash flows from investing activities:
Investment property expenditures (93,265) (44,151)
--------- ---------
Net cash used in investing activities (93,265) (44,151)
--------- ---------
Cash flows from financing activities:
Cash distributions to partners (180,000) (340,996)
--------- ---------
Net cash used in financing activities (180,000) (340,996)
--------- ---------
Net decrease in cash and cash equivalents (112,432) (9,419)
Cash and cash equivalents, beginning of year 121,933 131,352
--------- ---------
Cash and cash equivalents, end of year $ 9,501 $ 121,933
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Notes to Financial Statements
Note 1. THE PARTNERSHIP AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mission Bay Super 8 Ltd., A California Limited Partnership (the
Partnership), formerly Motels of America Series IX, A California
Limited Partnership, was formed on February 5, 1987 pursuant to the
California Revised Uniform Limited Partnership Act. The purpose of
the Partnership is to construct, own, and operate a 117-room "economy"
motel under a Super 8 franchise. The motel was opened in November
1987.
The following is a summary of the Partnership's significant accounting
policies:
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid instruments purchased with
an original maturity of three months or less to be cash equivalents.
INVESTMENT PROPERTY
Investment property is recorded at cost. Depreciation is computed
using the straight-line method based on estimated useful lives of 5 to
35 years. Maintenance and repairs costs are expensed as incurred,
while significant improvements, replacements, and major renovations
are capitalized.
FRANCHISE FEES
Franchise fees are amortized over the 20-year life of the franchise
agreement.
INCOME TAXES
No provision for income taxes has been made as any liability for such
taxes would be that of the partners rather than the Partnership.
NET INCOME PER INTEREST
Net income per interest is based upon the 90% allocated to limited
partners divided by 6,600 limited partner interests outstanding
throughout the year.
F-70
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Notes to Financial Statements
(Continued)
Note 2. PARTNERSHIP AGREEMENT
Net income or loss and cash distributions from operations of the
Partnership are allocated 90% to the limited partners and 10% to the
general partner. Profits from the sale or other disposition of
Partnership property are to be allocated to the general partner until
its capital account equals zero; thereafter, to the limited partners
until their capital accounts equal their capital contributions reduced
by prior distributions of cash from sale or refinancing plus an amount
equal to a cumulative but not compounded annual 8% return thereon
which cumulative return shall be reduced (but not below zero) by the
aggregate amount of prior distributions of cash available for
distribution; thereafter, gain shall be allocated 15% to the general
partner and 85% to the limited partners. Loss from sale shall be
allocated 1% to the general partner and 99% to the limited partners.
Note 3. FRANCHISE AGREEMENT
The Partnership has entered into a twenty-year franchise agreement
with Super 8 Motels, Inc. to provide the Partnership with consultation
in the areas of design, construction, and operation of the motel. The
agreement required the payment of initial franchise fees of $20,000
and requires ongoing royalties equal to 4% of gross room revenues and
chain-affiliated advertising fees equal to 2% of gross room revenues.
Note 4. TRANSFER OF GENERAL PARTNER INTEREST
On December 31, 1989, Motels of America Inc., a Delaware Corporation
(MOA) and the former general partners sold their rights to manage the
Partnership's motel and their interests in the Partnership to
Grosvenor Hospitality Group, Inc., a Delaware Corporation (GHG). This
change of general partner and management (for the life of Partnership)
was approved by the limited partners at a special meeting in December
1989.
Notes 5. MOA SETTLEMENT
The Partnership entered into an agreement with MOA whereby the
Partnership received $10,000 and MOA and the Partnership released any
and all claims that they had against each other. The Partnership
recorded income from this settlement of $10,354 in 1992, which
consisted of cash received and receivables and payables written off
less legal fees and costs.
F-71
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Notes to Financial Statements
(Continued)
Notes 6. RELATED PARTY TRANSACTIONS
The motel is operated pursuant to a management agreement with GHG.
The agreement provides for the payment of monthly management fees of
6% of gross revenues.
The Partnership has agreed to reimburse GHG for certain expenses
related to services performed in maintaining the books and
administering the affairs of the Partnership.
GHG and an affiliate, Grosvenor Management Services, Inc. (GMS),
allocate to the Partnership certain marketing, accounting, and
maintenance salaries and certain other expenses directly related to
the operation of the Partnership.
Fees, reimbursements, salaries, and other expenses paid to GHG and GMS
and included in total expenses for the years ended December 31, 1993
and 1992 are as follows:
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Management fees $ 61,150 $ 75,459
Reimbursement for partnership
administration expenses 50,987 58,095
Salaries and other allocated
expenses 131,466 151,991
-------- --------
$243,603 $285,545
-------- --------
-------- --------
</TABLE>
In addition, all motel employees are paid by GMS. The Partnership
reimbursed GMS $210,693 in 1993 and $207,316 in 1992, including a one
percent processing fee, for the wages of these employees.
Note 7. COMMITMENTS AND CONTINGENCIES
In 1992, the Partnership was notified by its franchisor, Super 8
Motels, Inc., that it was required to make certain improvements to its
motel property in order to retain the franchise. In addition, the
Partnership decided to make certain discretionary improvements to its
motel property. The total estimated cost of these improvements was
approximately $87,000. Management made most of these improvements in
1993, and plans to make the remainder in 1994 to the extent of
available case. Approximately $5,000 of improvements remained to be
made as of December 31, 1993.
F-72
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB - Quarterly or Transitional Report
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
- --------- SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1995
-------------------
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
- --------- EXCHANGE ACT
For The Transition Period From to
---------- -----------
Commission File Number: 33-9075-LA
---------------------
MISSION BAY SUPER 8 LTD., A CALIFORNIA LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 33-0202890
- ------------------------------ ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3145 Sports Arena Blvd., San Diego, CA 92110
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(619) 226-1212
- --------------------------------------------------------------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Exchange Act during the last 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes x No
------ ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check wether the registrant filed all documents and reports required to be filed
bu Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
------ ------
State the number of limited partnership interests outstanding as of the latest
practicable date: 6,600
--------
F-73
<PAGE>
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Incorporated herein is the following unaudited financial
information:
Balance Sheet as of September 30, 1995 and December 31,
1994.
Statement of Operations for the three- and six-month periods
ended September 30, 1995 and September 30, 1994.
Statement of Cash Flows for the three- six-month periods
ended September 30, 1995 and September 30, 1994.
Notes to Financial Statements.
F-74
<PAGE>
MISSION BAY SUPER 8 LTD.
A California Limited Partnership
Balance Sheet
September 30, 1995 and December 31, 1994
(Unaudited)
(Part 1)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 201,713 $ 43,260
Accounts receivable 18,854 15,428
Operating supplies 19,340 19,204
Prepaid expenses 46,009 9,884
Due from affiliates (Note 4) 0 27,431
---------- ----------
Total Current Assets $ 285,916 $ 115,207
---------- ----------
Investment property, at cost:
Land 1,212,000 1,212,000
Building and improvements (Note 5) 2,024,033 2,024,033
Furniture, fixtures and equipment 719,695 702,412
---------- ----------
3,955,728 3,938,445
Less accumulated depreciation 1,190,533 1,128,445
---------- ----------
Investment property, net of
accumulated depreciation 2,765,195 2,810,000
Deferred organization costs and
franchise fee, net (Note 3) 12,079 12,829
Construction in Progress 0 0
---------- ----------
$3,063,190 $2,938,036
---------- ----------
---------- ----------
</TABLE>
F-75
<PAGE>
MISSION BAY SUPER 8 LTD.
A California Limited Partnership
Balance Sheet
September 30, 1995 and December 31, 1994
(Unaudited)
(Part 2)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
LIABILITIES AND
PARTNER'S CAPITAL ACCOUNTS
Current liabilities:
Accounts payable $ 15,037 $ 20,782
Accrued expenses 13,254 11,264
Due to affiliates (Note 5) 2,495 0
---------- ----------
Total current liabilities 30,786 32,046
---------- ----------
Partners' capital accounts (deficit):
General Partners:
Cumulative net earnings 30,594 7,953
Cumulative cash distributions (296,197) (286,197)
---------- ----------
(265,603) (278,244)
Limited partners:
Capital contributions,
net of offering costs 5,761,115 5,761,115
Cumulative net earnings 275,338 71,565
Cumulative cash distributions (2,738,446) (2,648,446)
---------- ----------
3,298,007 3,184,234
---------- ----------
Total partners' capital accounts 3,032,404 2,905,990
---------- ----------
$3,063,190 $2,938,036
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-76
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1995 1994 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Room revenues $ 395,068 $ 368,331 $ 873,478 $ 799,045
Phone revenues 10,783 12,605 27,379 31,592
Interest income 579 470 761 671
Other income 14,908 10,990 28,779 17,794
---------- ---------- ---------- ----------
421,338 392,396 930,397 849,102
---------- ---------- ---------- ----------
Expenses:
Property operating expenses 129,616 122,638 310,203 295,099
Depreciation 19,986 18,554 62,088 55,663
General and Administrative 33,232 29,615 106,072 100,187
Amortization 250 250 750 750
Management fees 25,245 23,516 55,699 50,906
Royalties 15,802 14,749 34,923 31,984
Repairs and Maintenance 13,440 15,352 39,424 42,866
Real estate taxes 9,153 12,147 31,879 37,491
Marketing 17,694 18,805 45,359 48,490
Property and liability insurance 5,919 5,834 17,586 18,405
---------- ---------- ---------- ----------
270,337 261,460 703,983 681,841
---------- ---------- ---------- ----------
Net earnings $ 151,001 $ 130,936 $ 226,414 $ 167,261
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings per limited
partnership interest $ 20.59 $ 17.85 $ 30.87 $ 22.81
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 151,001 $ 130,936 $ 226,414 $ 167,261
Adjustments to reconcile net earnings to cash:
Depreciation and amortization 20,236 18,804 62,840 56,413
Changes in assets and liabilities:
(Increase) in other assets: (11,900) 17,052 (39,687) 10,144
Increase in liabilities:
Accounts payable and accrued expenses 3,028) (621) (3,755) 4,811
---------- ---------- ---------- ----------
Net cash provided by operating activities 162,365 166,171 245,812 238,629
---------- ---------- ---------- ----------
Cash flows used in or provided
from investing activities:
Acquisition and construction costs
of investment property (484) (3,472) (17,283) (18,813)
Depletion of investment property (note 5) 0 0 0 25,702
---------- ---------- ---------- ----------
Net cash provided from investing activities (484) (3,472) (17,283) 6,889
---------- ---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in due to affiliates 33,857 8,412 29,924 (17,597)
Cash distributions (100,000) (50,000) (100,000) (50,000)
---------- ---------- ---------- ----------
Net cash (used in) financing activities (66,143) (41,588) (70,076) (67,597)
---------- ---------- ---------- ----------
Net increase (decrease) in cash 95,738 121,111 158,453 177,921
Cash and cash equivalents at beginning of period 105,975 66,311 43,260 9,501
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 201,713 $ 187,422 $ 201,713 $ 187,422
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE>
Notes to Financial Statements
September 30, 1995
(Unaudited)
Readers of this quarterly report should refer to the partnership
audited financial statements and annual report Form 10-KSB (File
No. 33-9075-LA) for the period ended December 31, 1994, as
certain footnote disclosures which would substantially duplicate
those contained in such financial reports have been omitted from
this report.
1. THE PARTNERSHIP AND A SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Mission Bay Super 8 Ltd., A California Limited Partnership (the
Partnership), (formerly Motels of America Series IX), a
California Limited Partnership, was formed on February 5, 1987
pursuant to the California Revised Uniform Limited Partnership
Act. The purpose of the Partnership is to construct, own, and
operate a 117-room "economy" motel under a Super 8 Franchise.
The motel was opened in November 1987.
The following is a summary of the Partnership's significant
accounting policies:
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid instruments purchased
with an original maturity of three months or less to be cash
equivalents.
INVESTMENT PROPERTY
Investment property is recorded at cost. Depreciation is
computed using the straight-line method based on estimated useful
lives of 5 to 35 years. Maintenance and repair costs are
expensed as incurred, while significant improvements,
replacements, and major renovation are capitalized.
FRANCHISE FEES
Franchise fees are amortized over the 20-year life of the
franchise agreement.
INCOME TAXES
No provision for income taxes has been made as any liability for
such taxes would be that of the partners rather than the
Partnership.
(Continued)
F-79
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Notes to Financial Statements, Continued
NET INCOME PER INTEREST
Net income per interest is based upon the 90% allocated to
limited partners divided by 6,600 limited partner interests
outstanding throughout the year.
2. PARTNERSHIP AGREEMENT
Net income or loss and cash distributions from operations of the
Partnership are allocated 90% to the limited partners and 10% to
the general partner. Profits from the sale or other disposition
of Partnership property are to be allocated to the general
partner until its capital account equals zero; thereafter, to the
limited partners until their capital accounts equal their capital
contributions reduced by prior distributions of cash from sale or
refinancing plus an amount equal to a cumulative but not
compounded annual 8% return thereon which cumulative return shall
be reduced (but not below zero) by the aggregate amount of prior
distributions of cash available for distribution; thereafter,
gain shall be allocated 15% to the general partner and 85% to the
limited partners. Loss from sale shall be allocated 1% to the
general partner and 99% to the limited partners.
3. FRANCHISE AGREEMENT
The Partnership has entered into a twenty-year franchise
agreement with Super 8 Motels, Inc. to provide the Partnership
with consultation in the areas of design, construction and
operation of the motel. The agreement required the payment of an
initial fee of $20,000 and ongoing royalties equal to 4% of gross
room revenues and a chain-affiliated advertising fee equal to 2%
of gross room revenues.
4. RELATED PARTY TRANSACTIONS
The motel is operated pursuant to a management agreement with
GHG. The agreement provides for the payment of monthly
management fees of 6% of gross revenues.
The Partnership has agreed to reimburse GHG for certain expenses
related to services performed in maintaining the books and
administering the affairs of the Partnership.
GHG and an affiliate, GMS Management Services, Inc. (GMS),
allocate to the Partnership certain marketing, accounting, and
maintenance salaries and certain other expenses directly related
to the operation of the Partnership.
(Continued)
F-80
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Notes to Financial Statements, Continued
4. RELATED PARTY TRANSACTIONS (Continued)
Fees and reimbursements for partnership administration expenses
paid to GHG and GMS for the three months ended September 30, 1995
and September 30, 1994 and for the nine months ended September
30, 1995 and September 30, 1994 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ------------------
9/30/95 9/30/94 9/30/95 9/30/94
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees $25,245 $23,516 $55,699 $50,906
Reimbursement for
partnership admini-
stration expenses $10,107 $10,620 $30,317 $31,860
</TABLE>
In addition, all motel employees are paid by GMS. The
Partnership reimbursed GMS $61,231 for the wages of these
employees plus a one percent processing fee.
At September 30, 1995, $2,495 was due to GHG and GMS relating to
reimbursement for these operating expenses.
5. PROPOSED EXCHANGE OF INVESTMENT PROPERTY AND WRITEDOWN TO
APPRAISED VALUE
Management is presently considering the possibility of exchanging
substantially all of the Partnership's investment property for
common stock in a real estate investment trust (REIT). Under
this proposal, the common stock in the REIT would be distributed
to the limited partners and the Partnership would be dissolved.
The proposed transaction is contingent upon management reaching a
satisfactory agreement with the REIT and is subject to the
approval of the limited partners.
In connection with this proposed transaction, an independent
appraiser valued the Partnership's investment property at
$2,810,000 as of August 1, 1994. Because of the significant
decrease in the market value of investment property, and the
proposed exchange of investment property for common stock in a
REIT, management has elected to writedown the Partnership's
investment property to its appraised value of $2,810,000 as of
December 31, 1994.
(Continued)
F-81
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Notes to Financial Statements, Continued
6. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) No person or group is known to the Partnership to be the
beneficial owner of more than 5% of the outstanding limited
partnership interests in the Partnership.
(b) The general partner does not directly or indirectly own any
limited partnership interests in the Partnership. The general
partner does not possess a right to acquire beneficial ownership
of limited partnership interests in the Partnership.
(c) There are no arrangements, known to the Partnership, which
may result in a change in control of the Partnership other than
the proposal to exchange the Partnership's investment property
for common stock in a REIT as discussed in Note 5.
7. ADJUSTMENTS
In the opinion of the general partners, all adjustments
(consisting solely of normal recurring adjustments) necessary for
a fair presentation have been made to the accompanying figures as
of and for the nine months ended September 30, 1995.
8. SUBSEQUENT EVENTS
In November 1995, the partnership paid a distribution of
$99,000.00 to the limited partners.
F-82
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition:
On November 19, 1986, the Partnership commenced its public
offering pursuant to its Prospectus. On June 15, 1987, the
Partnership completed the public offering. The Partnership
received $5,761,115 (net of offering costs of $838,885) from the
sale of limited partnership interests. These funds were
available for investment in property, to pay legal fees and other
costs related to the investments, to pay operating expenses, and
for working capital. The majority of the proceeds was used to
acquire and construct the 117-room "economy" motel on
approximately 1.056 acres of land.
The Partnership's liquidity is indicated by net working capital
which was $255,130 at September 30, 1995 and $83,161 at December
31, 1994.
At September 30, 1995, the Partnership had cash and cash
equivalents of approximately $201,713. Such funds will be
utilized to make distributions to partners and for working
capital requirements.
Results of Operations:
For the three months ended September 30, 1995, room revenues were
$395,068, the occupancy rate was 74% and the average daily rate
was $49.59. This compares to the three months ended September
30, 1994 with room revenues of $368,331, occupancy rate of 73.1%
and an average daily rate of $46.81. For the three months ended
September 30, 1995, the hotel experienced a profit of $151,001.
This compares to the three months ended September 30, 1994, which
resulted in a profit of $130,936.
For the nine months ended September 30, 1995, room revenues were
$873,478, the occupancy rate was 61.47% and average daily rate
was $44.49. This compares to September 30, 1994 with room
revenues of $799,045, occupancy rate of 58.58% and an average
daily rate of $42.72.
There is significant competition in the lodging market. The
Partnership is in competition either directly or indirectly with
a large number of hotels and motels of varying quality and sizes,
including other motels which are part of national or regional
chains. The Partnership's motel does not compete directly with
any large budget motel chains, but competes indirectly in the
greater San Diego area with such budget motels as Comfort Inns
and E-Z "8" Motels.
(Continued)
F-83
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The effect of current operations on liquidity was net cash
provided by operating activities of $245,812 for the nine months
ended September 30, 1995 and net cash provided by operating
activities of $238,629 for the nine months ended September 30,
1994.
Seasonality:
The motel business is seasonal with the third quarter being the
strongest due to the tourist business and the last half of the
fourth quarter and the first half of the first quarter being the
weakest.
F-84
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
By: GHG Hospitality, Inc.
Corporate General Partner
BY: /s/ J. Mark Grosvenor
------------------------------
President and Director
Date November 10, 1995
------------------------------
By: /s/ Sylvia Mellor Clark
------------------------------
Controller
Date: November 10, 1995
------------------------------
F-85
<PAGE>
APPENDIX A--FORM OF CONSENT FORM
CONSENT FORM
Please read this entire Consent Form Section. You should receive and
complete separate Proxy Cards (Part 2) if you have interests in different
capacities (e.g., (i) as husband and wife, (ii) individually, (Information
Agent) in trust, or (iv) in an IRA).
Please read the Transmittal Letter.
The Limited Partners have the option to vote "for", "against", or "abstain"
with respect to the Mission Bay Acquisition. The Mission Bay Agreement of
Limited Partnership provides that where a matter which the General Partner
recommends approval is to be voted upon without a meeting (as is the case
here), the limited partners whose votes are not received by the end of the
Solicitation Period shall be deemed to have voted all of their shares in
favor of the General Partner's recommendation. Notwithstanding this "deemed
positive" provision of the Mission Bay Agreement of Limited Partnership, the
dissenters condition described in the Prospectus/Consent Solicitation
Statement requires that at least 67% of the Mission Bay limited partnership
interests actually approve of the Mission Bay Acquisition. Thus, the "deemed
positive" votes of the Mission Bay limited partners whose votes are not
received within the Solicitation Period will not be counted toward the 67%
approval requirements. Further, any "abstain" votes will not be counted
toward the 67% approval requirement and limited partners who vote to
"abstain" will not be able to perfect their dissenters' rights and thus,
cannot become Dissenting Partners.
PART 1
TRANSMITTAL LETTER
The attached Proxy Card should be completed by Partners of Mission Bay
Super 8 Ltd., a California limited partnership who has received a Prospectus/
Consent Solicitation Statement with respect to the acquisition of assets of the
Mission Bay Partnership by Host Funding, Inc. Capitalized terms used herein and
not otherwise defined herein shall have the respective meaning as set forth in
the Prospectus/Consent Solicitation Statement of Host Funding, Inc. dated
December 1, 1995.
You should complete and return the enclosed Proxy Card. If you have interests
in more than one capacity (e.g., (i) as husband and wife, (ii) individually,
(Information Agent) in trust, or (iv) in an IRA), you will receive a separate
Proxy Card for each capacity.
THE CONSENT FORM CONSISTS OF TWO PARTS:
1. TRANSMITTAL LETTER. The first part is this Transmittal
Letter, which highlights the procedures for completing the Proxy Card.
For a more detailed discussion of these procedures, see the section
entitled "Voting Procedures" in the Prospectus/Consent Solicitation
Statement.
2. PARTNER CONSENT. (PROXY CARD) The second part is the Partner Consent
which seeks your consent to the Mission Bay Acquisition and certain
related matters. A Partner who submits a signed Proxy Card but fails
to make one or more of the three elections required by the Partner
Consent will be deemed to have voted "for" the Mission Bay
Acquisition. You should receive and complete separate Partner
Consents for each capacity in which you serve as a Partner (ie.
Proxy Cards).
WHEN SIGNING AS A GENERAL PARTNER, CORPORATE OFFICER, ATTORNEY-IN-FACT,
EXECUTOR, TRUSTEE, ADMINISTRATOR, GUARDIAN, CORPORATE OFFICER, ETC., PLEASE GIVE
YOUR FULL TITLE AND SEND PROPER EVIDENCE OF AUTHORITY WITH THE PROXY CARD. FOR
JOINT OWNERS, EACH JOINT OWNER MUST SIGN. BY SIGNING THE PROXY CARD, YOU HEREBY
AGREE TO ALL THE PROVISIONS CONTAINED IN THIS TRANSMITTAL LETTER. IF ANY PART
OF THE PROXY CARD IS UNDATED, YOUR SIGNATURE WILL BE AUTHORITY FOR THE COMPANY
TO ENTER THE DATE OF RECEIPT.
If the Partner whose name is printed on the Proxy Card is not an
individual, the person signing the Proxy Card hereby represents that he or she
is, in his or her representative capacity, empowered and duly authorized by the
governing documents, trust instruments, pension plan, charter, certificate or
articles of incorporation, bylaw provision or board or stockholder resolution
to complete and execute the Proxy Card in such capacity on behalf of the
Partner. The Company reserves the right to require from such partner evidence or
an opinion of counsel, acceptable to the Company, that the entity has met all of
the requirements of its governing instruments and is authorized to vote on the
proposal. If the Partner is an Individual Retirement Account or pension plan
pursuant to which the beneficiary thereof is permitted to direct the investment,
the person signing the Proxy Card further represents that such document has been
completed pursuant to direction of such beneficiary.
CONSENT OF A PARTNER (I.E., A VOTE "FOR") CONSTITUTES APPROVAL OF THE
MISSION BAY ACQUISITION BY THE COMPANY AND ALL THE TRANSACTIONS CONTEMPLATED IN
THE SECTION OF THE PROSPECTUS/CONSENT SOLICITATION STATEMENT ENTITLED "THE
FORMATION TRANSACTIONS".
Before filling out this Proxy Card, you and your advisor if any, should
carefully review the Prospectus/Consent Solicitation Statement, including
appendices.
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If you have any questions regarding the Mission Bay Acquisition or if you
would like assistance in completing this Proxy Card, please contact Elaine Ruff
at (619) 226-1212.
FOR THE PROXY CARD TO BE EFFECTIVE, THE EXECUTED PROXY CARD MUST BE
RETURNED TO, AND RECEIVED AT ANY TIME PRIOR TO 11:59 P.M. PACIFIC TIME ON
________________, 1995 BY THE INFORMATION AGENT AT THE FOLLOWING ADDRESS:
The Proxy Cards will be effective only upon actual receipt by the
Information Agent at the address specified above. A self-addressed stamped
envelope for return of the Proxy Card has been included.
Consents given by Limited Partners in the form of Proxy Card
accompanying this Prospectus/Consent Solicitation Statement will, when
executed and delivered to the General Partner, be revocable by written notice
to the General Partner until such time as unrevoked consents are received
from Limited Partners holding more than 50% of the outstanding Mission Bay
Limited Partnership interests. Accordingly, the action would be approved and
the right of revocation automatically will terminate, upon receipt of
unrevoked consents from Mission Bay Limited Partners holding more than 50% of
the outstanding Mission Bay Limited Partnership interests.
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PART 2
PARTNER CONSENT
MESSRS. HATFIELD AND GROSVENOR RECOMMEND THAT YOU VOTE "FOR" THE MISSION BAY
---
ACQUISITION.
Vote "for" or "against" participation by the Company of the Mission Bay
Acquisition or "abstain" by marking "X" in the appropriate box on the attached
proxy card ("Proxy Card"). A vote to approve the Mission Bay Acquisition also
operates as an approval of all the transactions contemplated in the section of
the Prospectus/Consent Solicitation Statement entitled "The Formation
Transactions", including approval of the Mission Bay Acquisition Agreement in
substantially the form set forth in Appendix B to the Prospectus/Consent
Solicitation Statement, and including the liquidation and/or dissolution of
Mission Bay. Partners who return a signed Partner Consent (ie. Proxy Card)
but fail to indicate their approval or disapproval will be deemed to have voted
to approve. Notwithstanding this "deemed positive" provision of the Mission
Bay Agreement of Limited Partnership, the dissenters condition described in
the Prospectus/Consent Solicitation Statement requires that at least 67% of
the Mission Bay limited partnership interests actually approve of the Mission
Bay Acquisition. Thus, the "deemed positive" votes of the Mission Bay
limited partners whose votes are not received within the Solicitation Period
will not be counted toward the 67% approval requirement. Further, any
"abstain" votes will not be counted toward the 67% approval requirement and
limited partners who vote to "abstain" will not be able to perfect their
dissenters' rights and thus, cannot become Dissenting Partners.
Consents given by Limited Partners in the form of the Proxy Card
accompanying this Prospectus/Consent Solicitation and Proxy Statement will,
when executed and delivered to the General Partner, be revocable by written
notice to the General Partner until such time as unrevoked consents are
received from Limited Partners holding more than 50% of the outstanding
Mission Bay Limited Partnership interests. Accordingly, the action would be
approved and the right of revocation automatically will terminate, upon
receipt of unrevoked consents from Mission Bay Limited Partners holding more
than 50% of the outstanding Mission Bay Limited Partnership interests.
Under penalty of perjury, the Partner whose name is printed herein, by
executing and returning the enclosed Proxy Card, certifies that the following,
to the best of his/her/its knowledge and belief, is true, correct and complete:
(1) My address is as provided on the Proxy Card; (2) I am not subject to
backup withholding under Internal Revenue Code ("Code") section 3406(a)(1)
either because (a) I have not been notified by the Internal Revenue Service
that I am subject to backup withholding as a result of a failure to report
all interest and dividends or (b) the Internal Revenue Service has notified
me that I am no longer subject to backup withholding; and (3) I am a citizen
or resident of a State of the United States and am NOT a nonresident alien,
nor is the entity for which I am signing this document (if applicable) a
foreign corporation, foreign partnership, foreign trust, or foreign estate
(as those terms are defined in the Code and Income Tax Regulations).
If the Partner is not an individual, the person signing this Proxy Card
hereby represents that he or she is, in his or her representative capacity,
empowered and duly authorized by the governing documents, trust instruments,
pension plan, charter, certificate or articles of incorporation, bylaw provision
or board or stockholder resolution to complete and execute this Partner consent
in such capacity on behalf of the Partner. The Company reserves the right to
require from such Partner evidence or an opinion of counsel, acceptable to the
Company, that the entity has met all of the requirements of its governing
instruments and is authorized to vote on the proposal. If the Partner is an
Individual Retirement Account or pension plan pursuant to which the beneficiary
thereof is permitted to direct the investment, the person signing this Proxy
Card further represents that such document has been completed pursuant to
direction of such beneficiary.
By executing the Proxy Card the undersigned represents and warrants that as
of the date hereof and the date of the consummation of the Mission Bay
Acquisition (i) the undersigned has received a copy of the Prospectus/Consent
Solicitation Statement, (ii) the undersigned is the owner of the Mission Bay
percentage indicated on the Partner Consent and the undersigned has good,
marketable and unencumbered title to such interests, and (iii) the undersigned
has full legal right, power and authority to execute an deliver the Proxy Card.
BY SIGNING THE PROXY CARD, THE UNDERSIGNED HEREBY AGREES TO ALL THE PROVISIONS
CONTAINED IN THE TRANSMITTAL LETTER. If any of this information is incorrect,
please notify the Information Agent at the address set forth in the Transmittal
Letter as soon as possible.
WHEN SIGNING AS A GENERAL PARTNER, CORPORATE OFFICER, ATTORNEY-IN-FACT,
EXECUTOR, TRUSTEE, ADMINISTRATOR, GUARDIAN, CORPORATE OFFICER, ETC., PLEASE GIVE
YOUR FULL TITLE WITH THE PROXY CARD. FOR JOINT OWNERS, EACH JOINT OWNER MUST
SIGN. IF NO SPECIFICATION IS MADE, YOU WILL HAVE VOTED "FOR" THE
CONSOLIDATION AS SET FORTH ABOVE. IF THIS PARTNER CONSENT IS UNDATED, YOUR
SIGNATURE WILL BE AUTHORITY FOR THE OPERATING PARTNERSHIP TO ENTER THE DATE
OF RECEIPT.
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PROXY CARD
The undersigned hereby acknowledges receipt of the Prospectus/Consent
Solicitation Statement of Host Funding, Inc., dated December 1, 1995,
for the acquisition of the assets of Mission Bay in exchange for Shares of the
Company and the undersigned votes as follows as to such transactions:
<TABLE>
<S> <C> <C>
VOTE HERE:
FOR AGAINST ABSTAIN
SIGN HERE:
____________________________________________ ____________________ __________________________________________ ______
Sign exactly as your name(s) appear(s) Date Sign exactly as your name(s) appears Date
</TABLE>
LABEL WILL CONTAIN PERTINENT PARTNER INFORMATION
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APPENDIX B
MISSION BAY ACQUISITION AGREEMENT
THIS MISSION BAY ACQUISITION AGREEMENT (this "Agreement") is made and
entered into as of _______________, 1995, by and between Host Funding, Inc., a
Maryland corporation (the "Company") and Mission Bay Super 8, Ltd., a California
limited partnership (the "Partnership").
RECITALS
WHEREAS, the Company currently owns four hotels and it wishes to acquire a
hotel owned by the Partnership and to close certain transactions in connection
therewith;
WHEREAS, in connection with the public offering of its Class A Common
Stockon the American Stock Exchange and its election of REIT status for federal
income tax purposes (the "Formation Transactions"), the partners of the
Partnership have approved the sale of all of the Property (as hereinafter
defined) of the Partnership to the Company pursuant to the terms of the
Prospectus/Consent Solicitation Statement dated ________, 1995, with such sale
to be effected through the transfer of all of the applicable assets and certain
of the liabilities of the Partnership to the Company upon the terms and
conditions provided herein;
WHEREAS, the Partnership owns the real and personal property comprising the
Mission Bay Super 8 hotel (the "Hotel") located in San Diego, California; and
WHEREAS, upon consummation of this Agreement, the Company will lease the
Hotel to Crossroads Hospitality Tenant Company, LLC, a Delaware limited
liability company (the "Lessee"), pursuant to a Percentage Lease identical in
form to the Percentage Leases which were entered into by and between the Company
and the Lessee with respect to the four hotels the Company currently owns.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and covenants set forth herein, the parties hereto hereby agree as follows:
SECTION I
DEFINITIONS
Certain of the terms used in this Agreement that are not otherwise defined
herein shall have the meanings set forth below:
"ACCOUNTANTS" shall have the meaning set forth in Subsection 7.7 of this
Agreement.
"ACQUIRED ASSETS" shall have the meaning set forth in Subsection 2.1 of
this Agreement.
"AFFILIATE" - with respect to any entity, any natural person or firm,
corporation, partnership, association, trust or other entity which controls is
controlled by, or is under common control with, the subject entity; a natural
person or entity which controls an Affiliate under the foregoing shall also be
deemed to be an Affiliate of such entity. For purposes hereof, the term
"control" shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of any such entity,
or the power to veto major policy decisions of any such entity, whether through
the ownership of voting securities, by contract, or otherwise.
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"AGREEMENT" shall mean this Mission Bay Acquisition Agreement, as the name
may be amended from time to time.
"APPLICATION" means the Application for Qualification of Securities under
the Corporate Securities Law of 1968 filed by the Company with the California
Department of Corporations on August 7, 1995 in connection with the Formation
Transactions, as such application is amended.
"APPURTENANCES" shall mean all rights, privileges, interests, licenses,
claims, easements, benefits, covenants, conditions and servitudes of any type of
nature which are appurtenant to or otherwise benefit the Land (as such term is
defined below) and/or Improvements (as such term is defined below), including
without limitation, all minerals, oil, gas and other hydrocarbon substances on
or under the Land, to the extent such rights, privileges, easements, benefits,
covenants, conditions and servitudes are owned by the Partnership, as well as
all development rights, air rights, water, water rights and water stock relating
to the Land and any other easements, rights of way or appurtenances owned by the
Partnership and used in connection with the beneficial operation, use and
enjoyment of the Land, the Improvements (as such term is defined below), the
Miscellaneous Hotel Assets (as such term is defined below) or any other
appurtenance, together with all rights of the Partnership in and to streets,
sidewalks, alleys, gores, strips, driveways, parking areas and areas adjacent
thereto or used in connection therewith, and all rights of the Partnership in
any land lying in the bed of any existing or proposed street adjacent to the
Land.
"ASSET TRANSFER CONDITIONS" shall have the meaning set forth in Section VI
of this Agreement.
"ASSUMED LIABILITIES" shall have the meaning set forth in Subsection 2.1 of
this Agreement.
"BOOKINGS" shall mean the contracts for the use or occupancy of guest rooms
and/or the meeting facilities of the Hotel.
"CLASS A COMMON STOCK" shall mean Class A shares of the Company's Common
Stock.
"CLOSING" shall have the meaning set forth in Subsection 2.4 hereof.
"CLOSING DATE" shall have the meaning set forth in Subsection 2.4 hereof.
"CLOSING REPRESENTATIVES" shall have the meaning set forth in
Subsection 7.6 hereof.
"CLOSING STATEMENTS" shall mean the Preliminary Closing Statement and Final
Closing Statement as required under the provisions of Section VII.
"COMMON STOCK" shall mean the shares of the Common Stock of the Company as
that term is described in the Prospectus/Consent Solicitation Statement and the
attachment thereto.
"COMPANY" shall mean Host Funding, Inc., a Maryland corporation.
"CONSIDERATION" shall have the meaning set forth in Subsection 2.3 of this
Agreement.
"CONSUMABLES" shall mean all engineering, maintenance and housekeeping
supplies, including soap, cleaning materials and matched; stationery and
printing; stock for in-room servi-bars; and other supplies of all kinds, whether
used, unused or held in reserve storage for future use in connection with the
maintenance and operation of the Hotel, which are on hand on the date hereof,
subject to such depletion and including such resupplies as shall occur and be
made in the normal course of business, excluding, however, (i) Operating
Equipment and (ii) all items of personal property owned by guests, employees, or
other persons furnishings, goods or services to the Hotel.
"CONTRACTS" shall mean all written or oral management, architectural,
engineering, leasing, insurance, bonding,
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construction, financing, guarantee, indemnity, service, maintenance, operating,
repair, collective bargaining, employment, employee benefit, equipment leasing,
supply, warranty, purchase, consulting, professional service, advertising,
promotion, public relations and other contracts and commitments to which the
Partnership is a party in any way relating to the Property or Hotel (such terms
are defined below) or any part thereof and which are material to the Partnership
or the operations of the Property or Hotel, but excluding, however: (i) the
Operating Leases; (ii) Excluded Contracts, and (iii) Bookings.
"CUT-OFF TIME" shall mean 12:01 a.m. on the day of the Closing Date.
"DEPOSITS AND REIMBURSEMENTS" shall mean, with respect to the Land,
Improvements and the Property, or any part thereof or interest therein,
(a) deposits made with or tendered to utility companies to secure service or to
permit the Partnership or its predecessors in interest to tie in to existing
service grids or to cause a utility company to install connections or extensions
necessary to provide service, (b) deposits made by the Partnership or its
predecessors in interest with any bonding or surety company or deposits, bonds
or other financial security devices posted with or for the benefit of any
governmental or quasi-governmental agency, in connection with subdivision or
public improvement bonds obtained by the Partnership or its predecessors in
interest or map, and (c) any refundable fees, payments or reimbursements which
the Partnership or its predecessors in interest or the then-current owner or
occupant of the Land or Improvements is entitled to receive from any
governmental or quasi-governmental or private body in respect of the ownership
and development of the Land or Improvements or any public improvements made in
connection with the Land or Improvements.
"DISCLOSURE SCHEDULE" shall mean the document labeled "Disclosure Schedule"
and attached hereto. The Disclosure Schedule shall include and incorporate by
reference the Title Policy with respect to the Real Property.
"ENGINEERING/ARCHITECTURAL REPORTS" shall mean the Engineering/
Architectural Reports dated ____________ prepared by _____________ relating to
the Real Property (as such term is defined below) owned by the Partnership.
"ENVIRONMENT REQUIREMENTS" shall mean all applicable present statutes,
regulations, rules, ordinances, codes, licenses, permits, orders, approvals,
plans, authorizations, concessions, franchises and similar items, of all
governmental agencies, departments, commissions, boards, bureaus or
instrumentalities of the United States, states and political subdivisions
thereof and all applicable judicial and administrative and regulatory decrees,
judgments and orders relating to the protection of human health or the
environment, including, without limitation: (i) all requirements, including but
not limited to those pertaining to reporting, licensing, permitting,
investigation and remediation of emissions, discharges, releases or threatened
releases of Hazardous Materials (as such term is defined below), chemical
substances, pollutants, contaminants or hazardous or toxic substances, materials
or wastes whether solid, liquid or gaseous in nature, into the air, surface
water, groundwater or land, or relating to the manufacture, processing,
distribution, use treatment, storage, disposal, transport or handling of
chemical substances, pollutants, condiments or hazardous or toxic substances,
materials, or wastes, whether solid, liquid gaseous in nature; and (ii) all
requirements pertaining to the protection of the health and safety of employees
or the public.
"ESCROW" shall mean an escrow opened with Escrow Agent to facilitate the
transactions contemplated by this Agreement.
"ESCROW AGENT" shall be ________________________________ at the following
address: ______________________________________.
"EXCESS CASH" shall mean, at any time, all cash and cash equivalents of the
Partnership not to exceed the amount, if any, by which the current assets of
such entity exceed the current liabilities of the Partnership at such time.
"EXCLUDED CONTRACTS" shall mean the contracts pertaining to the ownership,
maintenance, operation, provisioning, or equipping of the Hotel (a) between
either the Franchisor and/or the Management Company or any of its Affiliates on
the one hand, and the Partnership, on the other, (i) pertaining only to this
Hotel including the Management Agreement and the Franchise Agreement, or
(ii) which provide services to the Hotel on the same or similar
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<PAGE>
basis as that provided to other hotels owned or managed by the Management
Company, including insurance, the furnishing of credit cards, advertising,
Software Programs and software maintenance and reservation services; and
(b) which provide the benefits of group incentive, profit-sharing, retirement,
welfare and employee benefit plan to sharing, retirement, welfare and employee
benefit plans to employees of the Hotel and to employees of other hotels owned
or managed by the Management Company; and (c) any union or employment contracts
(including pension and benefit plans between the Management Company, as manager
of the Hotel, and any other person or entity.
"EXCLUDED PERMITS" shall mean the non-transferable permits and licenses and
other Permits that are indicated as Excluded Permits on Exhibit C.
"FF&E" shall mean all fixtures, furniture, furnishings, fittings,
equipment, machinery, apparatus, appliances, and other articles of Personal
Property now located on the Real Property and used or usable in connection with
any part of the Hotel, subject to such depletions, resupplies, substitutions and
replacements as shall occur and be made in the ordinary course of business and
in accordance with Subsection 5.8 excluding, however (i) Consumables,
(ii) Operating Equipment, (iii) equipment and property leased pursuant to
Contracts, (iv) property owned by guests, employees or other persons furnishing
goods or services to the Hotel, (v) Improvements, and (vi) Software Programs.
"FORMATION TRANSACTIONS" shall have the meaning set forth in the first
paragraph of the Recitals herein.
"FRANCHISE AGREEMENT" shall mean the agreement between Franchisor and the
Partnership.
"FRANCHISOR" shall mean Super 8, Inc.
"GENERAL PARTNER" shall mean Grosvenor Hospitality Group, Inc., a
California corporation, the existing general partner of the Partnership.
"HAZARDOUS MATERIALS" shall mean (i) any flammables, explosive or
radioactive materials, hazardous wastes, toxic substances or related materials
including, without limitation, substances defined as "hazardous substances,"
"hazardous materials," "toxic substances" or "solid waste" in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
42 U.S.C. Sec. 9601, ET SEQ.; the Hazardous Materials Transportation Act,
49 U.S.C. Section 1801, ET SEQ.; the Toxic Substances Control Act, 15 U.S.C.,
Section 2601 ET SEQ.; the Resource Conservation and Recovery Act of 1976,
42 U.S.C., Section 6901 ET SEQ.; and in the regulations adopted and publications
promulgated pursuant to said laws; (ii) those substances listed in the United
States Department of Transportation Table (49 C.F.R. 172.101 and amendments
thereto) or by the Environmental Protection Agency (or any successor agency) as
hazardous substances (40 C.F.R. Part 302 and amendments thereto); (iii) those
substances defined as "hazardous wastes," "hazardous substances" or "toxic
substances" in any similar federal, state or local laws or in the regulations
adopted and publications promulgated pursuant to any of the foregoing laws or
which otherwise are regulated by any governmental authority, agency, department,
commission, board of instrumentality of the United States of America, the State
of California or any political subdivision thereof; (iv) any pollutant or
contaminant or hazardous dangerous or toxic chemicals, materials, or substances
within the meaning of any other applicable federal, state, or local law,
regulation, ordinance, or requirement (including consent decrees and
administrative orders) relating to or imposing liability or standards of conduct
concerning any hazardous, toxic, or dangerous waste, substance or material, all
as amended; (v) petroleum or any by-products thereof; (vi) any radioactive
material, including any source, special nuclear or by-product material as
defined at 42 U.S.C. Sections 2011 ET SEQ., as amended, and in the regulations
adopted and publications promulgated pursuant to said law; (vii) asbestos in any
form or condition; and (viii) polychlorinated biphenyls.
"HOTEL" shall mean the hotel referred to in the third paragraph of the
Recitals.
"HOTEL NAMES" shall mean any names, logos and designs (other than those
owned by the Management Company) used in the ownership or operation of the
Hotel, including without limitation, any such set forth on Exhibit
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<PAGE>
B hereto and the names, logos and designs now used in connection with the
restaurants, cocktail lounges, night clubs, banquet rooms and meeting rooms in
and/or about the Hotel, together with the good will appurtenant to each of such
names, logos and designs.
"IMPROVEMENTS" shall mean all improvements, structures or fixtures
constructed upon the Land, including without limitation, all buildings and
structures presently located on the Land, all apparatus, equipment and
appliances presently located on the Land and used in connection with the
operation or occupancy thereof, such as parking services, refrigeration,
ventilation, garbage disposal, recreation or other services thereto, and all
landscaping and leasehold improvements of tenants, if any, which become the
property of the lessor upon termination of a Operating Lease.
"LAND" shall mean that certain real property with respect to the
Partnership described in the Disclosure Schedule.
"LEASES" shall mean all leases, subleases, licenses, franchises,
concessions, and other occupancy agreements, whether or not of record, oral or
written, for the use or occupancy of any portion of the Real Property,
excluding, however, (i) Bookings, (ii) the Management Agreement, and (iii) the
Franchise Agreement.
"LESSEE" shall mean Crossroads Hospitality Tenant Company, LLC, a Delaware
limited liability company.
"LICENSES AND ENTITLEMENTS" shall mean all licenses, franchises,
certifications, authorizations, approvals, rights, privileges, entitlements and
permits issued or approved by any governmental or quasi-governmental authority
or other person or entity having authority over the Property, and all
applications, filings and submittals therefor, in each case relating to the
operation, ownership, subdivision, development, use or maintenance of the
Property or any part thereof, including, without limitation, construction
permits, grading permits, elevator permits, machinery permits, business
licenses, ingress and egress permits, development agreements, subdivision,
parcel and tract maps and approvals thereof, plans and/or permits required under
the applicable zoning regulations, variances, utility agreements and
commitments, improvement agreements, certificates of occupancy and the like, but
excluding therefrom for all purposes of this Agreement any licenses issued to or
solely on behalf of any Tenant.
"MANAGEMENT AGREEMENT" shall mean the Hotel Management Agreement, the terms
and provisions of which are being observed and performed by and between the
Management Company and the Partnership regarding the present management of the
Hotel by the Management Company.
"MANAGEMENT COMPANY" shall mean Grosvenor Hospitality Group, Inc., a
California Corporation.
"MISCELLANEOUS HOTEL ASSETS" shall mean all contract rights, leases,
concessions, trademarks, service marks, trade names, inventions, patents, trade
secrets, know-how, copyrights, (including any registration or applications for
registration of any of the foregoing), Deposits and Reimbursements, Licenses and
Entitlements, environmental and hazardous and toxic waste reports and studies,
surveys, maps, correspondence, inspection reports, management reports, marketing
reports, marketing displays and brochures, insurance policies, proceeds and
unearned premiums, all books and records, assignable warranties, and other items
of intangible personal property relating to the ownership or operation of the
Hotel, but such term shall not include (i) Contracts, (ii) the items
specifically enumerated as exclusions from the definition of Contracts,
(iii) Permits, (iv) Hotel Names, (v) cash or other funds, whether in petty cash
or house banks, or on deposit in bank accounts or in transit for deposit,
(vi) books and records (except as provided in Subsection 5.13),
(vii) receivables, (viii) refunds, rebates, or other claims, or any interest
thereon, for periods or events occurring prior to the Cut-Off Time, (ix) utility
and similar deposits, or (x) prepaid insurance or other prepaid items, and
(xi) the Software Programs.
"NOTICE" shall have the meaning as set forth in Subsection 8.4.
"OFFERING" shall mean the offering of the Company's Class A Common Stock as
the term "Offering" is defined in the Prospectus/Consent Solicitation Statement.
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"OPERATING EQUIPMENT" shall mean all china, glassware, linens, silverware
and uniforms (if owned), whether in use or held in reserve storage for future
use in connection with the operations of the Hotel, which are on hand on the
date hereof, subject to such depletion and including such resupplies as shall be
made in the normal course of business and in accordance with Subsection 4.19.
"OPERATING LEASES" shall mean all leases, occupancy agreements and other
similar agreements, together with all modifications, extensions and renewals
thereof, and any guarantees of any of the foregoing with respect to or demising
any part of the Real Property.
"PARTNERSHIP" shall have the meaning set forth in the first paragraph of
this Agreement.
"PARTNERSHIP AGREEMENT" shall mean the Agreement of Limited Partnership of
the Partnership as amended through and including January 1, 1990 by an
"AMENDMENT OF AGREEMENT OF LIMITED PARTNERSHIP OF MOTELS OF AMERICA, SERIES IX,
a California Limited Partnership".
"PERMITS" shall mean all licenses, franchises and permits owned by the
Partnership and used in or relating to the ownership, occupancy or operation of
any part of the Hotel.
"PERMITTED EXCEPTIONS" shall mean San Diego County secured real property
taxes and assessments, the matters shown as recorded in the official records of
San Diego County, California by the Title Commitments as well as those matters
which would be disclosed by a physical inspection of the land as shown on the
Survey all approved or deemed approved by the Company pursuant to Subsection 2.9
hereof to which title to the Property may be subject on the Closing Date.
"PERMITTED LIENS" shall mean with respect to the respective Property, those
liens described on the Disclosure Schedule which included liens for real
property taxes and assessments for utilities not yet delinquent, the outstanding
principal balance of mortgage debt, rights of tenants under the Operating
Leases, and obligations arising under the Contracts.
"PERSONAL PROPERTY" shall mean and include any and all tangible personal
property owned by the respective Partnership located at, upon or about, or
affixed or attached to, or installed in the Real Property or used or to be used
in connection with or incorporated into or otherwise relating to the Real
Property or its ownership, use, development, construction, maintenance,
management, operation, marketing, leasing, occupancy, sale or financing,
including, but not limited to, fixtures, furniture, furnishings, tools,
machinery, appliances and other apparatus and equipment supplies and other
inventories, office equipment, communications equipment, vehicles, storage
tanks, spare and replacement parts, fuel, plans, specifications, operational
handbooks, machinery and/or equipment operational instructions and/or
specifications, surveys, drawings, and records, files and papers, whether in
hard copy or computer format, including, without limitation, structural and
engineering information, sales and promotional literature, manuals and data,
sales and purchase correspondence, lists of present and former suppliers, lists
of present and former leases and clients, personnel and employment records, and
any information relating taxes imposed on the Property.
"PROPERTY" shall mean the Real Property, Personal Property, and the
Miscellaneous Hotel Assets.
"PROSPECTUS/CONSENT SOLICITATION STATEMENT" shall mean the Prospectus/
Consent Solicitation Statement filed with the Application.
"REAL PROPERTY" shall mean the Land, the Appurtenances and the
Improvements.
"SOFTWARE PROGRAMS" shall mean the computer software programs for
accounting functions for the Hotel's general ledger, accounts payable, accounts
receivable and payroll.
"SURVEY" as defined in Subsection 2.8.
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"TENANT" shall mean each lessee, tenant or other entity occupying any
portion of the Property.
"TITLE COMMITMENTS" shall have the meaning set forth in Subsection 2.6 of
this Agreement.
"TITLE COMPANY" shall have the meaning set forth in Subsection 2.6 of this
Agreement.
"TITLE POLICY" shall have the meaning set forth in Subsection 2.6 of this
Agreement.
"TRANSACTION" shall have the meaning set forth in Subsection 2.1 of this
Agreement.
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SECTION II
THE TRANSACTION
2.1 ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED. When the Asset
Transfer Conditions are satisfied through the requisite vote of holders of
partnership interests of the Partnership, and subject to the terms and
conditions set forth herein, on the Closing Date:
(a) The Partnership shall sell, transfer, deliver to the Company, and
the Company shall acquire from the Partnership, all of the Partnership's right,
title and interest in each of the following items (herein collectively called
the "Acquired Assets"):
(i) the Real Property;
(ii) the Personal Property;
(iii) the FF&E;
(iv) the Consumables and Operating Equipment;
(v) the Hotel Names and the Franchise Agreement;
(vi) the Permits (other than Excluded Permits);
(vii) the transferable contract rights, title and interest of the
Partnership in, to and under all the Bookings and Contracts;
and
(viii) all Miscellaneous Hotel Assets.
(b) The Company shall assume, and therefore be responsible for paying
and satisfying, to the extent not discharged prior to Closing, all of the debts,
liabilities and obligations of the Partnership of every kind, character or
description, whether accrued, contingent or otherwise (collectively, the
"Assumed Liabilities").
(c) Notwithstanding anything in this Subsection 2.1 to the contrary,
the Partnership shall retain all of its right, title and interest in and to the
Excess Cash such Partnership may hold at the time of Closing, and such Excess
Cash shall be excluded from the transfers to the Company contemplated herein.
(d) The transfer and conveyance of the Acquired Assets and the
assumption of the Assumed Liabilities of the Partnership and the related
transactions contemplated herein are collectively referred to as the
"Transaction."
2.2 "AS IS" SALE. THE COMPANY ACKNOWLEDGES THAT, EXCEPT AS EXPRESSLY
PROVIDED IN THIS AGREEMENT OR IN ANY DOCUMENT DELIVERED BY THE PARTNERSHIP TO
THE COMPANY AT CLOSING, THE PARTNERSHIP HAS MADE NO REPRESENTATION OR WARRANTY,
AND THE COMPANY IS NOT RELYING ON ANY REPRESENTATION OR WARRANTY MADE (WHETHER
ORALLY OR IN WRITING) BY ANY PERSON ACTING ON THE PARTNERSHIP'S BEHALF,
PERTAINING TO ALL OR ANY PART OF THE PROPERTY OR THE PHYSICAL CONDITION, INCOME
POTENTIALS, EXPENSES OF OPERATION, CURRENT USES OR PRIOR USES THEREOF OR THE
PRESENCE OF HAZARDOUS OR TOXIC MATERIALS OR CONDITIONS WITHIN OR ABOUT THE
PROPERTY.
THE COMPANY HAS EXAMINED THE PROPERTY AND, EXCEPT AS EXPRESSLY PROVIDED IN THIS
AGREEMENT OR IN ANY DOCUMENT DELIVERED BY THE PARTNERSHIP TO THE COMPANY AT
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CLOSING, WILL PURCHASE THE PROPERTY "AS IS" ON THE DATE OF THIS AGREEMENT,
ORDINARY WEAR AND TEAR THEREAFTER EXCEPTED, AND SUBJECT TO ANY SUBSEQUENT
CHANGES WHICH MAY BE PERMITTED UNDER SECTION V HEREOF.
2.3 PURCHASE PRICE. The Consideration to be paid by the Company to the
Partnership for the Property shall be the following:
(i) 277,487 shares of the Company's Common Stock ("Class A Common
Stock") as determined in accordance with the methodology described in
the Prospectus/Consent Solicitation Statement. The Partnership may
request prior to Closing that such Class A Common Stock to be paid to
it pursuant to this Subsection 2.3 be issued for and in the name of
its partners in accordance with the terms of the Partnership Agreement
or other governing document; and
(ii) Upon Closing, cash equal to the amount of the excess of the total
current assets (excluding cash) of the Partnership over total current
liabilities ("Cash"). Such amount of Cash shall be computed at
Closing and in accordance with General Accounting Principles. In
order to avoid post-Closing adjustments and to determine the amount of
Cash, the parties shall agree to a reasonable estimate of total
current assets and total current liabilities as the parties reasonably
expect them to be upon the Closing of Escrow.
2.4 CLOSING TIME AND PLACE. Unless another date or place is agreed to by
the parties, the closing of the Transaction (the "Closing") shall take place
within ninety days after the expiration of the Solicitation Period (the
"Closing Date") at the offices of Host Funding, Inc., 7825 Fay Avenue, Suite
250, La Jolla, CA 92037 upon the satisfaction or waiver of all conditions to
Closing set forth in Sections VI and VII hereof.
2.5 TITLE. On the Closing Date, the Partnership will convey to the
Company marketable, fee simple title to the Real Property (and title to the
Personal Property), free and clear of all liens, encumbrances, judgments
tenancies, adverse interests, easements, encroachments, rights-of-way, and
restrictions, other than the Permitted Liens.
2.6 TITLE INSURANCE
(a) The Company has obtained preliminary title reports or commitments
for title insurance (collectively, the "Title Commitments") for the Real
Property issued by a recognized national title insurance company (the "Title
Company") licensed to do business in California, upon which the Title Company
will issue a standard ALTA Form B (1992) owner's policy of title insurance (the
"Title Policy") in the policy amount of not less than the amount specified on
the Disclosure Schedule. The Title Policy shall included (i) as exceptions to
coverage only the applicable Permitted Liens, and (ii) appropriate endorsements,
including without limitation, access, covenant, condition and restriction,
contiguity, encroachment, improvement, mineral rights, subdivision map act, and
other endorsements, in each case to the extent applicable.
(b) If, as of the Closing Date, the Partnership cannot convey title
subject only to Permitted Liens or any other liens of encumbrances on the
Property which do not materially effect the value or marketability thereof, the
Company shall have as its sole remedy the option, exercisable immediately, to
terminate this Agreement with respect to the Partnership. Notwithstanding the
existence of any title defect that may arise with respect to any Real Property,
the Company shall have, at any time on or prior to the Closing Date, the right
to waive such title defect and proceed to Closing, in which case the Company
shall be deemed to have waived all claims, actions and rights against the
Partnership affected by such title defect.
2.7 DUE DILIGENCE Prior to the execution and delivery hereof, the Company
and its agents and representatives have had access to the Property to study,
survey and investigate the Property and the Partnership's ownership and the
Management Company's management and operation of the Property and to interview
the employees and consultants of the Partnership and the Management Company
regarding the Property. The investigation included
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an examination of all books and records of the Hotel, other documents relating
to the ownership and operation of the Property, and one or more on-site physical
inspections of the Property. In the course of such investigation, the
Partnership has delivered all material books, records, reports and studies in
the possession or under the control of the Partnership or the Management Company
and has disclosed all material facts and information known to the Partnership,
relevant to the ownership, operation or financial condition of the Property.
2.8 SURVEY. As soon as practicable after the date hereof, the Company, at
the Partnership's sole cost and expense, shall obtain an ALTA survey of current
date ("Survey"), showing the location of (i) all Improvements, (ii) all
easements, roads and rights-of-way (together with related recording
information), (iii) the 100-year flood plain, if applicable, (iv) any
encroachments or protrusions over boundary lines to the Real Property, and
(v) all dedicated streets adjoining the Real Property and the distances thereto.
The Survey shall contain a legal description of the Land, and the surveyor shall
certify to the Title Company and to the Company that the Survey was made on the
ground of the Real Property, that the Survey is correct, and that there are no
encroachments, improvements, or visible uses except as are shown on the Survey.
2.9 PERMITTED EXCEPTIONS. The Company has approved the title matters set
forth on Exhibit E hereto and agrees that such matters shall be "Permitted
Exceptions" hereunder. The Company shall have five (5) days after the receipt
by the Company of the Survey or any supplement to the Title Report to approve or
disapprove any items shown thereon. Such notice of approval or disapproval
shall specify (i) any objections the Company has to the sufficiency of the
Survey or any matters shown on any supplement to the Title Report, (ii) a list
of the matters approval of which is conditioned upon receipt at Closing of an
endorsement as to such exceptions and (iii) a list of all endorsements to the
Company of the title policy shall require at Closing. In the event that the
Company shall object to any matter or require any endorsement as provided
herein, the Partnership shall have two (2) days to approve the Company's notice,
in which case each item disapproved by the Company shall be corrected, and as a
condition to Closing, the Title Policy shall include each of the endorsements
specified by the Company, or to disapprove the Company's notice, in which case
this Agreement shall terminate and be of no further force and effect (except as
provided below), and the deposit and interest accrued thereon shall be returned
to the Company. Failure by the Partnership to give notice of its approval or
disapproval of the Company's notice shall be deemed to be an approval of the
Company's notice. If the Partnership shall disapprove the Company's notice
hereunder, the Partnership shall specify the matters resulting in such
disapproval of the Company's notice. Notwithstanding the foregoing, if after
receipt of Seller's notice disapproving the Company's notice, that the Company
waives its disapproval of the subject matter or its requirement of the subject
endorsement, this Agreement shall remain in full force and effect and such
matter shall be deemed to be a Permitted Exception or such endorsement shall not
be required as a condition to Closing.
2.10 MANAGEMENT AGREEMENT TERMINATION. As a condition to Closing, the
Partnership agrees to secure written certification from the Management Company
and the Partnership that the Management Agreement will terminate upon
consummation of the Transaction.
2.11 FRANCHISOR CONSENT. As a condition to Closing, the Partnership will
secure written certification from the Franchisor stating that: (i) the
Franchisor consents to the assignment by the Partnership of the Hotel to the
Company, (ii) the Franchisor will enter an agreement similar to the Franchise
Agreement with the Company.
SECTION III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company hereby represents and warrants to the Partnership as
follows:
3.1 ORGANIZATION, POWER AND AUTHORITY, AND QUALIFICATION. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Maryland. The Company has the requisite power and
authority to carry on its respective business as it is now being conducted. The
Company is now or
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by the Closing Date will be qualified to do business and is now or by the
Closing date will be in good standing in each jurisdiction in which the
character of its property owned or leased or the nature of its activities makes
such qualification necessary, except where the failure to be so qualified and in
good standing would not have a material adverse effect on the business or
financial condition of the Company, as the case may be.
3.2 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has taken all action
necessary to authorize the execution, delivery and performance of this Agreement
by the Company and no other proceedings on the part of the Company are necessary
to authorize the execution and delivery of this Agreement and the consummation
of the Transaction.
None of the execution and delivery of this Agreement by the Company, the
consummation by the Company of the Transaction or compliance by the Company with
any of the provisions hereof will (a) conflict with or result in any breach of
any provisions of the charter or bylaws of the Company; (b) result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which the Company is a party or by which it or any
of its properties or assets may be bound; or (c) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Company or any
of the properties or assets of the Company; except in the case of (b) or (c) for
violations, breaches, or defaults (A) that would not in the aggregate have a
material adverse effect on the business or financial condition of the Company,
as the case may be, and that will not impair the effectiveness of the
Transaction contemplated hereby, or (B) for which waivers or consents have been
or will be obtained prior to the Closing Date.
3.3 BINDING OBLIGATION. This Agreement has been duly and validly executed
and delivered by the Company to the Partnership, and constitutes a valid and
binding agreement of the Company enforceable against the Company in accordance
with its terms, except that such enforcement may be subject to bankruptcy,
conservatorship, receivership, insolvency, moratorium, or similar laws affecting
creditors' rights generally or the rights of creditors of limited partnerships
and to general principles of equity.
3.4 INSOLVENCY. There are not attachments, executions or assignments for
the benefit of creditors, or voluntary or involuntary proceedings in bankruptcy,
or under any other debtor relief laws, contemplated by or pending
or threatened against the Company.
3.5 BROKERS. The Company has employed no broker or finder, or incurred
any liability therefore, in connection with the Transaction.
3.6 VALID CONSIDERATION. The Class A Common Stock, when issued in
accordance with this Agreement and the Articles of Incorporation of the
Company, will be duly and validly issued, fully paid and nonassessable, and the
issuance thereof will not be subject to preemptive or other similar rights.
SECTION IV
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
The Partnership represents and warrants to the Company (with respect only
to the Partnership and the Acquired Assets of such Partnership), except as
disclosed in the Prospectus/Consent Solicitation Statement or on the Disclosure
Schedule, that:
4.1 AUTHORITY; NO VIOLATION. The Partnership is a partnership duly
organized, validly existing, and in good standing under the laws of the State
of California, and has the power to own all of its properties and assets and to
carry on its business as presently conducted. The execution, delivery and
performance of this Agreement has been duly and validly authorized by all
necessary action of the Partnership and this Agreement is a valid and binding
obligation of the Partnership, enforceable against the Partnership in accordance
with its terms. To the knowledge of the
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Partnership, the execution and delivery of this Agreement by the Partnership and
the consummation of the transactions contemplated hereby will not result in or
constitute any of the following except as would not have a material adverse
effect on the Partnership or the Property: (i) a default or an event that, with
notice or lapse of time or both would be a default, breach, or violation of the
partnership agreement of the Partnership or any Contract or any Operating Lease,
License or Entitlement, promissory note, conditional sales contract, commitment,
indenture, mortgage, deed of trust, or other agreement, instrument or
arrangement to which the Partnership is a party or by which it or the Property
is bound, (ii) an event that would permit any party to terminate any Contract by
which the Partnership is bound or to accelerate the maturity of any indebtedness
or other obligation of the Partnership, except with respect to indebtedness
which the Company has identified as indebtedness which it intends to satisfy
with the proceeds of the Initial Private Placement and listed on the Disclosure
Schedule, (iii) a violation or conflict with any term or provision of any
judgment, decree, order, statute, injunction, rule or regulation of a
governmental unit applicable to the Partnership or the Property, or (iv) the
creation or imposition of any lien, charge or encumbrance on the Property.
4.2 COMPLIANCE WITH LAWS. In connection with its Property, to the
knowledge of the Partnership, the Partnership has complied in all material
respects with all applicable laws, ordinances, rules and regulations (including
without limitation those relating to zoning), except as would not have a
material adverse effect on the Partnership or the Property, and the Partnership
has not received any written notice of a violation of any such laws, rules or
regulations which individually or in the aggregate would have a material adverse
effect on the Partnership or the value of the Property. The Partnership has not
received written notice or knowledge that any government agency or any
government employee or official considers the construction of the Property or
its operation or use to have failed to comply with any law, ordinance,
regulation or order or that any investigation has been commenced or is
contemplated respecting any such possible failure of compliance which
individually or in the aggregate would have a material adverse effect on the
Partnership or the use of the Property. To the knowledge of the Partnership,
there are no unsatisfied requirements for repairs, restorations or improvements
from any person (other than from any Tenant), entity or authority, including,
but not limited to, any lender, insurance carrier or governmental authority. The
Partnership has not received from any insurance company or board of fire
underwriters any written or actual notice, which remains uncured, of any defect
or inadequacy in connection with the Property or its operation.
4.3 LICENSES, PERMITS, CERTIFICATES OF OCCUPANCY, ZONING, ETC. To the
knowledge of the Partnership, all Licenses and Entitlements required in
connection with the construction, use, or occupancy of the Property have been
obtained and are in full force and effect and in good standing, except as such
would not have a material adverse effect on the Partnership or the Property. To
the knowledge of the Partnership, such Partnership has not taken any action or
failed to take any action that would result in the revocation of such License
and Entitlements nor has it received written notice that any governmental entity
has revoked or intends to revoke any of them as to a violation that has not been
cured or otherwise resolved to the satisfaction of such governmental entity,
except as such would not have a material adverse effect on the Partnership or
the Property.
4.4 NO CONSENTS OR APPROVALS. No consent, waiver, approval or
authorization of, or filing, registration or qualification with, or notice to,
any governmental unit or any other person is required to be made, obtained or
given by the Partnership in connection with the execution, delivery or
performance of this Agreement, except those which have already been obtained or
those which individually or in the aggregate would not have a material adverse
effect on the Partnership or the Property or those identified on the Disclosure
Schedule.
4.5 ENVIRONMENTAL MATTERS. Except as disclosed in the Phase i
Environmental Reports, copies of which have been delivered to the Company, to
the knowledge of the Partnership: (i) neither the Partnership nor any previous
owner, tenant, occupant or user of the Property, nor any other person, has
engaged in or permitted any operations or activities upon, or any use or
occupancy of the Property, or any portion thereof, for the purpose of or in any
way involving the handling, manufacture, treatment, storage, use, generation,
release, discharge, refining, dumping or disposal of any Hazardous Materials
(whether legal or illegal, accidental or intentional) on, under, in or about the
Property, or transported any Hazardous Materials to, from or across the
Property, except in all cases in compliance with Environmental Requirements,
except where failure to do so would not have a material adverse effect on the
Partnership or the Property, and only in the course of legitimate business
operations at the Property (which shall not include any
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business primarily or substantially devoted to the handling, manufacture,
treatment, storage, use, generation, release, discharge, refining, dumping or
disposal of Hazardous Materials); and (ii) no Hazardous Materials are presently
constructed, deposited, stored, or otherwise located on, under, in or about the
Property, except in all cases in compliance with Environmental Requirements.
4.6 TAXES AND ASSESSMENTS. All real and personal property taxes relating
to the Partnership, excepting those for the current tax year which are not yet
overdue (i.e., which are still payable without interest or penalty), have
been paid in full. The Partnership has not received written or actual notice of
and does not have any actual knowledge of (i) any proposed increase in the
assessed valuation of the Property, or (ii) any existing or proposed assessment
that has or may become a lien on the Property.
4.7 PHYSICAL CONDITION. Except as disclosed in the Engineering/
Architectural Reports, the Partnership has no knowledge of any structural
defects or deficiencies in the improvements comprising any portion of the Land
which individually or in the aggregate would have a material adverse effect on
the Partnership or on the value of the Property. To the knowledge of the
Partnership, the improvements and tangible Personal Property (including, without
limitation, plumbing equipment, HVAC, electric wiring and fixtures, gas
distribution system, and water and sewage drainage systems presently on or in
the Property) are in good working order and condition, except as such would not
individually or in the aggregate have a material adverse effect on the
operations of the Partnership.
4.8 THE OPERATING LEASES. A list of the current Operating Leases in
effect as of the date hereof is provided on the Disclosure Schedule. Except for
the Operating Leases, there are no other leases, licenses or other
agreements affecting the occupancy of the Property which would become an
obligation of the Company after the Closing except as provided on the Disclosure
Schedule. With respect to each Operating Lease, except as individually or in
the aggregate would not have a material adverse effect on the Partnership or the
Property: (i) there is no default by the Partnership under any Operating Lease
and to the best of the Partnership's knowledge, there is no existing or
threatened default by any Tenant under any Operating Lease and (ii) the
Operating Lease is assignable by the Partnership to the Company.
4.9 NO DEFAULTS AFFECTING THE PROPERTY. To the knowledge of the
Partnership, neither the Partnership, nor to the best of the Partnership's
knowledge, any other party is in material default under any agreement affecting
the Property, and, to the knowledge of the Partnership, no event exists which,
with the passage of time or the giving of notice or both, will become a material
default thereunder on the part of the Partnership or, to the best of the
Partnership's knowledge, any other party thereto. To the knowledge of the
Partnership, the Partnership is in full compliance with the terms and provisions
of the covenants, conditions, restrictions, rights-of-way or easements affecting
the Property, except as such would not have a material adverse effect on the
Partnership or the Property.
4.10 NO LITIGATION OR ADVERSE EVENTS. There are no investigations,
actions, liens, proceedings or claims pending or, to the knowledge of the
Partnership, threatened against or affecting the Partnership or the Property,
at law or in equity brought before or by any federal, state, municipal or other
governmental department, commission, board, agency, or instrumentality, domestic
or foreign, except for such arising in the ordinary course of business or such
that would not have a material adverse effect on the Partnership or the
Property. To the knowledge of the Partnership, it is not subject to any order,
writ, injunction or decree of any court or federal, state, municipal or other
governmental agency or department, commission, board, agency or instrumentality.
4.11 EMINENT DOMAIN. There is no existing or, to the knowledge of the
Partnership, proposed or threatened eminent domain, condemnation or similar
proceeding, or private purchase in lieu of such a proceeding, which would
affect the Property in any way whatsoever.
4.12 CONTRACTS AND AGREEMENTS. All Contracts (other than Operating Leases)
are listed on the Disclosure Schedule, and there are no other Contracts which
would become an obligation of the Company after the Closing. With respect to
each Contract: (1) the Contract has been duly and validly executed and
delivered by the Partnership, (ii) the contract is in full force and effect,
(iii) the copy of the Contract delivered by the Partnership to the Company is
true and
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accurate and is unmodified except as shown therein, and (iv) to the knowledge of
the Partnership, neither the Partnership nor any other party thereto is in
material default under the Contract.
4.13 NON-FOREIGN PERSON. The Partnership is not a "foreign person" as such
term is defined in Section 1445(f) of the Internal Revenue Code of 1986, as
amended, and the Partnership is not subject to withholding under
Section 26131 of the California Revenue and Taxation Code.
4.14 EMPLOYEES. No employee employed by the Partnership in connection with
the Property is covered by a collective bargaining agreement and there are no
retroactive increases or other accrued and unpaid sums owed to any such
employee. There is no labor trouble, dispute, grievance, controversy or strike
pending or, to the knowledge of the Partnership, threatened against the
Partnership or any Tenant which, individually or in the aggregate, would have
a material adverse effect on the Partnership or the Property, and the
Partnership does not know of any basis for any such trouble, dispute, grievance,
controversy or strike which, individually or in the aggregate, would have a
material adverse effect on the Partnership or the Property.
4.15 OPERATING STATEMENTS. The Application contains audited statements of
profit and loss of the Partnership with respect to the Property for calendar
years 1993 and 1994 and unaudited statements for the six months ended June 30,
1995 (the "Operating Statements"). These statements properly reflect the profit
or loss from the management and operation of the Property for such periods and,
in all material respects, accurately reflect all rents and other gross receipts,
and all amounts paid by the Partnership for electricity, water, sewer, other
utility services, insurance, fuel, maintenance and repairs (whether capitalized
or expensed), real estate taxes, payroll and payroll taxes and all other
operating and other expenses associated with the Property. Since the end of the
latest period covered by such financial statements, there have been no
transactions or occurrences materially affecting the operating expenses (or
items thereof) associated with the Property.
4.16 DISCLOSURE. No representation or warranty of the Partnership in this
Agreement, or any information, statement or certificate furnished or to be
furnished by or on behalf of the Partnership pursuant to this Agreement or in
connection with the transactions contemplated hereby, contains or shall contain
any untrue statement of a material fact or omits or shall omit to state a
material fact necessary to make the statements contained therein not misleading.
4.17 KNOWLEDGE OF THE PARTNERSHIP. As used in this Section IV, the phrase
"to the knowledge of the Partnership" shall mean to the actual knowledge of the
General Partner, without the obligation to perform any investigation, research
or due diligence whatsoever into the accuracy or truth of the subject matter of
such representation.
4.18 BOOKINGS. Exhibit D attached hereto identifies (i) all Bookings
with groups or with corporate clients which provide for the occupancy of a room
or rooms at the Hotel by an individual or individuals such that such occupancy
would, in the aggregate, exceed ten (10) room-nights (i.e., one room for ten
nights, two rooms for five nights, etc.), and (ii) all contracts, agreements, or
other arrangements, oral or written, pursuant to which rooms in the Hotel are
provided at a discount below posted room rates.
4.19 INVENTORIES. The inventories of Consumables, Operating Equipment, and
FF&E issued to operating departments of the Hotel are at levels generally
consistent with levels carried by the Management Company in the normal
operation of a comparable hotel under the Management Company's management.
4.20 HOTEL NAMES. Exhibit B identifies all Hotel Names which are used in
the business of operating the Hotel and is true, complete and correct in all
material respects.
4.21 PERMITS. With regard to Permits: (i) Exhibit C identifies all
extant Permits; (ii) The Partnership has delivered true and correct copies of
all such Permits to the Company; (iii) to the best knowledge of the
Partnership, no default has occurred in the Company's due observance or
condition of any Permit, except as disclosed in Exhibit C; and
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(iv) The Partnership has not received any notice from any source to the effect
that there is lacking any Permit needed in connection with the operation of the
Hotel, nor is the Partnership aware that such is the case.
4.22 CONTRACTS. Exhibit A identifies all Contracts, excluding any purchase
order with an unpaid balance less than $200.00 the Partnership has delivered
copies true and correct in all material respects, of all Contracts to the
Company. There are no material defaults under any Contract by the Partnership,
or to the best knowledge of the Partnership by any other party thereto, other
than disclosed in Exhibit A hereto.
SECTION V
COVENANTS AND AGREEMENTS OF THE PARTNERSHIP
The Partnership hereby covenants and agrees with the Company that
subsequent to the execution of this Agreement and prior to the Closing Date:
5.1 ACTIONS AFFECTING ASSETS. The Partnership shall not sell, assign,
lease, pledge, transfer or encumber any of the Property, or enter into any other
consent, commitment, understanding or other agreement, or incur any material
obligation or liability (contingent or absolute) with respect to the Property
or merge or consolidate with or into any other entity or enter into any
agreements relating thereto, other than in the ordinary course of business.
5.2 ACCESS TO PROPERTY AND RECORDS. Upon reasonable notice and during
regular business hours, the Partnership shall give the Company, and authorized
representatives of the Company, full access to the Partnership's personnel,
properties, documents, contracts, facilities, books, equipment and records.
5.3 LICENSES AND ENTITLEMENTS. The Partnership shall maintain all
Licenses and Entitlements in full force and effect, shall file timely all
reports, statements, renewal applications and other filings, and shall pay
timely all fees and charges in connection therewith that are required to keep
the Licenses and Entitlements in full force and effect.
5.4 MATERIAL CONTRACTS. Except for agreements (including Operating Leases
with prospective Tenants) entered into in the ordinary course of the
Partnership's business and terminable without penalty on not more than 90 days'
notice, the Partnership will not enter into any new contracts or agreements
without in each case obtaining the Company's prior written consent.
5.5 INSURANCE. The Partnership shall maintain in full force and effect
substantially the same public liability and casualty insurance coverage now in
effect with respect to the Property.
5.6 TAXES AND ASSESSMENTS. The Partnership shall pay or discharge before
delinquent all tax liabilities and obligations, including, without limitation,
those for federal, state or local income, property, unemployment, withholding,
sales, use and other taxes.
5.7 BINDING COMMITMENTS. The Partnership shall not make any material
commitments or representations to any applicable government authorities, any
adjoining or surrounding property owners, any civic association, any utility
or any other similar person or entity that would in any manner be binding upon
the Company or the Property without the Company's prior written consent in each
case.
5.8 OPERATION OF PROPERTY. The Partnership shall continue to operate and
maintain the Property in the ordinary course of its business and shall maintain
inventories in the operating departments at present levels.
5.9 NO NEW LEASES. The Partnership will not enter into any new Leases,
without the prior written consent of the Company.
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5.10 PERMITS. The Partnership will execute, and the Company, where
necessary, will join in the execution of, all applications and instruments
required in connection with the transfer of all Permits (other than Excluded
Permits) in order to transfer the benefits of such Permits to the Company on or
prior to the Closing Date. Seller, subject to the next succeeding sentence,
shall use its commercially reasonable efforts to preserve in force all existing
Permits and to cause all those expiring to be renewed prior to the Closing Date.
If any such Permit shall be suspended or revoked, the Partnership shall promptly
so notify the Company and shall take all measures necessary to cause the
reinstatement of such Permit without any additional limitation or condition.
5.11 REPRESENTATIONS AND WARRANTIES. The Partnership shall provide prompt
Notice to the Company if the Partnership becomes aware of any transaction or
occurrence prior to the Closing Date which would make any of the
representations, warranties and agreements of the Partnership contained in
Section IV not true in any material respect. The receipt by the Company of any
such Notice shall not negate or impair any of Purchaser's rights hereunder.
5.12 ZONING. The Partnership shall not make any application for a change
in zoning or platting for the Real Property nor consent to or apply for the
creation of a special taxing district including the Real Property.
5.13 BOOKS AND RECORDS. Although the Transaction hereby does not include
any sale or transfer of the books and records of the Partnership with respect to
the Hotel, the Partnership agrees that all books, records, files and
correspondence pertaining to the business of the Hotel will remain in the Hotel
for use by the Company for such reasonable time as the Company may desire;
provided, however, that the above shall not include general ledgers, general
journals, voucher registers and other records not pertaining to the business of
the Hotel, all of which may be removed by the Partnership within a reasonable
time after the Closing Date. The Partnership agrees to preserve all books and
records, files and correspondence described in the first sentence of this clause
(i) remaining at the Hotel after the Closing Date, and not to destroy or dispose
of the same for at least seven (7) years after the Closing Date, and then only
after 60 days prior to written Notice to the Company, and the Company and its
representatives shall have access to such books, records, correspondence and
files at all reasonable times.
SECTION VI
CONDITIONS TO CONSUMMATION OF TRANSACTION
The respective obligations of each party to consummate the Transaction
shall be subject to fulfillment (or waiver) at or prior to the Closing Date of
the following conditions (the "Asset Transfer Conditions"):
6.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations,
warranties and covenants, including, without limitation, the mutual covenants
contained in Section II hereof, made by the Partnership and the Company in this
Agreement or in any document delivered by either of them pursuant to this
Agreement shall be true and correct in all material respects when made and on
and as of the Closing Date as though such representations, warranties and
covenants were made on and as of such date, except as otherwise permitted by the
terms of this Agreement (including Subsection 7.2(f) and Subsection 7.3(d)).
6.2 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in the value or condition of the Partnership or its Property since the
date hereof, except for changes contemplated by this Agreement and changes in
the ordinary course of business that do not have a material adverse effect on
the business or financial condition of such Partnership or its Property.
6.3 CONSENTS. With respect to a Partnership, the equity owners of the
Partnership shall have approved the Formation Transactions with the requisite
vote as set forth in and contemplated by the Prospectus/Consent Solicitation
Statement. If any of the Limited Partners of the Partnership vote against this
Agreement, and perfect their dissenters' rights as set forth in the Prospectus/
Consent Solicitation Statement, then the Company can terminate this Agreement in
accordance with the terms of Exhibit F.
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6.4 FORMATION TRANSACTIONS. In addition to the conditions set forth in
this Section VI, all conditions to the closing of the Formation Transactions set
forth in Prospectus/Consent Solicitation Statement shall have been satisfied on
terms satisfactory to the Company in its sole discretion.
SECTION VII
THE CLOSING
Subject to the terms and conditions of this Agreement, the Closing shall
take place promptly after satisfaction or waiver of the conditions set forth in
this Section VII hereof.
7.1 CLOSING. Within five (5) days after the execution and delivery
hereof, the Company and Seller shall deliver a fully executed copy of this
Agreement to Escrow Agent. This Agreement, together with any supplemental
instructions jointly executed by the Company and Seller and delivered to
Escrow Agent, shall constitute the escrow instructions by which the
transactions contemplated herein shall be consummated, provided that in the
event of an inconsistency between any such supplemental instructions and the
terms of this Agreement, the terms of this Agreement shall prevail. Subject
to adjournments as provided elsewhere in this Agreement, the closing (the
"Closing") of the within transaction shall take place upon the satisfaction
or waiver of all conditions to Closing set forth in Section VI and the
recordation of the grant deed of the Property to the Company, which shall
occur on no later than ninety (90) days after the end of the Solicitation
Period which such Solicitation Period shall end no later than January 31,
1996 (the "Closing Date"). Time is expressly declared to be of the essence.
On the business day before the anticipated Closing Date, a pre-closing shall
occur at the offices of the Partnership, at which the actions specified in
Subsections 7.2 and 7.3 below shall be taken, all of which will be deemed
taken simultaneously at the Closing and no one of which will be deemed
completed until all have been completed and the Closing shall have occurred.
7.2 DELIVERIES BY THE PARTNERSHIP. At Closing, the Partnership shall
deliver or cause to be delivered the following:
(a) A special warranty deed conveying good and marketable fee simple
title to the Real Property (subject only to Permitted Liens);
(b) Appropriate recording and transfer tax returns and related
documents necessary or appropriate;
(c) Such assignment and assumption agreements, or confirmatory
instruments with respect thereto, as may be deemed necessary and appropriate by
the Partnership and the Company pursuant to which the Partnership shall assign
to the Company the Acquired Assets, and pursuant to which the Company shall
assume the Assumed Liabilities, if any;
(d) A certificate duly executed by the Partnership under penalty of
perjury, setting forth the Partnership's address and federal tax identification
number and certifying that the Partnership is not a "foreign person" in
accordance with the provisions of Section 1445 (as may be amended prior to the
date hereof) of the Internal Revenue Code of 1986, as amended, any regulations
promulgated thereunder;
(e) A certificate from the Partnership certifying that the
representations and warranties of the Partnership set forth herein are true and
accurate in all material respects as of the Closing Date, or if not true and
correct because of events or circumstances occurring since the date hereof,
stating such changes as appropriate and certifying that the revisions to such
representations and warranties are true and accurate in all material respects as
of the Closing Date; and
(f) Such other documents and instruments as the Company and the
Partnership agree are
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<PAGE>
necessary or appropriate.
7.3 DELIVERIES BY THE COMPANY. At Closing, the Company shall deliver or
cause to be delivered the following:
(a) The Class A Common Stock in the names and denominations specified
by the Partnership;
(b) A certificate from a duly authorized representative of the
Company certifying that the representations and warranties of the Company, set
forth herein are true and accurate as of the Closing Date, or if not true and
correct because of events or circumstances occurring since the date hereof,
stating such changes as appropriate and certifying that the revisions to such
representations and warranties are true and accurate in all material respects as
of the Closing Date;
(c) The assignment and assumption agreements or confirmatory
instruments with respect thereto referenced in Subsection 7.2(c) above; and
(d) Such other documents and instruments as the Partnership and the
Company agree are necessary or appropriate.
7.4 CLOSING COSTS. The Company will pay or provide for all costs
associated with the closing of the acquisition of the Property of the
Partnership pursuant to this Agreement, including (i) costs of obtaining a title
insurance policy for the benefit of the Company and (ii) all documentary and
transfer fees and taxes and all recording charges, fees and taxes imposed on or
in connection with the Transaction.
7.5 POSSESSION. At Closing, the Partnership shall deliver possession of
its Property to the Company or its designee (subject to the rights of Tenants
under the Operating Leases), which Property shall be in the same condition as of
the date of execution of this Agreement, reasonable wear and tear excepted.
7.6 NOTICES TO TENANTS. The Partnership at the Company's expense shall
cause the manager of each parcel of Real Property to mail via first-class mail
(postage prepaid) or personally deliver to each Tenant under such Partnership's
Operating Leases, within 20 days after the Closing, a letter in substantially
the form reached hereto as Exhibit F advising each tenant of the applicable
change of ownership and the holding of security deposits, all in conformity with
the requirements of California Civil Code Section 1950.5(g)(1). If the notice
to the Tenant is made by personal delivery, the Tenant shall acknowledge receipt
of the notice and sign his or her name on the Partnership's copy of the notice.
7.7 THE ACCOUNTANTS CLOSING STATEMENTS. The Partnership shall provide
such preliminary inventories and schedules necessary to make the prorations and
adjustments necessary to accurately reflect the inventories as of the Closing.
Thereafter, the parties hereto authorize J. Mark Grosvenor, as the Partnership's
representative, and Ian Gardner-smith, as the Company's representative
(collectively the "Closing Representatives") to enter the Hotel at all
reasonable times, both before and after the Closing Date, for the purpose of
making such additional inventories, examinations and audits of the Hotel, and of
the books and records of the Hotel, as the Closing Representatives may deem
necessary in order to verify such preliminary inventories and schedules provided
by the Partnership and to make the adjustments and prorations required to
accurately reflect the inventories as of the Closing. Based upon such
preliminary schedules and inventories and the Closing Representatives'
verifications thereof, at the Closing the Closing Representatives will prepare
and deliver to each of the parties a Preliminary Closing Statement, which will
show the net amount due either to the Partnership or to the Company as the
result thereof, and such net amount will be added to or subtracted from the
payment of the cash portion of the purchase price to be paid to the Partnership
pursuant to Subsection 2.1 hereof. Within thirty (30) days following the
Closing Date, the Closing Representative shall deliver a Final closing Statement
to each of the parties setting forth the final determination of all items to be
included on the Closing Statements. The net amount due the Partnership or the
Company, if any, by reason of adjustments in the
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Preliminary Closing Statement as shown in the Final Closing Statement, shall be
paid in cash by the party obligated therefor within ten (10) days following that
party's receipt of the Final Closing Statement.
If the Closing Representatives are unable to agree on the Preliminary
Closing Statement or the Final Closing Statement, the dispute shall be submitted
to William H. Ling, C.P.A., 3655 Ruffin Road, Suite 320, San Diego, California,
92123 (the "Accountant") for resolution. If so submitted, the adjustments,
prorations and determinations of the Accountants shall be conclusive and binding
on the parties hereto. Notwithstanding the foregoing, if, at any time within
one (1) year following the Closing Date, either party discovers any items which
should have been included in the Closing Statements but were omitted therefrom,
then such items shall be adjusted in the same manner as if their existence had
been known at the time of the preparation of the Closing Statement. The
foregoing limitations shall not apply to any items which, by their nature,
cannot be finally determined within the periods specified.
The Company shall have the right to have its representatives present, both
before and after the Closing Date, for the purpose of observing the taking of
any inventories (including the counting of house funds), and such
representatives shall be given reasonable access to the books and records of the
Hotel which are relevant to the preparation of the Closing Statements.
In connection with the preparation of the Preliminary Closing Statement, if
it is determined upon the basis of reasonable information that there is a
deficiency in any item or items of Operating Equipment or Consumables in the
operating departments of the Hotel as of the Cut-Off Time, then the Partnership
shall make up such deficiency by either issuing additional Operating Equipment
or Consumables out of reserve storage or by giving the Company an appropriate
credit on the Preliminary Closing Statement, such credit to be determined by the
Closing Representatives or the Accountants.
SECTION VIII
GENERAL PROVISIONS
8.1 LIMITATIONS ON LIABILITY. Notwithstanding anything in this Agreement
or applicable law to the contrary, in the event of liability under this
Agreement, the Company hereby waives the right to assert a claim for breach
against the Partnership or any Partner of the Partnership, or against any
proceeds of the Transaction distributed or distributable to the Partners of the
Partnership, the intent being that no Partner of the Partnership shall have any
personal liability to the Company under this Agreement or applicable law.
Notwithstanding anything to the contrary in this Agreement, no officer,
director, employee or stockholder of the Company shall have any personal
liability to the Partnership under this Agreement.
8.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties shall survive the Closing. Any claim, action, suit or proceeding
with respect to the truth, accuracy or completeness of the representations and
warranties shall be commenced or made, if at all, within one year after the
Closing in the case of any and all representations and warranties other than in
connection with the representations and warranties set forth in Subsection 4.5
"Environmental Matters," and three years after the Closing in the case of any
and all representations and warranties set forth in Section 4.5 "Environmental
Matters."
8.3 EXPENSES. All costs and expenses incurred in connection with the
consummation of the Transaction and the Formation Transactions shall be paid by
the Company.
8.4 NOTICE. All notices, demands, requests or other communications that
may be or are required to be given or made by any party pursuant to this
Agreement shall be in writing and shall be hand delivered or transmitted by
certified mail, express overnight mail or delivery service, telegram, telex, or
facsimile transmission.
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<PAGE>
(a) to the Partnership at:
Grosvenor Hospitality Group, Inc.
3145 Sports Arena Boulevard
San Diego, CA 92110
Attention: J. Mark Grosvenor
(b) with a copy to:
Steven D. Burchett, Esq.
Grosvenor Hospitality Group, Inc.
3145 Sports Arena Boulevard
San Diego, CA 92110
(c) to the Company at:
Host Funding, Inc.
7825 Fay Avenue, Suite 250
La Jolla, CA 92037
(d) with a copy to:
Peter G. Aylward, Esq.
3250 Vista Diego Road
Jamul, CA 91935
or such other address as the addressee may indicate by written notice to the
other parties.
Each notice, demand, request or communication that is given or made in the
manner described above shall be deemed sufficiently given or made for all
purposes at such time as it is delivered to the addressee (with the delivery
receipt, the affidavit of messenger time (with respect to a telex) the answer
back being deemed conclusive but not exclusive evidence of such delivery) or at
such time as delivery is refused by the addressee upon presentation.
8.5 GOVERNING LAW. This Agreement, the rights and obligations of the
parties hereto and any claims or disputes relating to such rights and
obligations shall be governed by and construed under the laws of the State of
California, without giving effect to its choice of law principles.
8.6 HEADINGS. Section and subsection headings contained in this Agreement
are inserted for convenience of reference only, shall not be deemed to be a part
of this Agreement for any purpose, and shall not in any way define or affect the
meaning, construction or scope of any of the provisions hereof.
8.7 FURTHER ASSURANCES. Each party agrees to cooperate fully with the
other parties and to prepare, execute, and deliver such further instruments of
conveyance, sale, assignment, or transfer and shall take or cause to be taken
such other or further action as either party shall reasonably request at any
time or from time to time in order to consummate the terms and provisions and to
carry into effect the intents and purposes of this Agreement.
8.8 BENEFIT AND ASSIGNMENT. Neither party shall assign this Agreement, in
whole or in part, whether by
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<PAGE>
operation of law or otherwise, without the prior written consent of the other
party hereto. Any purported assignment contrary to the terms hereof shall be
null, void and of no force and effect. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns as permitted hereunder. No Affiliate of either party, no person,
nor any other entity other than the parties hereto is or shall be entitled to
bring any action to enforce any provision of this Agreement against any of the
parties hereto, and the covenants and agreements set forth in this Agreement
shall be solely for the benefit of, and shall be enforceable only by, the
parties hereto or their respective successors and assigns as permitted
hereunder.
8.9 RISK OF LOSS. The Partnership shall bear the risk of loss or damage
to all or any part of its Property by fire or other casualty prior to the
Closing. Notwithstanding the foregoing, in the event all or part of the
Partnership's Property is damaged by a fire or other casualty subsequent to the
execution hereof but prior to the Closing Date, the Company shall not be
relieved of its obligation to consummate the Transaction when and as required to
do so hereunder so long as the Partnership has in place, at the time of the
casualty, casualty insurance in an amount equal to the full replacement cost of
the improvements located on its Property. In the event of such damage to all or
part of its Property, the Partnership shall assign to the Company at Closing all
of the Partnership's right, title and interest in and to all of the proceeds of
insurance payable by virtue of such casualty.
8.10 COUNTERPARTS. To facilitate execution, this Agreement may be executed
in as many counterparts as may be required. It shall not be necessary that the
signatures of, or on behalf of, each party, or that the signatures of all
persons required to bind any party appear on each counterpart, but it shall be
sufficient that the signature of, or on behalf of, each party, appear on one or
more of the counterparts. All counterparts shall collectively constitute a
single agreement. It shall not be necessary in making proof of this Agreement
to produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereof.
8.11 SEVERABILITY. If any part of any provision of this Agreement or any
other agreement, document or writing given pursuant to or in connection with
this Agreement shall be invalid or unenforceable under applicable law, such part
shall be ineffective to the extent of such invalidity or unenforceability only,
without in any way affecting the remaining parts of such provisions or the
remaining provisions of said agreement so long as the economic and legal
substance of the Transaction is not affected in any manner materially adverse to
either party.
8.12 ENTIRE AGREEMENT: AMENDMENT. The Exhibits and the Schedules attached
hereto are hereby incorporated into the Agreement as if fully set forth herein.
This Agreement and the Exhibits and Schedules attached hereto (each of which
shall be deemed incorporated herein and made a part hereof) contain the final
and entire agreement between the parties hereto with respect to the Transaction,
supersede all prior oral and written memoranda and agreements with respect to
the matters contemplated herein, and are intended to be an integration of all
prior negotiations and understandings. Neither the Partnership nor the Company
shall be bound by any terms, conditions, statements, warranties or
representations, oral or written, not contained or referred to herein or
therein. No change or modification of this Agreement shall be valid unless the
same is in writing and signed by the parties hereto.
8.13 NO WAIVER. No delay or failure on the part of any party hereto in
exercising any right, power or privilege under this Agreement or under any other
instrument or attachment given in connection with or pursuant to this Agreement
shall impair any such right, power or privilege or be construed as a waiver of
any default or any acquiescence herein. No single or partial exercise of any
such right, power or privilege shall preclude the further exercise of such
right, power or privilege. No waiver shall be valid against any party hereto
unless made in writing and signed by the party against whom enforcement of such
waiver is sought and then only to the extent expressly specified therein.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed and delivered on its behalf as of the date first above written.
"PARTNERSHIP" MISSION BAY SUPER 8, LTD.
By: Grosvenor Hospitality Group, Inc.
Its: General Partner
---------------------------------------
By: J. Mark Grosvenor
Its: President
"COMPANY" HOST FUNDING, INC.
---------------------------------------
By: Michael S. McNulty
Its: President
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<PAGE>
DISCLOSURE SCHEDULE
TO
PARTNERSHIP ACQUISITION AGREEMENT
[To be completed prior to execution and Closing]
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<PAGE>
EXHIBIT LIST
CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A
HOTEL NAMES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B
PERMITS/EXCLUDED PERMITS . . . . . . . . . . . . . . . . . . . . . . . . . . . C
BOOKINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D
PERMITTED EXCEPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E
DISSENTERS CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F
<PAGE>
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or the solicitation of any offer to buy any
security other than the Common Stock offered by this Prospectus, nor does it
constitute an offer to sell or a solicitation of an offer to buy the Common
Stock by anyone in any jurisdiction in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof.
SUMMARY TABLE OF CONTENTS
Page
----
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
The Company in General . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Distribution Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Pro Forma Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Selected Financial Information . . . . . . . . . . . . . . . . . . . . . . . .46
Financial Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Business and Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Formation Transactions and Other Related Transactions. . . . . . . . . . . . .82
Allocation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86
Voting Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87
Comparison of Ownership of Mission Bay Interests
and Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91
Policies and Objectives With Respect to Certain
Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
The Company's Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . 108
Federal Income Tax Considerations. . . . . . . . . . . . . . . . . . . . . . 115
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Reports to Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
277,487 SHARES
HOST FUNDING, INC.
Class A
Common Stock
PROSPECTUS/CONSENT
SOLICITATION STATEMENT
December 1, 1995
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<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Maryland General Corporate Law ("MGCL") permits a Maryland corporation
to include in its charter a provision limiting the liability of its directors
and officers to the corporation and its stockholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
charter of the Company contains such a provision which eliminates such liability
to the maximum extent permitted by Maryland law.
The charter of the Company authorizes it, to the maximum extent permitted
by Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise. The Bylaws of the Company obligate it, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer who is made a party to the proceeding by reason of
his service in that capacity or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, partner or trustee of such corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The charter and Bylaws also permit the Company to indemnify and advance expenses
to any person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the Bylaws and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statement Schedules
See Index to Financial Statements.
(b) Exhibits:
3.1 Amended and Restated Charter of the Registrant
3.2 Amended and Restated By-Laws of the Registrant
<PAGE>
4.1 Form of Share Certificate
5.1 Form of Opinion of Peter G. Aylward
5.2 Form of Opinion of Ballard Spahr Andrews & Ingersoll
8.1 Form of Opinion of Peter G. Aylward as to Tax Matters
10.1 Form of Percentage Leases
10.2 Master Agreement
10.3 Advisory Agreement
10.4 Mission Bay Acquisition Agreement (See Appendix B to Form S-4)
10.5 Appraisal Report for Super 8 Motel in Miner, Missouri
10.6 Appraisal Report for Super 8 Motel in Poplar Bluff, Missouri
10.7 Appraisal Report for Super 8 Motel in Rock Falls, Illinois
10.8 Appraisal Report for Super 8 Motel in Somerset, Kentucky
10.9 Appraisal Report for the Mission Bay Super 8 Motel in San Diego,
California
10.10 Post-Formation Acquisition Agreement
10.11 Underwriting Agreement
10.12 Non-Competition Agreement
10.13 Pledge Agreement
13.1 Mission Bay's Annual Report on Form 10-K (SB) for the fiscal year ended
December 31, 1994.
23.1 Consent of Peter G. Aylward, APC (included in Exhibit 5.1)
23.2 Consent of Ballard Spahr Andrews & Ingersoll (included in 5.2)
23.3 Consent of Peter G. Aylward, APC (included in Exhibit 8.1)
23.4 Form of Consent of William H. Ling, C.P.A.
23.5 Form of Consent of Levitz, Zacks & Ciceric
23.6 Form of Consent of Arthur Andersen LLP
99.1 Form of Proxy Card for Vote without a Meeting by Mission Bay Limited
Partners
99.2 Consents of persons named to become directors
_____________________________
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
A. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
B. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
C. To remove from registration by means of a post-effective amendment any
of the securities which remain unsold at the termination of the
offering.
D. (1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and
is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and
that, for purposes of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
E. The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this form, within one business
day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to
the request.
F. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject
of and included in the registration statement when it became
effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of San Diego, State of California on the 1st day of December, 1995.
HOST FUNDING, INC.
a Maryland corporation
/s/ Michael S. McNulty
----------------------------------------
By: Michael S. McNulty
Its: Chairman of the Board and President
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Michael S. McNulty as his or her true and lawful attorney-in-fact, for him or
her and in his or her name, place and stead, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to
cause the same to be filed with the Securities and Exchange Commission, hereby
granting to said attorneys-in-fact full power and authority to do and perform
all and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things that
said attorneys-in-fact may do or cause to be done by virtue of these presents.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 1st day of December, 1995
by the following persons in the capacities indicated.
Signature Title
--------- -----
\s\ Michael S. McNulty Chairman of the Board, President, Treasurer
- ------------------------ and Director
Michael S. McNulty
\s\ Don W. Cockroft Director
- -----------------------
Don W. Cockroft
\s\ William Birdsall Director
- -----------------------
William Birdsall
\s\ Guy E. Hatfield Director
- -----------------------
Guy E. Hatfield
\s\ Charles R. Dunn Director
- -----------------------
Charles R. Dunn
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
Number Exhibit Page No.**
- ------ ------- -----------
3.1 Amended and Restated Charter of the Registrant
3.2 Amended and Restated By-Laws of the Registrant
4.1 Form of Share Certificate
5.1 Form of Opinion of Peter G. Aylward
5.2 Form of Opinion of Ballard Spahr Andrews & Ingersoll
8.1 Form of Opinion of Peter G. Aylward as to Tax Matters
10.1 Form of Percentage Leases
10.2 Master Agreement
10.3 Advisory Agreement
10.5 Appraisal Report for Super 8 Motel in Miner, Missouri
10.6 Appraisal Report for Super 8 Motel in Poplar Bluff, Missouri
10.7 Appraisal Report for Super 8 Motel in Rock Falls, Illinois
10.8 Appraisal Report for Super 8 Motel in Somerset, Kentucky
10.9 Appraisal Report for the Mission Bay Super 8 Motel in San Diego,
California
10.10 Post-Formation Acquisition Agreement
10.11 Underwriting Agreement
10.12 Non-Competition Agreement
10.13 Pledge Agreement
13.1 Mission Bay's Annual Report on Form 10-K (SB) for the fiscal year
ended December 31, 1994.
23.1 Consent of Peter G. Aylward, APC (included in Exhibit 5.1)
23.2 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit
5.2)
23.3 Consent of Peter G. Aylward, APC (included in Exhibit 8.1)
23.4 Form of Consent of William H. Ling, C.P.A.
23.5 Form of Consent of Levitz, Zacks & Ciceric
23.6 Form of Consent of Arthur Andersen LLP
99.1 Form of Proxy Card for Vote without a Meeting by Mission Bay Limited
Partners
99.2 Consents of persons named to become directors
<PAGE>
EXHIBIT 3.1
<PAGE>
STATE OF MARYLAND
333385
DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 WEST PRESTON STREET BALTIMORE, MARYLAND 21201
DATE: DECEMBER 22, 1994
THIS IS TO ADVISE YOU THAT THE ARTICLES OF INCORPORATION FOR
HOST FUNDING, INC.
WERE RECEIVED AND APPROVED FOR RECORD ON DECEMBER 22, 1994 AT 2:22 PM.
FEE PAID: 144.00
[EMBLEM]
IRENE B. HOZNY
CHARTER SPECIALIST
ATS-031
<PAGE>
STATE DEPARTMENT OF ASSESSMENTS
AND TAXATION
APPROVED FOR RECORD
12/22/94 at 2:22 pm.
ARTICLES OF INCORPORATION
OF
HOST FUNDING, INC.
THIS IS TO CERTIFY THAT:
FIRST: The undersigned, James J. Hanks, Jr., whose address is c/o
Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street, Baltimore, Maryland
21202, being at least 18 years of age, does hereby form a corporation under the
general laws of the State of Maryland.
SECOND: The name of the corporation (which is hereinafter called the
"Corporation") is:
Host Funding, Inc.
THIRD: The Corporation is formed for the purpose of carrying on any
lawful business.
FOURTH: The address of the principal office of the Corporation in
this State is c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street,
Baltimore, Maryland 21202, Attention: James J. Hanks, Jr.
FIFTH: The resident agent of the Corporation is James J. Hanks,
Jr., whose address is Ballard Spahr Andrews & Ingersoll, 300 East Lombard
Street, Baltimore, Maryland 21202. The resident agent is a citizen of and
resides in the State of Maryland.
SIXTH: The total number of shares of stock which the Corporation
has authority to issue is one thousand (1,000) shares, $0.01 par value per
share, all of one class. The aggregate par value of all authorized shares
having a par value is Ten Dollars ($10.00).
SEVENTH: The Corporation shall have a board of three directors unless
the number is increased or decreased in accordance with the bylaws of the
Corporation. However, the number of directors shall never be less than the
minimum number required by the Maryland General Corporation Law. The initial
directors are:
Peter G. Aylward
Dorothy Hatfield
Guy E. Hatfield
---------------------------------------------------------------------
STATE OF MARYLAND
I hereby certify that this is a true and complete copy of the 3
page document on file in this office. DATED: 12-22-94.
STATE DEPARTMENT OF ASSESSMENTS AND TAXATION
BY: /s/ Brenda
-------------------------------------------------------------------
This stamp replaces our previous certification system. Effective 10/84
----------------------------------------------------------------------
<PAGE>
EIGHTH: (a) The Corporation reserves the right to make any
amendment of the charter, now or hereafter authorized by law, including any
amendment which alters the contract rights, as expressly set forth in the
charter, of any shares of outstanding stock.
(b) The Board of Directors of the Corporation may authorize
the issuance from time to time of shares of its stock of any class, whether now
or hereafter authorized, or securities convertible into shares of its stock of
any class, whether now or hereafter authorized, for such consideration as the
Board of Directors may deem advisable, subject to such restrictions or
limitations, if any, as may be set forth in the bylaws of the Corporation.
(c) The Board of Directors of the Corporation may, by
articles supplementary, classify or reclassify any unissued stock from time to
time by setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of the stock.
NINTH: No holder of shares of stock of any class shall have any
preemptive right to subscribe to or purchase any additional shares of any class,
or any bonds or convertible securities of any nature; provided, however, that
the Board of Directors may, in authorizing the issuance of shares of stock of
any class, confer any preemptive right that the Board of Directors may deem
advisable in connection with such issuance.
TENTH: To the maximum extent that Maryland law in effect from time
to time permits limitation of the liability of directors and officers, no
director or officer of the Corporation shall be liable to the Corporation or its
stockholders for money damages. Neither the amendment nor repeal of this
Article, nor the adoption or amendment of any other provision of the charter or
bylaws inconsistent with this Article, shall apply to or affect in any respect
the applicability of the preceding sentence with respect to any act or failure
to act which occurred prior to such amendment, repeal or adoption.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation and
acknowledge the same to be my act on this 22nd day of December, 1994.
/s/ James J. Hanks, Jr.
------------------------------
James J. Hanks, Jr.
- 2 -
<PAGE>
HOST FUNDING, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT
FIRST: Host Funding, Inc., a Maryland corporation (the
"Corporation"), desires to amend and restate its charter as currently in effect
and as hereinafter amended.
SECOND: The following provisions are all the provisions of the
charter currently in effect and as hereinafter amended:
ARTICLE I
INCORPORATOR
The undersigned, James J. Hanks, Jr., whose address is 300 East
Lombard Street, Baltimore, Maryland 21202, being at least 18 years of age, does
hereby form a corporation under the general laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation (the "Corporation") is:
Host Funding, Inc.
ARTICLE III
PURPOSE
The purposes for which the Corporation is formed are to engage in any
lawful act or activity (including, without limitation or obligation, engaging in
business as a real estate investment trust under the Internal Revenue Code of
1986, as amended, or any successor statute (the "Code")) for which corporations
may be organized under the general laws of the State of Maryland as now or
hereafter in force. For purposes of these Articles, "REIT" means
<PAGE>
a real estate investment trust under Sections 856 through 860 of the Code.
ARTICLE IV
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT
The address of the principal office of the Corporation in the State of
Maryland is c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street,
Baltimore, Maryland 21202, Attention: James J. Hanks, Jr. The name of the
resident agent of the Corporation in the State of Maryland is James J. Hanks,
Jr., whose post address is c/o Ballard Spahr Andrews & Ingersoll, 300 East
Lombard Street, Baltimore, Maryland 21202. The resident agent is a citizen of
and resides in the State of Maryland.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 1. NUMBER AND CLASSIFICATION OF DIRECTORS. The business and
affairs of the Corporation shall be managed under the direction of the Board of
Directors. The number of directors of the Corporation initially shall be five
(5), which number may be increased or decreased pursuant to the Bylaws, but
shall never be less than the minimum number required by the Maryland General
Corporation Law. The names of the directors who shall serve until the first
annual meeting of stockholders and until their successors are duly elected and
qualify are:
Independent Directors Non-Independent Directors
--------------------- -------------------------
Don W. Cockroft Michael S. McNulty
William Birdsall Guy E. Hatfield
Charles R. Dunn
- 2 -
<PAGE>
These directors may increase the number of directors and may fill any vacancy,
whether resulting from an increase in the number of directors or otherwise, on
the Board of Directors prior to the first annual meeting of stockholders in the
manner provided in the Bylaws.
At any meeting of stockholders, the directors may be classified, with
respect to the terms for which they severally hold office, into three classes,
as nearly equal in number as possible, one class to hold office initially for a
term expiring at the next succeeding annual meeting of stockholders, another
class to hold office initially for a term expiring at the second succeeding
annual meeting of stockholders and another class to hold office initially for a
term expiring at the third succeeding annual meeting of stockholders, with the
members of each class to hold office until their successors are duly elected and
qualify. At each annual meeting of the stockholders, the successors to the
class of directors whose term expires at such meeting shall be elected to hold
office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election.
Section 2. EXTRAORDINARY ACTIONS. Except as specifically provided in
Article VIII, notwithstanding any provision of law permitting or requiring any
action to be taken or authorized by the affirmative vote of the holders of a
greater number of votes, any such action shall be effective and valid if
- 3 -
<PAGE>
taken or authorized by the affirmative vote of holders of shares entitled to
cast a majority of all the votes entitled to be cast on the matter.
Section 3. AUTHORIZATION BY BOARD OF STOCK ISSUANCE. The Board of
Directors may authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock of any class or
series, whether now or hereafter authorized, for such consideration as the Board
of Directors may deem advisable, subject to such restrictions or limitations, if
any, as may be set forth in the charter or the Bylaws.
Section 4. PREEMPTIVE RIGHTS. Except as may be provided by the Board
of Directors in setting the terms of classified or reclassified shares of stock
pursuant to Article VI, Section 4, no holder of shares of stock of the
Corporation shall, as such holder, have any preemptive right to purchase or
subscribe for any additional shares of stock of the Corporation or any other
security of the Corporation which it may issue or sell.
Section 5. INDEMNIFICATION. The Corporation shall have the power, to
the maximum extent permitted by Maryland law in effect from time to time, to
obligate itself to indemnify, and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to, (a) any individual who is a
present or former director or officer of the Corporation or (b) any individual
who, while a director of the Corporation and at the
- 4 -
<PAGE>
request of the Corporation, serves or has served as a director, officer, partner
or trustee of another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise from and against any claim or liability to
which such person may become subject or which such person may incur by reason of
his status as a present or former director or officer of the Corporation. The
Corporation shall have the power, with the approval of the Board of Directors,
to provide such indemnification and advancement of expenses to a person who
served a predecessor of the Corporation in any of the capacities described in
(a) or (b) above and to any employee or agent of the Corporation or a
predecessor of the Corporation.
Section 6. DETERMINATIONS BY BOARD. The determination as to any of
the following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with the charter and in the absence of actual
receipt of an improper benefit in money, property or services or active and
deliberate dishonesty established by a court, shall be final and conclusive and
shall be binding upon the Corporation and every holder of shares of its stock:
the amount of the net income of the Corporation for any period and the amount of
assets at any time legally available for the payment of dividends, redemption of
its stock or the payment of other distributions on its stock; the amount of
paid-in surplus, net assets, other surplus, annual or other net profit, net
assets in excess of capital, undivided profits or excess of profits over losses
on sales of assets; the
- 5 -
<PAGE>
amount, purpose, time of creation, increase or decrease, alteration or
cancellation of any reserves or charges and the propriety thereof (whether or
not any obligation or liability for which such reserves or charges shall have
been created shall have been paid or discharged); the fair value, or any sale,
bid or asked price to be applied in determining the fair value, of any asset
owned or held by the Corporation; and any matters relating to the acquisition,
holding and disposition of any assets by the Corporation.
Section 7. REIT QUALIFICATION. If the Corporation elects to qualify
for federal income tax treatment as a REIT, the Board of Directors shall use its
reasonable best efforts to take such actions as are necessary or appropriate to
preserve the status of the Corporation as a REIT; however, if the Board of
Directors determines that it is no longer in the best interests of the
Corporation to continue to be qualified as a REIT, the Board of Directors may
revoke or otherwise terminate the Corporation's REIT election pursuant to
Section 856(g) of the Code.
Section 8. REMOVAL OF DIRECTORS. Any director, or the entire
Board of Directors, may be removed from office at any time, but only for cause
and then only by the affirmative vote of the holders of at least two thirds of
the votes entitled to be cast in the election of directors. For the purpose of
this paragraph, "cause" shall mean with respect to any particular director a
final judgment of a court of competent jurisdiction holding that such
- 6 -
<PAGE>
director caused demonstrable, material harm to the Corporation through bad faith
or active and deliberate dishonesty.
Section 9. ADVISOR AGREEMENTS. Subject to such approval of
stockholders and other conditions, if any, as may be required by any applicable
statute, rule or regulation, the Board of Directors may authorize the execution
and performance by the Corporation of one or more agreements with any person,
corporation, association, company, trust, partnership (limited or general) or
other organization whereby, subject to the supervision and control of the Board
of Directors, any such other person, corporation, association, company, trust,
partnership (limited or general) or other organization shall render or make
available to the Corporation managerial, investment, advisory and/or related
services, office space and other services and facilities (including, if deemed
advisable by the Board of Directors, the management or supervision of the
investments of the Corporation) upon such terms and conditions as may be
provided in such agreement or agreements (including, if deemed fair and
equitable by the Board of Directors, the compensation payable thereunder by the
Corporation).
ARTICLE VI
STOCK
Section 1. AUTHORIZED SHARES. The Corporation has authority to issue
50,000,000 shares of Class A Common Stock, $0.01 par value per share (the "Class
A Common Stock"), 4,000,000 shares of Class B Common Stock, $0.01 par value per
share (the "Class B
- 7 -
<PAGE>
Common Stock"), 1,000,000 shares of Class C Common Stock, $0.01 par value per
share (the "Class C Common Stock") and 20,000,000 shares of Preferred Stock,
$0.01 par value per share. The aggregate par value of all authorized shares
of stock having par value is $750,000.
Section 2. COMMON STOCK. (a) No dividend shall be paid on any share
of the Class B Common Stock nor the Class C Common Stock in any calendar quarter
, until at least $.2275 has been paid in dividends during the same calendar
quarter on each share of Class A Common Stock, (b) likewise no further dividend
shall be paid on any share of the Class A Common Stock during such calendar
quarter until at least $.2275 has been paid in dividends during such calendar
quarter on each share of the Class B Common Stock and Class C Common Stock, and
(c) thereafter during such calendar quarter shares of the Class A Common Stock,
the Class B Common Stock, and the Class C Common Stock shall be entitled to
share equally in dividends.
At any time after a continuous 12-month period after which the
Class C shares have been issued, but not earlier than January 1, 1997 any holder
of any share of the Class B Common Stock shall be entitled, upon surrender of
the certificate representing each such share to the Corporation, properly
endorsed, to convert such share to a share of the Class A Common Stock and to
receive a certificate representing such share of the Class A Common Stock in
exchange therefor.
Shares of Common Stock shall be subject to the terms and conditions of
Article VII.
- 8 -
<PAGE>
The Board of Directors may reclassify any unissued shares of Common
Stock from time to time in one or more classes or series of stock.
Section 3. PREFERRED STOCK. The Board of Directors may classify any
unissued shares of Preferred Stock and reclassify any previously classified but
unissued shares of Preferred Stock of any series from time to time, in one or
more series of stock.
Section 4. CLASSIFIED OR RECLASSIFIED SHARES. Prior to issuance of
classified or reclassified shares of any class or series, the Board of Directors
by resolution shall: (a) designate that class or series to distinguish it from
all other classes and series of stock of the Corporation; (b) specify the number
of shares to be included in the class or series; (c) set or change, subject to
the provisions of Article VII and subject to the express terms of any class or
series of stock of the Corporation outstanding at the time, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms and conditions of
redemption for each class or series; and (d) cause the Corporation to file
articles supplementary with the State Department of Assessments and Taxation of
Maryland ("SDAT"). Any of the terms of any class or series of stock set or
changed pursuant to clause (c) of this Section 4 may be made dependent upon
facts or events ascertainable outside the charter (including determinations by
the Board of Directors or other facts or events within the control of the
Corporation) and may vary among holders thereof, provided that
- 9 -
<PAGE>
the manner in which such facts, events or variations shall operate upon the
terms of such class or series of stock is clearly and expressly set forth in the
articles supplementary filed with the SDAT.
Section 5. CHARTER AND BYLAWS. All persons who shall acquire stock
in the Corporation shall acquire the same subject to the provisions of the
charter and the Bylaws.
ARTICLE VII
RESTRICTIONS ON TRANSFER,
ACQUISITION AND REDEMPTION OF SHARES
Section 1. DEFINITIONS. For the purpose of this Article, the
following terms shall have the following meanings:
"ACQUIRE" shall mean the acquisition of Beneficial Ownership or
Constructive Ownership of shares of Common Stock by any means including, without
limitation, a Transfer, the exercise of any right under any option, warrant,
convertible security, pledge or other interest or similar right to acquire
shares, but shall not include the acquisition of any such rights unless, as a
result, the acquiror would be considered a Beneficial Owner or Constructive
Owner, as defined below. The term "Acquisition" shall have the correlative
meaning.
"BENEFICIAL OWNERSHIP" shall mean ownership of Common Stock by a
Person who is or would be an actual owner of such shares of Common Stock
(entitled, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, to
- 10 -
<PAGE>
a direct or indirect pecuniary interest in the Common Stock) or who is or would
be treated as a constructive owner of such shares through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code (except
where expressly provided otherwise). The terms "Beneficial Owner,"
"Beneficially Owns" and "Beneficially Owned" shall have the correlative
meanings.
"BUSINESS DAY" shall mean any day, other than a Saturday or Sunday,
that is neither a legal holiday nor a day on which banking institutions in New
York City are authorized or required by law, regulation or executive order to
close.
"CHARITABLE BENEFICIARY" shall mean one or more beneficiaries of the
Trust as determined pursuant to Section 3.6, each of which shall be an
organization described in Section 170(c)(2) of the Code.
"CHARTER" shall mean the charter of the Corporation, as that term is
defined in the MGCL.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"COMMON STOCK AFFECTED PERSONS" shall have the meaning set forth in
Section 2.1(c) of this Article VII.
"COMMON STOCK OWNERSHIP LIMIT" shall mean not more than 9.9% (in value
or in number of shares, whichever is more restrictive) of the aggregate of the
outstanding shares of Common Stock of the Corporation and, after any adjustment
as set forth in Section 2.9 of this Article VII, shall mean such percentage as
so adjusted. The number and value of outstanding shares of Common
- 11 -
<PAGE>
Stock of the Corporation shall be determined by the Board of Directors of the
Corporation in good faith, which determination shall be conclusive for all
purposes hereof.
"COMMON STOCK CONSTRUCTIVE OWNERSHIP EVENT" shall have the meaning set
forth in Section 2.1(c) of this Article VII.
"CONSTRUCTIVE OWNERSHIP" shall mean ownership of Common Stock by a
Person who is or would be an actual owner of Common Stock (entitled, directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise, to a direct or indirect pecuniary interest in the Common Stock) or
who is or would be treated as a constructive owner of such shares through the
application of Section 318(a) of the Code, as modified by Section 856(d)(5) of
the Code. The terms "Constructive Owner," "Constructively Owns" and
"Constructively Owned" shall have the correlative meanings.
"EXISTING HOLDER" shall mean (a) any Person who is the Beneficial
Owner of Common Stock in excess of the Common Stock Ownership Limit both upon
and immediately after the Initial Date, so long as, but only so long as, such
Person Beneficially Owns Common Stock in excess of the Common Stock Ownership
Limit and (b) any Person to whom an Existing Holder Transfers, subject to the
limitations provided in this Article, Beneficial Ownership of Common Stock
causing such transferee to Beneficially Own Common Stock in excess of the
Ownership Limit.
"EXISTING HOLDER LIMIT" shall mean (a) for any Existing Holder who is
an Existing Holder by virtue of clause (a) of the
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definition thereof, shall mean, initially, the percentage of the outstanding
Common Stock Beneficially Owned, by such Existing Holder upon and immediately
after the Initial Date, and after any adjustment pursuant to Section 2.8 of this
Article VII, shall mean such percentage of the outstanding Common Stock as so
adjusted; and (b) for any Existing Holder who becomes an Existing Holder by
virtue of clause (b) of the definition thereof, shall mean, initially, the
percentage of the outstanding Common Stock Beneficially Owned by such Existing
Holder at the time that such Existing Holder becomes an Existing Holder, but in
no event shall such percentage be greater than the Existing Holder Limit for the
Existing Holder who Transfers Beneficial Ownership of the Common Stock or, in
the case of more than one transferor, in no event shall such percentage be
greater than the smallest Existing Holder Limit of any transferring Existing
Holder, and, after any adjustment pursuant to Section 2.8 of this Article VII,
shall mean such percentage of the outstanding Common Stock as so adjusted. From
the Initial Date and prior to the Restriction Termination Date, the Secretary of
the Corporation shall maintain and, upon request, make available to each
Existing Holder, a schedule which sets forth the then current Existing Holder
Limits for each Existing Holder.
"INITIAL DATE" shall mean September 1, 1995.
"MARKET PRICE" on any date shall mean, with respect to any class of
outstanding shares of Common Stock, the Closing Price for such Common Stock on
such date. The "Closing Price" on any
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date shall mean the last sale price for such Common Stock, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, for such Common Stock, in either case as reported on
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the NYSE or, if such Common Stock is
not listed or admitted to trading on the NYSE, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which such Common Stock is listed
or admitted to trading or, if such Common Stock is 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 quotation system that may then be in use or, if such
Common Stock is not quoted by any such system, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
such Common Stock selected by the Board of Directors of the Corporation.
"MGCL" shall mean the Maryland General Corporation Law, as amended
from time to time.
"NYSE" shall mean the New York Stock Exchange.
"PERSON" shall mean an individual, corporation, partnership, estate,
trust (including a trust qualified under
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Sections 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set
aside for or to be used exclusively for the purposes described in Section 642(c)
of the Code, association, private foundation within the meaning of Section
509(a) of the Code, joint stock company or other entity and also includes a
group as that term is used for purposes of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended.
"PURPORTED BENEFICIAL TRANSFEREE" shall mean, with respect to any
purported Transfer or Acquisition which results in a transfer to a Trust, as
provided in Section 3 of this Article VII, the purported beneficial transferee
for whom the Purported Record Transferee would have acquired shares of Common
Stock if such Transfer or Acquisition had not violated the provisions of Section
2.1 of this Article VII. The Purported Beneficial Transferee and the Purported
Record Transferee may be the same Person.
"PURPORTED RECORD TRANSFEREE" shall mean, with respect to any
purported Transfer or Acquisition which results in a transfer to a Trust, as
provided in Section 3 of this Article VII, the Person who would have been the
record holder of the Common Stock if such Transfer or Acquisition had not
violated the provisions of Section 2.1 of this Article VII. The Purported
Beneficial Transferee and the Purported Record Transferee may be the same
Person.
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"REIT" shall mean a real estate investment trust within the meaning of
Section 856 of the Code.
"RESTRICTION TERMINATION DATE" shall mean the first day after the
Initial Date on which the Corporation determines (a) that it is no longer in the
best interests of the Corporation to attempt to, or continue to, qualify as a
REIT or (b) that compliance with the restrictions and limitations on Beneficial
Ownership, Constructive Ownership and Transfers and Acquisitions of shares of
Common Stock set forth herein is no longer required in order for the Corporation
to qualify as a REIT.
"SPECIAL TRIGGERING EVENT" shall mean either (a) the redemption or
purchase by the Corporation of all or a portion of the outstanding shares of
Common Stock or (b) a change in the relative values of classes of Common Stock.
"TRANSFER" shall mean any sale, transfer, gift, assignment, devise or
other disposition of Common Stock or the right to vote or receive dividends on
Common Stock including (a) the granting of any option or entering into any
agreement for the sale, transfer or other disposition of Common Stock or the
right to vote or receive dividends on Common Stock or (b) the sale, transfer,
assignment or other disposition of any securities or rights convertible into or
exchangeable for Common Stock, in each case whether voluntary or involuntary,
whether of record or Beneficially or Constructively Owned (including, without
limitation, Transfers of interests in other entities which result in changes in
Beneficial or Constructive Ownership of Common
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Stock), whether by operation of law or otherwise. The terms "Transferring" and
"Transferred" shall have the correlative meanings.
"TRUST" shall mean any trust provided for in Section 3.1 of this
Article VII.
"TRUSTEE" shall mean the Person unaffiliated with the Corporation, the
Purported Beneficial Transferee or the Purported Record Transferee that is
appointed by the Corporation to serve as trustee of the Trust.
Section 2. COMMON STOCK.
Section 2.1. OWNERSHIP LIMITATIONS.
(a) During the period commencing on the Initial Date and ending on
the Restriction Termination Date:
(i) except as provided in Section 2.7 of this Article VII, no
Person (other than an Existing Holder) shall Acquire or Beneficially or
Constructively Own any shares of Common Stock if, as the result of such
Acquisition or Beneficial or Constructive Ownership, such Person shall
Beneficially or Constructively Own shares of Common Stock in excess of the
Common Stock Ownership Limit and no Existing Holder shall Acquire or
Beneficially or Constructively Own any shares of Common Stock in excess of the
Existing Holder Limit for such Existing Holder.
(ii) no Person shall Acquire or Beneficially or Constructively
Own shares of Common Stock to the extent that such Acquisition or Beneficial or
Constructive Ownership of Common Stock would result in the Corporation being
"closely held" within the
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meaning of Section 856(h) of the Code, or otherwise failing to qualify as a REIT
(including, without limitation, an Acquisition or Beneficial or Constructive
Ownership that would result in the Corporation owning (actually or
Constructively) an interest in a tenant that is described in Section
856(d)(2)(B) of the Code if the income derived by the Corporation from such
tenant would cause the Corporation to fail to satisfy any of the gross income
requirements of Section 856(c) of the Code).
(b) If, during the period commencing on the Initial Date and ending
on the Restriction Termination Date, any Transfer or Acquisition of shares of
Common Stock (other than a Transfer or Acquisition to which Section 2.1(c) of
this Article VII applies) (whether or not such Transfer or Acquisition is the
result of a transaction entered into through the facilities of the NYSE or any
other national securities exchange or automated inter-dealer quotation system)
occurs which, if effective, would result in any Person Acquiring shares of
Common Stock in violation of Section 2.1(a) of this Article VII, (i) then that
number of shares of the Common Stock being Transferred or Acquired that
otherwise would cause such Person to violate Section 2.1(a) of this Article VII
(rounded up to the nearest whole share) shall be automatically transferred to a
Trust for the benefit of a Charitable Beneficiary, as described in Section 3 of
this Article VII, effective as of the close of business on the Business Day
prior to the date of such Transfer or Acquisition, and such Person shall acquire
no rights in such shares or (ii) if the transfer to the Trust described in
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clause (i) of this sentence would not be effective for any reason to prevent any
Person from Acquiring or Transferring Common Stock in violation of Section
2.1(a) of this Article VII, then the Transfer or Acquisition of that number of
shares of Common Stock that otherwise would cause any Person to violate Section
2.1(a) of this Article VII shall be void AB INITIO and the intended transferee
shall acquire no rights in such shares of Common Stock.
(c) If, during the period commencing on the Initial Date and ending
on the Restriction Termination Date, a change in the relationship between two or
more Persons ("Common Stock Affected Persons") results in any of such Common
Stock Affected Persons Beneficially or Constructively Owning shares of Common
Stock in violation of Section 2.1(a) of this Article VII because of the
application of Section 318(a) of the Code (as modified by Section 856(d)(5) of
the Code) or Section 544 of the Code (as modified by Section 856(h)(1)(B) of the
Code) (a "Common Stock Constructive Ownership Event"), then that number of
shares of Common Stock Beneficially or Constructively Owned by the Common Stock
Affected Persons (rounded up to the nearest whole share) that otherwise would
violate Section 2.1(a) of this Article VII shall be automatically transferred to
a Trust for the benefit of a Charitable Beneficiary, as described in Section 3
of this Article VII, effective as of the close of business on the Business Day
prior to such Common Stock Constructive Ownership Event and such Common Stock
Affected Person or Persons shall acquire no rights in such shares.
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(d) If, during the period commencing on the Initial Date and ending
on the Restriction Termination Date, a Special Triggering Event (if effective)
or other event or occurrence (if effective), other than a Transfer or
Acquisition described in Section 2.1(b) of this Article VII or a Common Stock
Constructive Ownership Event described in Section 2.1(c) of this Article VII,
would result in any violation of Section 2.1(a) of this Article VII, then: (i)
the number of shares of Common Stock (rounded up to the nearest whole share)
that would (but for this Section 2.1(d)) cause any Person to Beneficially or
Constructively Own Common Stock in violation of Section 2.1(a) of this Article
VII shall be automatically repurchased by the Corporation from the actual owner
of such shares of Common Stock, effective as of the close of business on the
Business Day prior to the date of such Special Triggering Event or other event
or occurrence; or (ii) if the automatic repurchase described in clause (i) of
this sentence would not be effective for any reason to prevent any Person from
Beneficially or Constructively Owning Common Stock in violation of Section
2.1(a) of this Article VII, then that number of shares of Common Stock (rounded
up to the nearest whole share) that otherwise would cause any Person to violate
Section 2.1(a) of this Article VII shall be automatically transferred to a Trust
for the benefit of a Charitable Beneficiary, as described in Section 3 of this
Article VII, effective as of the close of business on the Business Day prior to
the date of such Special Triggering Event or other event or occurrence, and the
actual owner shall retain no rights in
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such shares of Common Stock; or (iii) if the transfer to the Trust described in
clause (ii) of this sentence would not be effective for any reason to prevent
any Person from Beneficially or Constructively Owning Common Stock in violation
of Section 2.1(a) of this Article VII, then the Special Triggering Event or
other event or occurrence that would otherwise cause such Person to violate
Section 2.1(a) of this Article VII shall be void AB INITIO. The repurchase
price of each share of Common Stock automatically repurchased pursuant to this
Section 2.1(d) shall be a price per share equal to the Market Price on the date
of the Special Triggering Event or other event or occurrence that resulted in
the repurchase. Dividends which were accrued but unpaid with respect to the
repurchased shares as of the date of the Special Triggering Event or other event
or occurrence that resulted in the repurchase shall be paid. Any dividend or
other distribution paid after the Special Triggering Event or other event or
occurrence that resulted in the repurchase, but prior to the discovery by the
Corporation that shares of Common Stock have been automatically repurchased by
the Corporation, shall be repaid to the Corporation upon demand.
(e) Notwithstanding any other provisions contained herein, during the
period commencing on the Initial Date and ending on the Restriction Termination
Date, any Transfer or Acquisition of shares of Common Stock (whether or not such
Transfer or Acquisition is the result of a transaction entered into through the
facilities of the NYSE or any other national securities exchange or automated
inter-dealer quotation system) that, if effective, would result in
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the Common Stock being beneficially owned by less than 100 Persons (determined
without reference to any rules of attribution) shall be void AB INITIO and the
intended transferee shall acquire no rights in such shares of Common Stock.
Section 2.2. REMEDIES FOR BREACH. If the Board of Directors of the
Corporation or any duly authorized committee thereof shall at any time determine
in good faith that a Transfer or other event has taken place that results in a
violation of Section 2.1 of this Article VII or that a Person intends to Acquire
or has attempted to Acquire Beneficial or Constructive Ownership of any shares
of Common Stock in violation of Section 2.1 of this Article VII (whether or not
such violation is intended), the Board of Directors or a committee thereof shall
take such action as it deems advisable to refuse to give effect to or to prevent
such Transfer or other event, including, without limitation, causing the
Corporation to redeem shares, refusing to give effect to such Transfer on the
books of the Corporation or instituting proceedings to enjoin such Transfer;
PROVIDED, HOWEVER, that any Transfers or attempted Transfers or, in the case of
an event other than a Transfer, Beneficial or Constructive Ownership in
violation of Section 2.1 of this Article VII shall automatically result in the
transfer to the Trust described above (or the automatic repurchase), and, where
applicable, such Transfer (or other event) shall be void AB INITIO as provided
above irrespective of any action (or non-action) by the Board of Directors or a
committee thereof.
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Section 2.3. NOTICE OF RESTRICTED TRANSFER. Any Person who Acquires
or attempts or intends to Acquire shares of Common Stock in violation of Section
2.1 of this Article VII or any Person who is a transferee in a Transfer or is
otherwise affected by an event other than a Transfer that results in a violation
of Section 2.1 of this Article VII shall immediately give written notice to the
Corporation of such Acquisition, Transfer or other event and shall provide to
the Corporation such other information as the Corporation may request in order
to determine the effect, if any, of such Acquisition, Transfer or attempted,
intended or purported Acquisition, Transfer or other event on the Corporation's
status as a REIT.
Section 2.4. OWNERS REQUIRED TO PROVIDE INFORMATION. From the
Initial Date and to the Restriction Termination Date:
(a) every owner of more than five percent (or such lower percentage
as required by the Code or the Treasury Regulations promulgated thereunder) of
the outstanding shares of Common Stock shall, within 30 days after December 31
of each year, give written notice to the Corporation stating the name and
address of such owner, the number of shares of Common Stock and other shares of
the Common Stock Beneficially or Constructively Owned, and a description of the
manner in which such shares are held. Each such owner shall provide to the
Corporation such additional information as the Corporation may request in order
to determine the effect, if any, of such Beneficial or Constructive Ownership on
the
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Corporation's status as a REIT and to ensure compliance with the Common Stock
Ownership Limit.
(b) each Person who is a Beneficial or Constructive Owner of Common
Stock and each Person (including the stockholder of record) who is holding
Common Stock for a Beneficial or Constructive Owner shall provide to the
Corporation such information as the Corporation may request, in good faith, in
order to determine the Corporation's status as a REIT and to comply with
requirements of any taxing authority or governmental authority to determine such
compliance.
Section 2.5. REMEDIES NOT LIMITED. Nothing contained in this Section
2.5 shall limit the authority of the Board of Directors of the Corporation to
take such other action as it deems necessary or advisable to protect the
Corporation and the interests of its stockholders in preserving the
Corporation's status as a REIT.
Section 2.6. AMBIGUITY. In the case of an ambiguity in the
application of any of the provisions of this Section 2, Section 3 of this
Article VII, or any definition contained in Section 1 of this Article VII, the
Board of Directors of the Corporation shall have the power to determine the
application of the provisions of this Section 2 or Section 3 of this Article VII
with respect to any situation based on the facts known to it. If Section 2 or 3
requires an action by the Board of Directors of the Corporation, and the Charter
fails to provide specific guidance with respect to such action, the Board of
Directors of the Corporation shall have
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the power to determine the action to be taken so long as such action is not
contrary to the provisions of Sections 1, 2 or 3. Absent a decision to the
contrary by the Board of Directors (which the Board may make in its sole and
absolute discretion), the shares to be affected by the remedies set forth in
Section 2.1(b), (c) and (d) of this Article VII shall be as follows: (1) if a
Person would have (but for the remedies set forth in Section 2.1(b), (c) and (d)
as applicable) Acquired shares of Common Stock in violation of Section 2.1(a),
such remedies (as applicable) shall apply first to the shares which, but for
such remedies, would have been Acquired and actually owned by such Person,
second to shares which, but for such remedies, would have been Acquired by such
Person and which would have been Beneficially Owned or Constructively Owned (but
not actually owned) by such Person, PRO RATA among the Persons who actually own
such shares based upon the relative value of the shares held by each such
Person; and (2) if a Person is in violation of Section 2.1(a) of this Article
VII as a result of an event other than an Acquisition of shares of Common Stock
by such Person, the remedies set forth in Section 2.1(b), (c) or (d) (as
applicable) shall apply first to shares which are actually owned by such Person
and second to shares which are Beneficially or Constructively Owned (but not
actually owned) by such Person, PRO RATA among the Persons who actually own such
shares based upon the relative value of the shares held by each such Person.
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Section 2.7. EXCEPTIONS.
(a) Subject to Section 2.1(a)(ii) of this Article VII, the Board of
Directors of the Corporation, in its sole discretion, may exempt a Person from
the Common Stock Ownership Limit or Existing Holder Limit if: (i) such Person is
not (A) an individual for purposes of Section 542(a)(2) of the Code as modified
by Section 856(h) of the Code or (B) treated as the owner of such stock for
purposes of Section 542(a)(2) of the Code as modified by Section 856(h) of the
Code and the Board of Directors obtains such representations and undertakings
from such Person as are reasonably necessary to ascertain that no individual's
Beneficial or Constructive Ownership of such shares of Common Stock will violate
Section 2.1 of this Article VII; (ii) such Person does not and represents that
it will not own, actually or Constructively, an interest in a tenant of the
Corporation (or a tenant of an entity owned or controlled by the Corporation)
that would cause the Corporation to own, actually or Constructively, more than a
9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant
and the Board of Directors obtains such representations and undertakings from
such Person as are reasonably necessary to ascertain this fact; and (iii) such
Person agrees that any violation or attempted violation of such representations
or undertakings (or other action which is contrary to the restrictions contained
in Sections 2.1 through 2.6) will result in such Common Stock being
automatically transferred to a Trust or automatically repurchased in accordance
with Section 2.1 of this Article VII.
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Solely for purposes of clause (ii) above, a tenant from whom the Corporation (or
an entity owned or controlled by the Corporation) derives (and is expected to
continue to derive) a sufficiently small amount of revenue such that, in the
opinion of the Board of Directors of the Corporation, rent from such tenant
would not adversely affect the Corporation's ability to qualify as a REIT, shall
not be treated as a tenant of the Corporation.
(b) Prior to granting any exception pursuant to Section 2.7(a) of
this Article VII, the Board of Directors of the Corporation may require a ruling
from the Internal Revenue Service, or an opinion of counsel, in either case in
form and substance satisfactory to the Board of Directors in its sole
discretion, as it may deem necessary or advisable in order to determine or
ensure the Corporation's status as a REIT. Notwithstanding the receipt of any
ruling or opinion, the Board of Directors may impose such conditions or
restrictions as it deems appropriate in connection with granting such exception.
(c) Subject to Section 2.1(a)(ii) of this Article VII, an underwriter
which participates in a public offering or a private placement of Common Stock
(or securities convertible into or exchangeable for Common Stock) may Acquire or
Beneficially Own or Constructively Own shares of Common Stock (or securities
convertible into or exchangeable for Common Stock) in excess of the Common Stock
Ownership Limit, but only to the extent necessary to facilitate such public
offering or private placement.
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Section 2.8. MODIFICATION OF EXISTING HOLDER LIMITS. The Existing
Holder Limits may be modified as follows:
(a) Subject to the limitations provided in Section 2.10 of this
Article VII, the Board of Directors may grant stock options which result in
Beneficial Ownership of Common Stock by an Existing Holder pursuant to a stock
option plan approved by the Board of Directors and/or the stockholders of the
Corporation. Any such grant shall increase the Existing Holder Limit for the
affected Existing Holder to the maximum extent possible under Section 2.10 of
this Article VII to permit the Beneficial Ownership of the shares of Common
Stock issuable upon the exercise of such stock option.
(b) Subject to the limitations provided in Section 2.10 of this
Article VII, an Existing Holder may elect to participate in a dividend
reinvestment plan approved by the Board of Directors which results in Beneficial
Ownership of Common Stock by such participating Existing Holder. Any such
participation shall increase the Existing Holder Limit for the affected Existing
Holder to the maximum extent possible under Section 2.10 of this Article VII to
permit Beneficial Ownership of the shares of Common Stock acquired as a result
of such participation.
(c) The Board of Directors will reduce the Existing Holder Limit for
any Existing Holder after any Transfer permitted in this Article by such
Existing Holder by the percentage of the outstanding Equity Stock so Transferred
or after the lapse (without exercise) of a stock option described in Section
2.8(a) of this
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Article VII by the percentage of the Common Stock that the stock option, if
exercised, would have represented, but in either case no Existing Holder Limit
shall be reduced to a percentage which is less than the Common Stock Ownership
Limit.
Section 2.9. INCREASE IN OWNERSHIP LIMIT. Subject to the limitations
provided in Section 2.10 of this Article VII, the Board of Directors may from
time to time increase the Common Stock Ownership Limit.
Section 2.10. LIMITATIONS ON CHANGES IN EXISTING HOLDER AND OWNERSHIP
LIMITS. (a) Neither the Common Stock Ownership Limit nor any Existing Holder
Limit may be increased (nor may any additional Existing Holder Limit be created)
if, after giving effect to such increase (or creation), five or fewer Beneficial
Owners of Common Stock (including all of the then Existing Holders) could
Beneficially Own, in the aggregate, more than 50.0% in number or value of the
outstanding shares of Common Stock.
(b) Prior to the modification of any Existing Holder Limit or Common
Stock Ownership Limit pursuant to Section 2.8 or 2.9 of this Article VII, the
Board of Directors may require such opinions of counsel, affidavits,
undertakings or agreements as it may deem necessary or advisable in order to
determine or ensure the Corporation's status as a REIT.
(c) No Existing Holder Limit shall be reduced to a percentage which
is less than the Common Stock Ownership Limit.
Section 2.11. LEGEND. Each certificate for shares of Common Stock
shall bear the following legend:
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The shares represented by this certificate are subject to restrictions
on Beneficial and Constructive Ownership and Transfer for the purpose
of the Corporation's maintenance of its status as a Real Estate
Investment Trust under the Internal Revenue Code of 1986, as amended
(the "Code"). Subject to certain further restrictions and except as
expressly provided in the Corporation's Charter (the "Charter"), (a)
no Person may Beneficially or Constructively Acquire shares of the
Corporation's Common Stock in excess of 9.9% (or such other percentage
as may be determined by the Board of Directors of the Corporation in
conformity with the Charter) (in value or number of shares) of the
outstanding shares of Common Stock of the Corporation unless such
person is an Existing Holder (in which case the Existing Holder Limit
shall be applicable); (b) no Person may Beneficially or Constructively
Own Common Stock that would result in the Corporation being "closely
held" under Section 856(h) of the Code or otherwise cause the
Corporation to fail to qualify as a REIT; and (c) no Person may
Transfer or Acquire Shares of Common Stock if such Transfer or
Acquisition would result in the Corporation being owned by fewer than
100 Persons. Any Person who Beneficially or Constructively Owns or
attempts to Beneficially or Constructively Own shares of Common Stock
which causes or will cause a Person to Beneficially or Constructively
Own shares of Common Stock in excess of or in violation of the above
limitations must immediately notify the Corporation. If any of the
restrictions on transfer or ownership are violated, the shares of
Common Stock represented hereby will be automatically transferred to a
Trustee of a Trust for the benefit of one or more Charitable
Beneficiaries or, in certain circumstances, such shares will be
repurchased automatically by the Corporation. In addition, the
Corporation may redeem shares upon the terms and conditions specified
by the Board of Directors in its sole discretion if the Board of
Directors determines that ownership or a Transfer or other event may
violate the restrictions described above. Furthermore, upon the
occurrence of certain events, attempted Transfers in violation of the
restrictions described above may be void AB INITIO. All capitalized
terms in this legend have the meanings defined in the charter of the
Corporation, as the same may be amended from time to time, a copy of
which, including the restrictions on transfer and ownership, will be
furnished to each holder of Common Stock on request and without
charge.
Section 3. TRANSFER OF COMMON STOCK IN TRUST.
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Section 3.1. OWNERSHIP IN TRUST. Upon any purported Transfer,
Acquisition or other event described in Section 2.1(b), (c) or (d) of this
Article VII that results in a transfer of shares of Common Stock to a Trust,
such shares of Common Stock shall be deemed to have been transferred to the
Trustee as trustee of a Trust for the exclusive benefit of one or more
Charitable Beneficiaries. Such transfer to the Trustee shall be deemed to be
effective as of the close of business on the Business Day prior to the purported
Transfer, Acquisition or other event that results in a transfer to the Trust
pursuant to Section 2.1 of this Article VII. The Trustee shall be appointed by
the Corporation and shall be a Person unaffiliated with the Corporation, any
Purported Beneficial Transferee or any Purported Record Transferee. Each
Charitable Beneficiary shall be designated by the Corporation.
Section 3.2. STATUS OF SHARES IN TRUST HELD BY THE TRUSTEE. Shares
of Common Stock held by the Trustee shall be issued and outstanding shares of
Common Stock of the Corporation. The Purported Beneficial Transferee or
Purported Record Transferee shall have no rights in the shares held by the
Trustee. The Purported Beneficial Transferee or Purported Record Transferee
shall not benefit economically from ownership of any shares held in trust by the
Trustee, shall have no rights to dividends and shall not possess any rights to
vote or other rights attributable to the shares held in the Trust.
Section 3.3. DIVIDEND AND VOTING RIGHTS. The Trustee shall have all
voting rights and rights to dividends with respect
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to shares of Common Stock held in the Trust, which rights shall be exercised for
the exclusive benefit of the Charitable Beneficiary. Any dividend or
distribution paid prior to the discovery by the Corporation that the shares of
Common Stock have been transferred to the Trustee shall be paid to the Trustee
upon demand and any dividend or distribution declared but unpaid shall be paid
when due to the Trustee with respect to such shares of Common Stock. Any
dividends or distributions so paid over to the Trustee shall be held in trust
for the Charitable Beneficiary. The Purported Record Transferee shall have no
voting rights with respect to shares held in the Trust and, subject to Maryland
law, effective as of the date that the shares of Common Stock have been
transferred to the Trustee any vote cast by a Purported Record Transferee prior
to the discovery by the Corporation that the shares of Common Stock have been
transferred to the Trustee will be rescinded as void and shall be recast in
accordance with the desires of the Trustee acting for the benefit of the
Charitable Beneficiary.
Section 3.4. SALE OF SHARES BY TRUSTEE. Within 20 days of receiving
notice from the Corporation that shares of Common Stock have been transferred to
the Trust, the Trustee of the Trust shall sell the shares held in the Trust to a
person, designated by the Trustee, whose ownership of the shares will not
violate the ownership limitations set forth in Section 2.1(a) of this
Article VII. Upon such sale, the interest of the Charitable Beneficiary in the
shares sold shall terminate and the Trustee shall distribute the net proceeds of
the sale to the Purported Record Transferee and
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to the Charitable Beneficiary as provided in this Section 3.4. The Purported
Record Transferee shall receive the lesser of (a) the price paid by the
Purported Record Transferee for the shares or, if the Purported Record
Transferee did not give value for the shares (through a gift, devise or other
transaction), the Market Price of the shares on the day of the event causing the
shares to be held in the Trust and (b) the price per share received by the
Trustee from the sale or other disposition of the shares held in the Trust. The
Trustee may reduce the amount payable to the Purported Record Transferee by the
amount of dividends and distributions which have been paid to the Purported
Record Transferee and are owed by the Purported Record Transferee to the Trustee
pursuant to Section 3.3 of this Article VII. Any net sales proceeds in excess
of the amount payable to the Purported Record Transferee shall be immediately
paid to the Charitable Beneficiary. If, prior to the discovery by the
Corporation that shares of Common Stock have been transferred to the Trustee,
such shares are sold by a Purported Record Transferee, then (i) such shares
shall be deemed to have been sold on behalf of the Trust and (ii) to the extent
that the Purported Record Transferee received an amount for such shares that
exceeds the amount that such Purported Record Transferee was entitled to receive
pursuant to this Section 3.4, such excess shall be paid to the Trustee upon
demand. If any of the foregoing restrictions on the transfer of shares of
Common Stock that have been transferred to the Trustee are determined to be
void, invalid or unenforceable by any court of competent jurisdiction, then the
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Purported Record Transferee may be deemed, at the option of the Trustee, to have
acted as an agent of the Trustee (acting in turn as agent on behalf of a third-
party purchaser) in acquiring such shares of Common Stock and to hold such
shares of Common Stock on behalf of the Trustee pursuant to provisions
substantially similar to those contained in this Section 3.4.
Section 3.5. PURCHASE RIGHT IN COMMON STOCK TRANSFERRED TO THE
TRUSTEE. Shares of Common Stock transferred to the Trustee shall be deemed to
have been offered for sale to the Corporation, or its designee, at a price per
share equal to the lesser of (a) the price per share in the transaction that
resulted in such transfer to the Trust (or, in the case of a devise or gift, the
Market Price at the time of such devise or gift) and (b) the Market Price on the
date the Corporation, or its designee, accepts such offer. The Corporation
shall have the right to accept such offer until the Trustee has sold the shares
held in the Trust pursuant to Section 3.4 of this Article VII. Upon such a sale
to the Corporation, the interest of the Charitable Beneficiary in the shares
sold shall terminate and the Trustee shall distribute the net proceeds of the
sale to the Purported Record Transferee.
Section 3.6. DESIGNATION OF CHARITABLE BENEFICIARIES. By written
notice to the Trustee, the Corporation shall designate one or more nonprofit
organizations to be the Charitable Beneficiary of the interest in the Trust such
that (a) the shares of Common Stock held in the Trust would not violate the
restrictions set forth in Section 3.1(a) of this Article VII in the
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hands of such Charitable Beneficiary and (b) each Charitable Beneficiary is an
organization described in Section 170(c)(2) of the Code.
ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendment to its charter, now or hereafter authorized by law, including any
amendment altering the terms or contract rights, as expressly set forth in this
charter, of any shares of outstanding stock. All rights and powers conferred by
the charter on stockholders, directors and officers are granted subject to this
reservation. Any amendment to Article V, this Article VIII, or Article IX of
the charter shall be valid only if approved by the affirmative vote of two-
thirds (2/3) of all the votes entitled to be cast on the matter.
ARTICLE IX
LIMITATION OF LIABILITY
To the maximum extent that Maryland law in effect from time to time
permits limitation of the liability of directors and officers of a corporation,
no director or officer of the Corporation shall be liable to the Corporation or
its stockholders for money damages. Neither the amendment nor repeal of this
Article IX, nor the adoption or amendment of any other provision of the charter
or Bylaws inconsistent with this Article IX, shall apply to or affect in any
respect the applicability of the
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preceding sentence with respect to any act or failure to act which occurred
prior to such amendment, repeal or adoption.
THIRD: The amendment to and restatement of the charter as hereinabove
set forth has been duly advised by the Board of Directors and approved by the
stockholders of the Corporation as required by law.
FOURTH: The current address of the principal office of the
Corporation is as set forth in Article IV of the foregoing amendment and
restatement of the charter.
FIFTH: The name and address of the Corporation's current resident
agent is as set forth in Article IV of the foregoing amendment and restatement
of the charter.
SIXTH: The number of directors of the Corporation and the names of
those currently in office are as set forth in Article V of the foregoing
amendment and restatement of the charter.
SEVENTH: The total number of shares of stock which the Corporation
had authority to issue immediately prior to this amendment and restatement was
one thousand (1,000) shares of common stock, $.01 par value per share. The
aggregate par value of all shares of stock having par value was Ten Dollars
($10.00).
EIGHTH: The total number of shares of stock which the Corporation has
authority to issue pursuant to the foregoing amendment and restatement of the
charter is 75,000,000 shares of stock, consisting of 50,000,000 shares of Class
A Common Stock, $.01 par value per, 5,000,000 shares of Class B Common Stock,
$.01 par value per share, and 20,000,000 shares of Preferred Stock, $.01
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par value per share. The aggregate par value of all authorized shares of stock
having par value is $750,000.
NINTH: The undersigned President acknowledges these Articles of
Amendment and Restatement to be the corporate act of the Corporation and as to
all matters or facts required to be verified under oath, the undersigned
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment and Restatement to be signed in its name and on its behalf by its
President and attested to by its Secretary on this 27th day of September, 1995.
ATTEST: HOST FUNDING, INC.
/s/ Dorothy Hatfield By:/s/ Guy E. Hatfield (SEAL)
- -------------------------- -----------------------
Dorothy Hatfield Guy E. Hatfield
Secretary President
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EXHIBIT 3.2
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HOST FUNDING, INC.
BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the
Corporation shall be located at such place or places as the Board of Directors
may designate.
Section 2. ADDITIONAL OFFICES. The Corporation may have additional
offices at such places as the Board of Directors may from time to time determine
or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE. All meetings of stockholders shall be held at the
principal office of the Corporation or at such other place within the United
States as shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the stockholders
for the election of directors and the transaction of any business within the
powers of the Corporation shall be held on a date and at the time set by the
Board of Directors during the month of December in each year.
Section 3. SPECIAL MEETINGS. The president, chief executive officer
or Board of Directors may call special meetings of the stockholders. Special
meetings of stockholders shall also be called by the secretary of the
Corporation upon the written request of the holders of shares entitled to cast
not less than 25% of all the votes entitled to be cast at such meeting. Such
request shall state the purpose of such meeting and the matters proposed to be
acted on at such meeting. The secretary shall inform such stockholders of the
reasonably estimated cost of preparing and mailing notice of the meeting and,
upon payment to the Corporation by such stockholders of such costs, the
secretary shall give notice to each stockholder entitled to notice of the
meeting. Unless requested by the stockholders entitled to cast a majority of
all the votes entitled to be cast at such meeting, a special meeting need not be
called to consider any matter which is substantially the same as a matter voted
on at any special meeting of the stockholders held during the preceding twelve
months.
Section 4. NOTICE. Not less than ten nor more than 90 days before
each meeting of stockholders, the secretary shall give to each
<PAGE>
stockholder entitled to vote at such meeting and to each stockholder not
entitled to vote who is entitled to notice of the meeting written or printed
notice stating the time and place of the meeting and, in the case of a special
meeting or as otherwise may be required by any statute, the purpose for which
the meeting is called, either by mail or by presenting it to such stockholder
personally or by leaving it at his residence or usual place of business. If
mailed, such notice shall be deemed to be given when deposited in the United
States mail addressed to the stockholder at his post office address as it
appears on the records of the Corporation, with postage thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Corporation may be
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice. No business shall be transacted at a special meeting
of stockholders except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of stockholders, the
Chairman of the Board, if there be one, shall conduct the meeting or, in the
case of vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting in the order stated: the
Vice Chairman of the Board, if there be one, the President, the Vice Presidents
in their order of rank and seniority, or a Chairman chosen by the stockholders
entitled to cast a majority of the votes which all stockholders present in
person or by proxy are entitled to cast, shall act as Chairman, and the
Secretary, or, in his absence, an assistant secretary, or in the absence of both
the Secretary and assistant secretaries, a person appointed by the Chairman
shall act as Secretary.
Section 7. QUORUM. At any meeting of stockholders, the presence in
person or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the charter of the
Corporation for the vote necessary for the adoption of any measure. If,
however, such quorum shall not be present at any meeting of the stockholders,
the stockholders entitled to vote at such meeting, present in person or by
proxy, shall have the power to adjourn the meeting from time to time to a date
not more than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.
Section 8. VOTING. A plurality of all the votes cast at a meeting
of stockholders duly called and at which a quorum is present shall be sufficient
to elect a director. Each share may be voted for as many individuals as there
are directors to be elected and for whose election the share is entitled to be
voted. A majority of the votes
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cast at a meeting of stockholders duly called and at which a quorum is present
shall be sufficient to approve any other matter which may properly come before
the meeting, unless more than a majority of the votes cast is required by
statute or by the charter of the Corporation. Unless otherwise provided in the
charter, each outstanding share, regardless of class, shall be entitled to one
vote on each matter submitted to a vote at a meeting of stockholders.
Section 9. PROXIES. A stockholder may vote the stock owned of
record by him, either in person or by proxy executed in writing by the
stockholder or by his duly authorized attorney in fact. Such proxy shall be
filed with the secretary of the Corporation before or at the time of the
meeting. No proxy shall be valid after eleven months from the date of its
execution, unless otherwise provided in the proxy.
Section 10. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the
Corporation registered in the name of a corporation, partnership, trust or other
entity, if entitled to be voted, may be voted by the president or a vice
president, a general partner or trustee thereof, as the case may be, or a proxy
appointed by any of the foregoing individuals, unless some other person who has
been appointed to vote such stock pursuant to a bylaw or a resolution of the
governing body of such corporation or other entity or agreement of the partners
of a partnership presents a certified copy of such bylaw, resolution or
agreement, in which case such person may vote such stock. Any director or other
fiduciary may vote stock registered in his name as such fiduciary, either in
person or by proxy.
Shares of stock of the Corporation directly or indirectly
owned by it shall not be voted at any meeting and shall not be counted in
determining the total number of outstanding shares entitled to be voted at any
given time, unless they are held by it in a fiduciary capacity, in which case
they may be voted and shall
be counted in determining the total number of outstanding shares at any given
time.
The Board of Directors may adopt by resolution a
procedure by which a stockholder may certify in writing to the Corporation that
any shares of stock registered in the name of the stockholder are held for the
account of a specified person other than the stockholder. The resolution shall
set forth the class of stockholders who may make the certification, the purpose
for which the certification may be made, the form of certification and the
information to be contained in it; if the certification is with respect to a
record date or closing of the stock transfer books, the time after the record
date or closing of the stock transfer books within which the certification must
be received by the Corporation; and any other provisions with respect to the
procedure which the Board of Directors considers necessary or desirable. On
receipt of such certification, the person specified in the certification shall
be
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regarded as, for the purposes set forth in the certification, the stockholder of
record of the specified stock in place of the stockholder who makes the
certification.
[OPTIONAL: NOTWITHSTANDING ANY OTHER PROVISION OF THE
CHARTER OF THE CORPORATION OR THESE BYLAWS, TITLE 3, SUBTITLE 7 OF THE
CORPORATIONS AND ASSOCIATIONS ARTICLE OF THE ANNOTATED CODE OF MARYLAND (OR ANY
SUCCESSOR STATUTE) SHALL NOT APPLY TO ANY ACQUISITION BY ANY PERSON OF SHARES OF
STOCK OF THE CORPORATION. THIS SECTION MAY BE REPEALED, IN WHOLE OR IN PART, AT
ANY TIME, WHETHER BEFORE OR AFTER AN ACQUISITION OF CONTROL SHARES AND, UPON
SUCH REPEAL, MAY, TO THE EXTENT PROVIDED BY ANY SUCCESSOR BYLAW, APPLY TO ANY
PRIOR OR SUBSEQUENT CONTROL SHARE ACQUISITION.]
Section 11. INSPECTORS. At any meeting of stockholders, the chairman
of the meeting may, or upon the request of any stockholder shall, appoint one
or more persons as inspectors for such meeting. Such inspectors shall ascertain
and report the number of shares represented at the meeting based upon their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all the stockholders.
Each report of an inspector shall be in writing and
signed by him or by a majority of them if there is more than one inspector
acting at such meeting. If there is more than one inspector, the report of a
majority shall be the report of the inspectors. The report of the inspector or
inspectors on the number of shares represented at the meeting and the results of
the voting shall be PRIMA FACIE evidence thereof.
[OPTIONAL: SECTION 12. NOMINATIONS AND STOCKHOLDER BUSINESS
(a) ANNUAL MEETINGS OF STOCKHOLDERS. (1) NOMINATIONS OF PERSONS FOR
ELECTION TO THE BOARD OF DIRECTORS AND THE PROPOSAL OF BUSINESS TO BE CONSIDERED
BY THE STOCKHOLDERS MAY BE MADE AT AN ANNUAL MEETING OF STOCKHOLDERS
(i) PURSUANT TO THE CORPORATION'S NOTICE OF MEETING, (ii) BY OR AT THE DIRECTION
OF THE BOARD OF DIRECTORS OR (iii) BY ANY STOCKHOLDER OF THE CORPORATION WHO WAS
A STOCKHOLDER OF RECORD AT THE TIME OF GIVING OF NOTICE PROVIDED FOR IN THIS
SECTION 12(A), WHO IS ENTITLED TO VOTE AT THE MEETING AND WHO COMPLIED WITH THE
NOTICE PROCEDURES SET FORTH IN THIS SECTION 12(a).
(2) FOR NOMINATIONS OR OTHER BUSINESS TO BE PROPERLY BROUGHT
BEFORE AN ANNUAL MEETING BY A STOCKHOLDER PURSUANT TO CLAUSE (iii) OF
PARAGRAPH (a)(1) OF THIS SECTION 12, THE STOCKHOLDER MUST HAVE GIVEN TIMELY
NOTICE THEREOF IN WRITING TO THE SECRETARY OF THE CORPORATION. TO BE TIMELY, A
STOCKHOLDER'S NOTICE SHALL BE DELIVERED TO THE SECRETARY AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE CORPORATION NOT LESS THAN 60 DAYS NOR MORE THAN 90 DAYS
PRIOR TO THE FIRST ANNIVERSARY OF THE PRECEDING YEAR'S ANNUAL MEETING; PROVIDED,
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HOWEVER, THAT IN THE EVENT THAT THE DATE OF THE ANNUAL MEETING IS ADVANCED BY
MORE THAN 30 DAYS OR DELAYED BY MORE THAN 60 DAYS FROM SUCH ANNIVERSARY DATE,
NOTICE BY THE STOCKHOLDER TO BE TIMELY MUST BE SO DELIVERED NOT EARLIER THAN THE
90TH DAY PRIOR TO SUCH ANNUAL MEETING AND NOT LATER THAN THE CLOSE OF BUSINESS
ON THE LATER OF THE 60TH DAY PRIOR TO SUCH ANNUAL MEETING OR THE TENTH DAY
FOLLOWING THE DAY ON WHICH PUBLIC ANNOUNCEMENT OF THE DATE OF SUCH MEETING IS
FIRST MADE. SUCH STOCKHOLDER'S NOTICE SHALL SET FORTH (i) AS TO EACH PERSON
WHOM THE STOCKHOLDER PROPOSES TO NOMINATE FOR ELECTION OR REELECTION AS A
DIRECTOR ALL INFORMATION RELATING TO SUCH PERSON THAT IS REQUIRED TO BE
DISCLOSED IN SOLICITATIONS OF PROXIES FOR ELECTION OF DIRECTORS, OR IS OTHERWISE
REQUIRED, IN EACH CASE PURSUANT TO REGULATION 14A UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT") (INCLUDING SUCH PERSON'S WRITTEN
CONSENT TO BEING NAMED IN THE PROXY STATEMENT AS A NOMINEE AND TO SERVING AS A
DIRECTOR IF ELECTED); (ii) AS TO ANY OTHER BUSINESS THAT THE STOCKHOLDER
PROPOSES TO BRING BEFORE THE MEETING, A BRIEF DESCRIPTION OF THE BUSINESS
DESIRED TO BE BROUGHT BEFORE THE MEETING, THE REASONS FOR CONDUCTING SUCH
BUSINESS AT THE MEETING AND ANY MATERIAL INTEREST IN SUCH BUSINESS OF SUCH
STOCKHOLDER AND OF THE BENEFICIAL OWNER, IF ANY, ON WHOSE BEHALF THE PROPOSAL IS
MADE; AND (iii) AS TO THE STOCKHOLDER GIVING THE NOTICE AND THE BENEFICIAL
OWNER, IF ANY, ON WHOSE BEHALF THE NOMINATION OR PROPOSAL IS MADE, (x) THE NAME
AND ADDRESS OF SUCH STOCKHOLDER, AS THEY APPEAR ON THE CORPORATION'S BOOKS, AND
OF SUCH BENEFICIAL OWNER AND (y) THE NUMBER OF SHARES OF EACH CLASS OF STOCK OF
THE CORPORATION WHICH ARE OWNED BENEFICIALLY AND OF RECORD BY SUCH STOCKHOLDER
AND SUCH BENEFICIAL OWNER.
(3) NOTWITHSTANDING ANYTHING IN THE SECOND SENTENCE OF PARAGRAPH
(a)(2) OF THIS SECTION 12 TO THE CONTRARY, IN THE EVENT THAT THE NUMBER OF
DIRECTORS TO BE ELECTED TO THE BOARD OF DIRECTORS IS INCREASED AND THERE IS NO
PUBLIC ANNOUNCEMENT NAMING ALL OF THE NOMINEES FOR DIRECTOR OR SPECIFYING THE
SIZE OF THE INCREASED BOARD OF DIRECTORS MADE BY THE CORPORATION AT LEAST 70
DAYS PRIOR TO THE FIRST ANNIVERSARY OF THE PRECEDING YEAR'S ANNUAL MEETING, A
STOCKHOLDER'S NOTICE REQUIRED BY THIS SECTION 12(a) SHALL ALSO BE CONSIDERED
TIMELY, BUT ONLY WITH RESPECT TO NOMINEES FOR ANY NEW POSITIONS CREATED BY SUCH
INCREASE, IF IT SHALL BE DELIVERED TO THE SECRETARY AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE CORPORATION NOT LATER THAN THE CLOSE OF BUSINESS ON THE TENTH DAY
FOLLOWING THE DAY ON WHICH SUCH PUBLIC ANNOUNCEMENT IS FIRST MADE BY THE
CORPORATION.
(b) SPECIAL MEETINGS OF STOCKHOLDERS. ONLY SUCH BUSINESS SHALL BE
CONDUCTED AT A SPECIAL MEETING OF STOCKHOLDERS AS SHALL HAVE BEEN BROUGHT BEFORE
THE MEETING PURSUANT TO THE CORPORATION'S NOTICE OF MEETING. NOMINATIONS OF
PERSONS FOR ELECTION TO THE BOARD OF DIRECTORS MAY BE MADE AT A SPECIAL MEETING
OF STOCKHOLDERS AT WHICH DIRECTORS ARE TO BE ELECTED (i) PURSUANT TO THE
CORPORATION'S NOTICE OF MEETING, (ii) BY OR AT THE DIRECTION OF THE BOARD OF
DIRECTORS OR (iii) PROVIDED THAT THE BOARD OF DIRECTORS HAS DETERMINED THAT
DIRECTORS SHALL BE ELECTED AT SUCH SPECIAL MEETING, BY ANY STOCKHOLDER
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OF THE CORPORATION WHO IS A STOCKHOLDER OF RECORD AT THE TIME OF GIVING OF
NOTICE PROVIDED FOR IN THIS SECTION 12(b), WHO IS ENTITLED TO VOTE AT THE
MEETING AND WHO COMPLIED WITH THE NOTICE PROCEDURES SET FORTH IN THIS
SECTION 12(b). IN THE EVENT THE CORPORATION CALLS A SPECIAL MEETING OF
STOCKHOLDERS FOR THE PURPOSE OF ELECTING ONE OR MORE DIRECTORS TO THE BOARD OF
DIRECTORS, ANY SUCH STOCKHOLDER MAY NOMINATE A PERSON OR PERSONS (AS THE CASE
MAY BE) FOR ELECTION TO SUCH POSITION AS SPECIFIED IN THE CORPORATION'S NOTICE
OF MEETING, IF THE STOCKHOLDER'S NOTICE CONTAINING THE INFORMATION REQUIRED BY
PARAGRAPH (a)(2) OF THIS SECTION 12 SHALL BE DELIVERED TO THE SECRETARY AT THE
PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION NOT EARLIER THAN THE 90TH DAY
PRIOR TO SUCH SPECIAL MEETING AND NOT LATER THAN THE CLOSE OF BUSINESS ON THE
LATER OF THE 60TH DAY PRIOR TO SUCH SPECIAL MEETING OR THE TENTH DAY FOLLOWING
THE DAY ON WHICH PUBLIC ANNOUNCEMENT IS FIRST MADE OF THE DATE OF THE SPECIAL
MEETING AND OF THE NOMINEES PROPOSED BY THE BOARD OF DIRECTORS TO BE ELECTED AT
SUCH MEETING.
(c) GENERAL. (1) ONLY SUCH PERSONS WHO ARE NOMINATED IN ACCORDANCE
WITH THE PROCEDURES SET FORTH IN THIS SECTION 12 SHALL BE ELIGIBLE TO SERVE AS
DIRECTORS AND ONLY SUCH BUSINESS SHALL BE CONDUCTED AT A MEETING OF STOCKHOLDERS
AS SHALL HAVE BEEN BROUGHT BEFORE THE MEETING IN ACCORDANCE WITH THE PROCEDURES
SET FORTH IN THIS SECTION 12. THE PRESIDING OFFICER OF THE MEETING SHALL HAVE
THE POWER AND DUTY TO DETERMINE WHETHER A NOMINATION OR ANY BUSINESS PROPOSED TO
BE BROUGHT BEFORE THE MEETING WAS MADE IN ACCORDANCE WITH THE PROCEDURES SET
FORTH IN THIS SECTION 12 AND, IF ANY PROPOSED NOMINATION OR BUSINESS IS NOT IN
COMPLIANCE WITH THIS SECTION 12, TO DECLARE THAT SUCH DEFECTIVE NOMINATION OR
PROPOSAL BE DISREGARDED.
(2) FOR PURPOSES OF THIS SECTION 12, "PUBLIC ANNOUNCEMENT" SHALL
MEAN DISCLOSURE IN A PRESS RELEASE REPORTED BY THE DOW JONES NEWS SERVICE,
ASSOCIATED PRESS OR COMPARABLE NEWS SERVICE OR IN A DOCUMENT PUBLICLY FILED BY
THE CORPORATION WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO SECTION
13, 14 OR 15(d) OF THE EXCHANGE ACT.
(3) NOTWITHSTANDING THE FOREGOING PROVISIONS OF THIS SECTION 12,
A STOCKHOLDER SHALL ALSO COMPLY WITH ALL APPLICABLE REQUIREMENTS OF STATE LAW
AND OF THE EXCHANGE ACT AND THE RULES AND REGULATIONS THEREUNDER WITH RESPECT TO
THE MATTERS SET FORTH IN THIS SECTION 12. NOTHING IN THIS SECTION 12 SHALL BE
DEEMED TO AFFECT ANY RIGHTS OF STOCKHOLDERS TO REQUEST INCLUSION OF PROPOSALS IN
THE CORPORATION'S PROXY STATEMENT PURSUANT TO RULE 14a-8 UNDER THE EXCHANGE
ACT.]
Section 13. VOTING BY BALLOT. Voting on any question or in any
election may be VIVA VOCE unless the presiding officer shall order or any
stockholder shall demand that voting be by ballot.
ARTICLE III
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DIRECTORS
Section 1. GENERAL POWERS; QUALIFICATIONS. The business and affairs
of the Corporation shall be managed under the direction of its Board of
Directors.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular
meeting or at any special meeting called for that purpose, a majority of the
entire Board of Directors may establish, increase or decrease the number of
directors, provided that the number thereof shall never be less than the minimum
number required by the Maryland General Corporation Law, nor more than 15, and
further provided that the tenure of office of a director shall not be affected
by any decrease in the number of directors.
Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the
Board of Directors shall be held immediately after and at the same place as the
annual meeting of stockholders, no notice other than this Bylaw being necessary.
The Board of Directors may provide, by resolution, the time and place, either
within or without the State of Maryland, for the holding of regular meetings of
the Board of Directors without other notice than such resolution.
Section 4. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by or at the request of the chairman of the board (or
any co-chairman of the board if more than one), president or by a majority of
the directors then in office. The person or persons authorized to call special
meetings of the Board of Directors may fix any place, either within or without
the State of Maryland, as the place for holding any special meeting of the Board
of Directors called by them.
Section 5. NOTICE. Notice of any special meeting of the Board of
Directors shall be delivered personally or by telephone, facsimile transmission,
United States mail or courier to each director at his business or residence
address. Notice by personal delivery, by telephone or a facsimile transmission
shall be given at least two days prior to the meeting. Notice by mail shall be
given at least five days prior to the meeting and shall be deemed to be given
when deposited in the United States mail properly addressed, with postage
thereon prepaid. Telephone notice shall be deemed to be given when the director
is personally given such notice in a telephone call to which he is a party.
Facsimile transmission notice shall be deemed to be given upon completion of the
transmission of the message to the number given to the Corporation by the
director and receipt of a completed answer-back indicating receipt. Neither the
business to be transacted at, nor the purpose of, any annual, regular or special
meeting of the Board of Directors need be stated in the notice, unless
specifically required by statute or these Bylaws.
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Section 6. QUORUM. A majority of the directors shall constitute a
quorum for transaction of business at any meeting of the Board of Directors,
provided that, if less than a majority of such directors are present at said
meeting, a majority of the directors present may adjourn the meeting from time
to time without further notice, and provided further that if, pursuant to the
charter of the Corporation or these Bylaws, the vote of a majority of a
particular group of directors is required for action, a quorum must also include
a majority of such group.
The Board of Directors present at a meeting which has
been duly called and convened may continue to transact business until
adjournment, notwithstanding the withdrawal of enough directors to leave less
than a quorum.
Section 7. VOTING. The action of the majority of the directors
present at a meeting at which a quorum is present shall be the action of the
Board of Directors, unless the concurrence of a greater proportion is required
for such action by applicable statute.
Section 8. TELEPHONE MEETINGS. Directors may participate in a
meeting by means of a conference telephone or similar communications equipment
if all persons participating in the meeting can hear each other at the same
time. Participation in a meeting by these means shall constitute presence in
person at the meeting.
Section 9. INFORMAL ACTION BY DIRECTORS. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting, if a consent in writing to such action is signed by each
director and such written consent is filed with the minutes of proceedings of
the Board of Directors.
Section 10. VACANCIES. If for any reason any or all the directors
cease to be directors, such event shall not terminate the Corporation or affect
these Bylaws or the powers of the remaining directors hereunder (even if fewer
than three directors remain). Any vacancy on the Board of Directors for any
cause other than an increase in the number of directors shall be filled by a
majority of the remaining directors, although such majority is less than a
quorum. Any vacancy in the number of directors created by an increase in the
number of directors may be filled by a majority vote of the entire Board of
Directors. Any individual so elected as director shall hold office until the
next annual meeting of stockholders and until his successor is elected and
qualifies.
Section 11. COMPENSATION. Directors shall not receive any stated
salary for their services as directors but, by resolution of the Board of
Directors, may receive fixed sums per year and/or per meeting and/or per visit
to real property owned or to be acquired by the Corporation and for any service
or activity they performed or engaged in as directors. Directors may be
reimbursed for expenses of
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attendance, if any, at each annual, regular or special meeting of the Board of
Directors or of any committee thereof and for their expenses, if any, in
connection with each property visit and any other service or activity they
performed or engaged in as directors; but nothing herein contained shall be
construed to preclude any directors from serving the Corporation in any other
capacity and receiving compensation therefor.
Section 12. LOSS OF DEPOSITS. No director shall be liable for any
loss which may occur by reason of the failure of the bank, trust company,
savings and loan association, or other institution with whom moneys or stock
have been deposited.
Section 13. SURETY BONDS. Unless required by law, no director shall
be obligated to give any bond or surety or other security for the performance of
any of his duties.
Section 14. RELIANCE. Each director, officer, employee and agent of
the Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.
[OPTIONAL: SECTION 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS. THE DIRECTORS SHALL HAVE NO RESPONSIBILITY TO DEVOTE
THEIR FULL TIME TO THE AFFAIRS OF THE CORPORATION. ANY DIRECTOR OR OFFICER,
EMPLOYEE OR AGENT OF THE CORPORATION, IN HIS PERSONAL CAPACITY OR IN A CAPACITY
AS AN AFFILIATE, EMPLOYEE, OR AGENT OF ANY OTHER PERSON, OR OTHERWISE, MAY HAVE
BUSINESS INTERESTS AND ENGAGE IN BUSINESS ACTIVITIES SIMILAR TO OR IN ADDITION
TO OR IN COMPETITION WITH THOSE OF OR RELATING TO THE CORPORATION.]
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of
Directors may appoint from among its members an Executive Committee, an Audit
Committee [, A COMPENSATION COMMITTEE] and other committees, composed of two or
more directors, to serve at the pleasure of the Board of Directors.
Section 2. POWERS. The Board of Directors may delegate to
committees appointed under Section 1 of this Article any of the powers of the
Board of Directors, except as prohibited by law.
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Section 3. MEETINGS. Notice of committee meetings shall be given in
the same manner as notice for special meetings of the Board of Directors. A
majority of the members of the committee shall constitute a quorum for the
transaction of business at any meeting of the committee. The act of a majority
of the committee members present at a meeting shall be the act of such
committee. The Board of Directors may designate a chairman of any committee,
and such chairman or any two members of any committee may fix the time and place
of its meeting unless the Board shall otherwise provide. In the absence of any
member of any such committee, the members thereof present at any meeting,
whether or not they constitute a quorum, may appoint another director to act in
the place of such absent member. Each committee shall keep minutes of its
proceedings.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Board
of Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if a consent in writing to such action is signed
by each member of the committee and such written consent is filed with the
minutes of proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board
of Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Corporation
shall include a chief executive officer, a president, a secretary and a
treasurer and may include a chairman of the board (or one or more co-chairmen of
the board), a vice chairman of the board, one or more vice presidents, a chief
operating officer, a chief financial officer, a treasurer, one or more assistant
secretaries and one or more assistant treasurers. In addition, the Board of
Directors may from time to time appoint such other officers with such powers and
duties as they shall deem necessary or desirable. The officers of the
Corporation shall be elected annually by the Board of Directors at the first
meeting of the Board of Directors held after each annual meeting of
stockholders, except that the chief executive officer may appoint one or more
vice presidents, assistant secretaries and assistant
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treasurers. If the election of officers shall not be held at such meeting, such
election shall be held as soon thereafter as may be convenient. Each officer
shall hold office until his successor is elected and qualifies or until his
death, resignation or removal in the manner hereinafter provided. Any two or
more offices except president and vice president may be held by the same person.
In its discretion, the Board of Directors may leave unfilled any office except
that of president, treasurer and secretary. Election of an officer or agent
shall not of itself create contract rights between the Corporation and such
officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Corporation may resign at any time by giving written notice of
his resignation to the Board of Directors, the chairman of the board (or any
co-chairman of the board if more than one), the president or the secretary. Any
resignation shall take effect at any time subsequent to the time specified
therein or, if the time when it shall become effective is not specified therein,
immediately upon its receipt. The acceptance of a resignation shall not be
necessary to make it effective unless otherwise stated in the resignation. Such
resignation shall be without prejudice to the contract rights, if any, of the
Corporation.
Section 3. VACANCIES. A vacancy in any office may be filled by the
Board of Directors for the balance of the term.
Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may
designate a chief executive officer. In the absence of such designation, the
chairman of the board (or, if more than one, the co-chairmen of the board in the
order designated at the time of their election or, in the absence of any
designation, then in the order of their election) shall be the chief executive
officer of the Corporation. The chief executive officer shall have general
responsibility for implementation of the policies of the Corporation, as
determined by the Board of Directors, and for the management of the business and
affairs of the Corporation.
Section 5. CHIEF OPERATING OFFICER. The Board of Directors may
designate a chief operating officer. The chief operating officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 6. CHIEF FINANCIAL OFFICER. The Board of Directors may
designate a chief financial officer. The chief financial officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
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Section 7. CHAIRMAN OF THE BOARD. The Board of Directors shall
designate a chairman of the board (or one or more co-chairmen of the board).
The chairman of the board shall preside over the meetings of the Board of
Directors and of the stockholders at which he shall be present. If there be
more than one, the co-chairmen designated by the Board of Directors will perform
such duties. The chairman of the board shall perform such other duties as may
be assigned to him or them by the Board of Directors.
Section 8. PRESIDENT. The president or chief executive officer,
as the case may be, shall in general supervise and control all of the
business and affairs of the Corporation. In the absence of a designation of
a chief operating officer by the Board of Directors, the president shall be
the chief operating officer. He may execute any deed, mortgage, bond,
contract or other instrument, except in cases where the execution thereof
shall be expressly delegated by the Board of Directors or by these Bylaws to
some other officer or agent of the Corporation or shall be required by law to
be otherwise executed; and in general shall perform all duties incident to
the office of president and such other duties as may be prescribed by the
Board of Directors from time to time.
Section 9. VICE PRESIDENTS. In the absence of the president or in
the event of a vacancy in such office, the vice president (or in the event there
be more than one vice president, the vice presidents in the order designated at
the time of their election or, in the absence of any designation, then in the
order of their election) shall perform the duties of the president and when so
acting shall have all the powers of and be subject to all the restrictions upon
the president; and shall perform such other duties as from time to time may be
assigned to him by the president or by the Board of Directors. The Board of
Directors may designate one or more vice presidents as executive vice president
or as vice president for particular areas of responsibility.
Section 10. SECRETARY. The secretary shall (a) keep the minutes of
the proceedings of the stockholders, the Board of Directors and committees of
the Board of Directors in one or more books provided for that purpose; (b) see
that all notices are duly given in accordance with the provisions of these
Bylaws or as required by law; (c) be custodian of the corporate records and of
the seal of the Corporation; (d) keep a register of the post office address of
each stockholder which shall be furnished to the secretary by such stockholder;
(e) have general charge of the share transfer books of the Corporation; and
(f) in general perform such other duties as from time to time may be assigned to
him by the chief executive officer, the president or by the Board of Directors.
Section 11. TREASURER. The treasurer shall have the custody of the
funds and securities of the Corporation and shall keep full and accurate
accounts of receipts and disbursements in books
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belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board of Directors. In the absence of a designation of
a chief financial officer by the Board of Directors, the treasurer shall be the
chief financial officer of the Corporation.
The treasurer shall disburse the funds of the Corporation
as may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and Board of Directors, at the
regular meetings of the Board of Directors or whenever it may so require, an
account of all his transactions as treasurer and of the financial condition of
the Corporation.
If required by the Board of Directors, the treasurer
shall give the Corporation a bond in such sum and with such surety or sureties
as shall be satisfactory to the Board of Directors for the faithful performance
of the duties of his office and for the restoration to the Corporation, in case
of his death, resignation, retirement or removal from office, of all books,
papers, vouchers, moneys and other property of whatever kind in his possession
or under his control belonging to the Corporation.
Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretaries and assistant treasurers, in general, shall perform such
duties as shall be assigned to them by the secretary or treasurer, respectively,
or by the president or the Board of Directors. The assistant treasurers shall,
if required by the Board of Directors, give bonds for the faithful performance
of their duties in such sums and with such surety or sureties as shall be
satisfactory to the Board of Directors.
Section 13. SALARIES. The salaries and other compensation of the
officers shall be fixed from time to time by the Board of Directors and no
officer shall be prevented from receiving such salary or other compensation by
reason of the fact that he is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors may authorize any
officer or agent to enter into any contract or to execute and deliver any
instrument in the name of and on behalf of the Corporation and such authority
may be general or confined to specific instances. Any agreement, deed,
mortgage, lease or other document executed by one or more of the directors or by
an authorized person shall be valid and binding upon the Board of Directors and
upon the Corporation when authorized or ratified by action of the Board of
Directors.
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<PAGE>
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders
for the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or agent of the
Corporation in such manner as shall from time to time be determined by the Board
of Directors.
Section 3. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may designate.
ARTICLE VII
STOCK
Section 1. CERTIFICATES. Each stockholder shall be entitled to a
certificate or certificates which shall represent and certify the number of
shares of each class of stock held by him in the Corporation. Each certificate
shall be signed by the chief executive officer, the president or a vice
president and countersigned by the secretary or an assistant secretary or the
treasurer or an assistant treasurer and may be sealed with the seal, if any, of
the Corporation. The signatures may be either manual or facsimile.
Certificates shall be consecutively numbered; and if the Corporation shall, from
time to time, issue several classes of stock, each class may have its own number
series. A certificate is valid and may be issued whether or not an officer who
signed it is still an officer when it is issued. Each certificate representing
shares which are restricted as to their transferability or voting powers, which
are preferred or limited as to their dividends or as to their allocable portion
of the assets upon liquidation or which are redeemable at the option of the
Corporation, shall have a statement of such restriction, limitation, preference
or redemption provision, or a summary thereof, plainly stated on the
certificate. If the Corporation has authority to issue stock of more than one
class, the certificate shall contain on the face or back a full statement or
summary of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of redemption of each
class of stock and, if the Corporation is authorized to issue any preferred or
special class in series, the differences in the relative rights and preferences
between the shares of each series to the extent they have been set and the
authority of the Board of Directors to set the relative rights and preferences
of subsequent series. In lieu of such statement or summary, the certificate may
state that the Corporation will furnish a full statement of such information to
any stockholder upon request and without charge. If any class of stock is
restricted by the Corporation as to transferability, the certificate shall
contain a full statement of the restriction or state that the Corporation will
furnish information about the restrictions to the stockholder on request and
without charge.
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Section 2. TRANSFERS. Upon surrender to the Corporation or the
transfer agent of the Corporation of a stock certificate duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, the Corporation shall issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of
record of any share of stock as the holder in fact thereof and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such share or on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of the
State of Maryland.
Notwithstanding the foregoing, transfers of shares of any
class of stock will be subject in all respects to the charter of the Corporation
and all of the terms and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the
Board of Directors may direct a new certificate to be issued in place of any
certificate previously issued by the Corporation alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen or destroyed. When authorizing the
issuance of a new certificate, an officer designated by the Board of Directors
may, in his discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or the owner's
legal representative to advertise the same in such manner as he shall require
and/or to give bond, with sufficient surety, to the Corporation to indemnify it
against any loss or claim which may arise as a result of the issuance of a new
certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
Board of Directors may set, in advance, a record date for the purpose of
determining stockholders entitled to notice of or to vote at any meeting of
stockholders or determining stockholders entitled to receive payment of any
dividend or the allotment of any other rights, or in order to make a
determination of stockholders for any other proper purpose. Such date, in any
case, shall not be prior to the close of business on the day the record date is
fixed and shall be not more than 90 days and, in the case of a meeting of
stockholders, not less than ten days, before the date on which the meeting or
particular action requiring such determination of stockholders of record is to
be held or taken.
In lieu of fixing a record date, the Board of Directors
may provide that the stock transfer books shall be closed for a stated period
but not longer than 20 days. If the stock transfer books are closed for the
purpose of determining stockholders
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entitled to notice of or to vote at a meeting of stockholders, such books shall
be closed for at least ten days before the date of such meeting.
If no record date is fixed and the stock transfer books
are not closed for the determination of stockholders, (a) the record date for
the determination of stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day on which the
notice of meeting is mailed or the 30th day before the meeting, whichever is the
closer date to the meeting; and (b) the record date for the determination of
stockholders entitled to receive payment of a dividend or an allotment of any
other rights shall be the close of business on the day on which the resolution
of the directors, declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at
any meeting of stockholders has been made as provided in this section, such
determination shall apply to any adjournment thereof, except when (i) the
determination has been made through the closing of the transfer books and the
stated period of closing has expired or (ii) the meeting is adjourned to a date
more than 120 days after the record date fixed for the original meeting, in
either of which case a new record date shall be determined as set forth herein.
Section 5. STOCK LEDGER. The Corporation shall maintain at its
principal office or at the office of its counsel, accountants or transfer agent,
an original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of
Directors may issue fractional stock or provide for the issuance of scrip, all
on such terms and under such conditions as they may determine. Notwithstanding
any other provision of the charter or these Bylaws, the Board of Directors may
issue units consisting of different securities of the Corporation. Any security
issued in a unit shall have the same characteristics as any identical securities
issued by the Corporation, except that the Board of Directors may provide that
for a specified period securities of the Corporation issued in such unit may be
transferred on the books of the Corporation only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Board of Directors shall have the power, from time to time, to fix
the fiscal year of the Corporation by a duly adopted resolution.
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ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon
the stock of the Corporation may be authorized and declared by the Board of
Directors, subject to the provisions of law and the charter of the Corporation.
Dividends and other distributions may be paid in cash, property or stock of the
Corporation, subject to the provisions of law and the charter.
Section 2. CONTINGENCIES. Before payment of any dividends or other
distributions, there may be set aside out of any assets of the Corporation
available for dividends or other distributions such sum or sums as the Board of
Directors may from time to time, in its absolute discretion, think proper as a
reserve fund for contingencies, for equalizing dividends or other distributions,
for repairing or maintaining any property of the Corporation or for such other
purpose as the Board of Directors shall determine to be in the best interest of
the Corporation, and the Board of Directors may modify or abolish any such
reserve in the manner in which it was created.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the charter of the Corporation, the Board
of Directors may from time to time adopt, amend, revise or terminate any policy
or policies with respect to investments by the Corporation as it shall deem
appropriate in its sole discretion.
ARTICLE XI
SEAL
Section 1. SEAL. The Board of Directors may authorize the adoption
of a seal by the Corporation. The seal shall contain the name of the
Corporation and the year of its incorporation and the words "Incorporated
Maryland." The Board of Directors may authorize one or more duplicate seals and
provide for the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the word
"(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Corporation.
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ARTICLE XII
INDEMNIFICATION AND ADVANCES FOR EXPENSES
To the maximum extent permitted by Maryland law in effect from time to
time, the Corporation, without requiring a preliminary determination of the
ultimate entitlement to indemnification, shall indemnify and shall pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any individual who is a present or former director or officer of the
Corporation and who is made a party to the proceeding by reason of his service
in that capacity or (b) any individual who, while a director of the Corporation
and at the request of the Corporation, serves or has served another corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a director, officer, partner or trustee of such corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise and who is made
a party to the proceeding by reason of his service in that capacity. The
Corporation may, with the approval of its Board of Directors, provide such
indemnification and advance for expenses to a person who served a predecessor of
the Corporation in any of the capacities described in (a) or (b) above and to
any employee or agent of the Corporation or a predecessor of the Corporation.
Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the Bylaws or charter of the Corporation
inconsistent with this Article, shall apply to or affect in any respect the
applicability of the preceding paragraph with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the charter of
the Corporation or these Bylaws or pursuant to applicable law, a waiver thereof
in writing, signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at nor the purpose
of any meeting need be set forth in the waiver of notice, unless specifically
required by statute. The attendance of any person at any meeting shall
constitute a waiver of notice of such meeting, except where such person attends
a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
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ARTICLE XIV
AMENDMENT OF BYLAWS
The Board of Directors shall have the exclusive power to adopt, alter
or repeal any provision of these Bylaws and to make new Bylaws.
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EXHIBIT 4.1
<PAGE>
Stock Certificate
Description:
Host Funding, Inc.
STOCK CERTIFICATE of 100 Shares of Common Stock, $.01 par value per share.
DATED 12/22/94
CERTIFYING All American Group Limited Partnership, a Delaware limited
partnership, as the registered holder of shares.
<PAGE>
EXHIBIT 5.1
<PAGE>
[PETER G. AYLWARD LETTERHEAD]
November 28, 1995
Host Funding, Inc.
7825 Fay Avenue, Suite 250
La Jolla, CA 92037
Gentlemen:
We refer to the Form S-4 Registration Statement of Host Funding, Inc., a
Maryland corporation (the "Company"), filed with the Securities and Exchange
Commission under file number 33-60011 and the Prospectus contained therein (the
"Prospectus"), for the purpose of registering under the Securities Act of 1933,
as amended, 277,487 shares of the Company's Class A Common Stock, par value $.01
(the "Shares").
We have examined copies, certified or otherwise identified to our
satisfaction, of the Charter and Bylaws of the Company, as amended to date, and
minutes of applicable meetings, or written consents in lieu of meetings, of the
stockholders and the Board of Directors of the Company, together with such other
corporate records, certificates of public officials and of officers of the
Company as we have deemed relevant for the purposes of this opinion. We have
also received an opinion of Ballard Spahr Andrews & Ingersoll of Baltimore,
Maryland dated November 28, 1995 a copy of which is attached hereto.
Based upon the foregoing and having regard to the legal considerations
which we deem relevant, it is our opinion that if and when the Shares are issued
sold and delivered in accordance with, as contemplated by and for the
consideration stated in the authorizing resolutions and the Prospectus, the
Shares will be legally issued, fully paid and nonassessable.
We hereby consent to the reference to us under the caption "Legal Matters"
in the Prospectus which constitutes a part of the Registration Statement
referred to above. We also consent to the inclusion in the Registration
Statement of this opinion as Exhibit 5.1 thereto.
Very truly yours,
/s/ Peter G. Aylward
Peter G. Aylward
<PAGE>
EXHIBIT 5.2
<PAGE>
[Ballard Spahr Andrews & Ingersoll Letterhead]
November 28, 1995
Host Funding, Inc.
Suite 250
7825 Fay Avenue
La Jolla, California 92037
Re: Host Funding, Inc.
Registration Statement on Form S-4
Registration No. 33-60011
----------------------------------
Ladies and Gentlemen:
We have acted as Maryland counsel to Host Funding, Inc., a Maryland
corporation (the "Company"), in connection with certain matters of Maryland
law arising out of the registration of up to 277,487 shares (the "Shares") of
Class A Common Stock, $.01 par value per share (the "Shares"), covered by the
above-referenced Registration Statement, and all amendments thereto (the
"Registration Statement"), under the Securities Act of 1933, as amended (the
"1933 Act"). Capitalized terms used herein shall have the meanings ascribed
to them in the Registration Statement.
In connection with our representation of the Company, and as a basis
for the opinion hereinafter set forth, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of the following
documents (hereinafter collectively referred to as the "Documents"):
1. The Registration Statement and the related form of final
prospectus included therein in the form in which it was
transmitted to the Securities and Exchange Commission
under the 1933 Act (the "Prospectus");
2. The charter of the Company (the "Charter"), certified as of
a recent date by the State Department of Assessments and
Taxation of Maryland (the "SDAT");
3. The Bylaws of the Company, certified as of a recent date by
its Secretary;
4. Resolutions adopted by the Board of Directors and
stockholders of the Company relating to the sale,
issuance and registration of the Shares, certified
as of a recent date by the Secretary of the Company;
5. A certificate as of a recent date of the SDAT as to the good
standing of the Company;
6. A certificate executed by Michael P. Fedynyshyn, Secretary
of the Company, dated November 28, 1995; and
7. Such other documents and matters as we have deemed necessary
or appropriate to express the opinion set forth in this
letter, subject to the assumptions, limitations and
qualifications stated herein.
In expressing the opinion set forth below, we have assumed, and so far
as is known to us there are no facts inconsistent with, the following:
1. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and delivered each of the
Documents to which such party is a signatory, and such party's
obligations set forth therein are legal, valid and binding.
<PAGE>
Host Funding, Inc.
November 28, 1995
Page 2
2. Each individual executing any of the Documents on behalf of a
party (other than the Company) is duly authorized to do so.
3. Each individual executing any of the Documents is legally
competent to do so.
4. All Documents submitted to us as originals are authentic. All
Documents submitted to us as certified or photostatic copies
conform to the original documents. All signatures on all
Documents are genuine. All public records reviewed or relied
upon by us or on our behalf are true and complete. All
statements and information contained in the Documents are true
and complete.
5. None of the Shares have been or will be issued or transferred in
violation of any restriction or limitation contained in the
Charter.
The phrase "known to us" is limited to the actual knowledge, without
independent inquiry, of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.
Based on the foregoing, and subject to the assumptions, limitations
and qualifications stated herein, it is our opinion that:
1. The Company is a corporation duly incorporated and existing under
and by virtue of the laws of the State of Maryland and is in good
standing with the SDAT.
2. All necessary corporate actions have been taken to authorize the
issuance of the Shares in accordance with and for the
consideration set forth in the Prospectus.
The foregoing opinion is limited to the laws of the State of Maryland
and we do not express any opinion herein concerning any other law. We
express no opinion as to compliance with the securities (or "blue sky") laws
or the real estate syndication laws of the State of Maryland.
We assume no obligation to supplement this opinion if any applicable
law changes after the date hereof or if we become aware of any fact that might
change the opinion expressed herein after the date hereof.
This opinion is being furnished to you solely for your submission
to the Securities and Exchange Commission as an exhibit to the Registration
Statement and, accordingly, may not be relied upon by, quoted in any manner
to, or delivered to any other person or entity without, in each instance, our
prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of our firm therein. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required by Section 7 of the 1933 Act.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll
Ballard Spahr Andrews & Ingersoll
<PAGE>
EXHIBIT 8.1
<PAGE>
November 28, 1995
Host Funding, Inc.
7825 Fay Avenue, Suite 250
La Jolla, CA 92037
Re: HOST FUNDING, INC.
Gentlemen:
We have acted as counsel to Host Funding, Inc., a Maryland corporation
(the "Company"), in connection with the preparation of an S-11 registration
statement filed with the Securities and Exchange Commission on May 26, 1995
and an S-4 registration statement filed with the Securities and Exchange
Commission on June 6, 1995 with subsequent amendments filed on September 29,
1995, and November 9, 1995 (The "Registration Statements") with respect to
the offering and sale (the "Offering") of up to 777,487 shares of the
Company's common stock (the "Common Stock"). The S-11 covers 500,000 shares
to be issued for cash and the S-4 covers 277,487 shares to be issued for the
assets of a California limited partnership which owns one hotel property.
The Company currently owns four hotels and associated personal property
(the "Initial Hotels") and will contract to acquire one additional hotel and
associated personal property (the "Acquisition Hotel") upon receipt of the
requisite approval from the limited partners of the Partnership owning the
Acquistion Hotel. Both the Initial Hotels and the Acquisition Hotel
(collectively the "Hotels")are currently operated under Super 8 franchises.
The Company leases the Initial Hotels to Inn Fund, LLC, a Delaware limited
liability company, pursuant to substantially similar operating leases. Inn
Fund, LLC entered into management agreements with All American Group, Inc., a
Delaware corporation, pursuant to which All American Group, Inc. operates and
manages the Initial Hotels on behalf of Inn Fund, LLC. Upon the Company's
acquisition of the Acquisition Hotel, the Company plans to lease the Hotels
pursuant to substantially similar operating leases (collectively the
"Leases") by and between the Company and Crossroads Hospitality Tenant
Company, LLC, a Delaware limited liability company (the "Lessee"). Host
Funding Advisors, Inc., a Delaware corporation (the "Advisor") will provide
management and administrative services to the Company pursuant to an advisory
agreement (the "Advisory Agreement").
<PAGE>
The Company has requested our opinion as to:
(a) whether the Company qualifies to be taxed as a real estate
investment trust (a "REIT") pursuant to sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"), for its taxable
year ended December 31, 1996, and whether the Company's organization and
current and proposed method of operation will enable it to continue to
qualify as a REIT for its taxable year ended December 31, 1997, and in the
future; and
(b) whether the descriptions of the law and the legal conclusions
contained in the portion of the prospectus in the Registration Statements
(the "Prospectus") under the caption "Federal Income Tax Considerations"
are correct in all material respects, and whether the discussion thereunder
omits any material provision with respect to the matters covered.
In connection with the opinions rendered below, I have examined the
following:
1. the Company's Amended and Restated Charter, as filed with the
Secretary of State of the State of Maryland on November 28, 1995;
2. the Company's amended By-Laws, adopted effective September 27, 1995;
3. the minutes of meetings of the Company's board of directors held
during calendar years 1994 and 1995;
4. the Prospectus;
5. the Leases;
6. the Advisory Agreement;
7. the appraisals of the Hotels, performed by Arthur Andersen, LLP as
well as individual appraisals of each hotel's personal property which set out
the values of the personal property in each hotel (the "Personal Property
Values");
8. such other documents as I have deemed necessary or appropriate for
purposes of this opinion.
In connection with the opinions rendered below, I have assumed generally
that:
1. each of the documents referred to above has been duly authorized,
executed, and delivered, is authentic, if an original, or accurate, if a copy ,
and has not been amended;
2. during its 1996 taxable year and subsequent taxable years, the Company
will continue
2
<PAGE>
to operate in such a manner that will make the representations set forth below
true for such years;
3. 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;
4. no actions will be taken by the Company after the date hereof that
would have the effect of altering the facts upon which the opinions set forth
below are based; and
5. the Personal Property Values accurately determine the fair market
value of the personal property contained in the Hotels at the time of the
Company's acquisition of such personal property.
Furthermore, I have relied upon the correctness of the following
representations of the Company and its authorized representatives:
1. During the period from the date of the close of the Formation
Transactions through December 31, 1996 (the "Relevant Period"), the following
requirements will be met by (i) the Lessee, and (ii) any other person who
leased, managed, or operated the Initial Hotels:
a. such person did not and 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 personal was a corporation, not more than 35% of its
stock, measured by voting power or number of shares, or if such person
was a non-corporate entity, not more than 35% of the interest in its
assets or net profits was owned, directly or indirectly (within the
meaning of section 856(d)(5) of the Code), by one or more persons who
owned 35% or more of the shares of the Company;
c. the Company did not and will not derive or receive any income
from such person, other than rents from the Initial Hotels;
d. such person was and will be adequately compensated for its
services;
e. if such person was or will be an individual, he or she was not an
officer or employee of the Company (or the Advisor);
f. if such person was or will be a corporation, none of its officers
or employees were officers or employees of the Company (or the
Advisor);
g. if an individual served or will serve as both (i) one of such
person's directors and (ii) a director and officer (or employee) of
the Company (or the Advisor), that individual did not and will not
receive any compensation for serving as one of such
3
<PAGE>
person's directors; and
h. if an individual served or will serve as both (i) one of such
person's directors and officers (or employees) and (ii) a director of
the Company (or the Advisor), that individual did not and will not
receive any compensation for serving as a director of the Company (or
the Advisor).
2. During the Relevant Period, the Company will not furnish or render, or
bear the cost of furnishing or rendering, any services to tenants of the Initial
Hotels, other than (i) the maintenance of underground utilities and structural
elements of the applicable hotel property or (ii) the payment of real property
taxes, casualty insurance, or the cost of replacing or refurbishing personal
property with respect to such hotel property. The services described in clauses
(i) and (ii) of the preceding sentence are usually or customarily provided by
lessors of hotel properties in the geographic areas in which the Initial Hotels
are located.
3. During the Relevant Period, the following requirements will be met by
(i) the Lessee, and (ii) any other person who furnished or rendered services
("Noncustomary Services") to the tenants of the Initial Hotels other than
services that are described in clause (i) or (ii) of paragraph 2 above or
usually or customarily rendered in connection with the rental of space for
occupancy only and are not otherwise considered rendered to the occupant:
a. such person satisfies the requirements described in paragraph 1
above;
b. the cost of the Noncustomary Services will be borne by such
person; and
c. a separate charge was made for the Noncustomary Services, and the
amount of the separate charge will be received and retained by such
person.
4. During the Relevant Period, the Company will not be chartered or
supervised as a bank, savings and loan, or similar association under state or
federal law.
5. During the Relevant Period, 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. During the Relevant Period, the Company will not engage in the
business of issuing life insurance, annuity contracts, or contracts of health or
accident insurance.
8. The Company will elect to be a REIT for its 1996 taxable year by
computing its taxable income as a REIT on its 1996 federal income tax return
(i.e., I.R.S. Form 1120-REIT).
4
<PAGE>
9. During the Relevant Period, the Company will not terminate or revoke
its REIT election.
10. During the Relevant Period, the Company will not succeed to any
earnings and profits accumulated during a non-REIT year.
11. During the Relevant Period, 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"), will be derived from:
a. dividends;
b. interest;
c. rents from real property (including charges for services
other than Noncustomary Services, whether or not such charges were
separately stated);
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 was 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") that
was not Prohibited Income;
g. amounts 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 (including regular and residual interests in real estate
mortgage investment conduits ("REMICs")) that was not Prohibited
Income;
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
(including regular and residual interests in REMICs, to the extent
provided in Code section 856(c)(6)(E) ("Qualified Hedging Contracts");
and
j. gain from the sale or other disposition of Qualified Hedging
Contracts.
5
<PAGE>
12. During the Relevant Period, at least 75% of the Company's gross income
(excluding Prohibited Income) will be derived from:
a. rents from real property (excluding any interest accrued on
such rents and including charges for services other than Noncustomary
Services, whether or not such charges are separately stated);
b. interest on obligations secured by mortgages on real
property or on interests in real property (including interest on
regular or residual interests in REMICs, to the extent provided in
Code section 856(c)(6)(E));
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 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 (other than Prohibited Income) from the sale or other
disposition of real estate assets (including regular and residual
interests in REMICs, to the extent provided in Code section
856(c)(6)(E)); and
i. income that is (i) attributable to stock or a debt
instrument, (ii) attributable to the temporary investment of new
capital, and (iii) received or accrued during the one-year period
beginning on the date on which the Company received such capital.
13. The initial adjusted basis of the personal property contained in the
Hotels equals the fair market values of such personal property as set forth
above in the Personal Property Values (except to the extent that the Company
acquired such personal property in a tax-free exchange). With respect to each
Hotel for the Relevant Period, the ratio of (i) the average of the adjusted
basis of the personal property contained in the Hotel at the beginning and at
the end of such taxable year to (ii) the average of the aggregate adjusted basis
of both the real property and personal property
6
<PAGE>
comprising the Hotel at the beginning and at the end of such taxable year (the
"Adjusted Basis Ratio") did not exceed 15%.
14. During the Relevant Period, the Leases provided that rent will be the
greater of a fixed amount or a percentage amount that was calculated by
multiplying specified percentages by the gross revenues for each of the Initial
Hotels in excess of certain levels (the "Percentage Rent"). During the Relevant
Period, the percentages used to compute the Percentage Rent (i) were not
renegotiated in a manner that had the effect of basing the Percentage Rent on
income or profits of any person and (ii) conformed with normal business
practice.
15. During the Relevant Period, the Company 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 as (i) rents from real
property that were (A) based solely on a percentage or percentages of receipts
or sales and the percentage or percentages were fixed at the time the leases
were entered into, were not renegotiated during the term of the leases in a
manner that had the effect of basing rent on income or profits, and conformed
with normal business practices or (B) attributable to qualified rents from
subtenants as provided by section 856(d)(6) of the Code and (ii) 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).
16. During the Relevant Period, the Company 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. During the
Relevant Period, the Company did not receive or accrue, directly or indirectly,
any rents from real property from any of the following:
a. a corporation of which the Company owned, 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; or
b. a noncorporate entity in which the Company owned, 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.
17. During the Relevant Period, less than 30% of the Company's gross
income 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 generated Prohibited Income;
or
c. real property (including interests in real property,
interests in mortgages on
7
<PAGE>
real property, regular and residual interests in REMICs, and mortgage
pass-through securities) 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.
18. At the close of each calendar quarter of the Relevant Period, (i) at
least 75% of the value of the Company's total assets will be represented by real
estate assets (including interests in mortgages on real property and interests
in REMICs, to the extent provided in Code section 856(c)(6)(E), cash and cash
items (including receivables), 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 will consist of the
securities of any one issuer (excluding the Company or corporations with respect
to which the Company held 100% of the stock at all times during the
corporation's existence) and (B) the Company will not hold more than 10% of the
outstanding voting securities of any one issuer (excluding the Company or
corporations with respect to which the Company held 100% of the stock at all
times during the corporation's existence).
19. During the Relevant Period, the Company will maintain sufficient
records as to its investments to be able to show that it complied with the
diversification requirements described in the preceding paragraph.
20. For the Relevant Period, 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) 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).
21. The dividends paid by the Company during the Relevant Period will be
made pro rata, with no preference to any shares as compared with other shares of
the same class.
22. Within 30 days after the end of the Relevant Period, the Company will
demand written statements from its shareholders that, at any time during the
last six months of such taxable year, owned 5% or more of its stock (or, if the
Company had less than 2,000 and more than 200 shareholders of record of its
stock on any dividend record date, 1% or more of its stock) setting forth the
following information:
a. the actual owners of the Company's stock (i.e., the persons
who will be required to include in gross income in their returns the
dividends received on the stock); and
b. the maximum number of shares of the Company (including the
number and
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<PAGE>
face value of securities convertible into stock of the Company) that
will be 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 stock at
any time during the last half of the 1997 taxable year.
23. During the Relevant Period, the Company will maintain the written
statements described in the preceding paragraph in San Diego, California, and
the statements will be available for inspection by the Internal Revenue Service
(the "Service").
24. During the Relevant Period, the Company will use the calendar year as
its taxable year.
25. During its 1997 taxable year and future taxable years, the Company
will operate in such a manner to continue to satisfy the representations
described in paragraphs 1 through 24 above as though (i) the term "Relevant
Period" included such years and (ii) the term "Hotels" included both the Hotels
and any other hotel properties in which the Company acquires an interest. In
addition, the Company will operate in such a manner as to satisfy the
representations described in paragraphs 11, 12, 13, 17, 18, 20, and 22 above for
its 1996 taxable year and each of its subsequent taxable years.
26. 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.
27. At no time during the last half of each taxable year beginning with
the Company's 1997 taxable year will more than 50% in value of the Company's
outstanding stock be 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 or
for five or fewer individuals. For that 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.
After reasonable inquiry, we are not aware of any facts inconsistent with
the representations set forth 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 Treasury regulations thereunder
(the "Regulations"), 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,
and the discussion in the Prospectus under the caption "Federal Income Tax
Considerations" (which is incorporated
9
<PAGE>
herein by reference), I am of the opinion that:
a. the Company qualifies to be taxed as a REIT pursuant to sections
856 through 860 of the Code for its taxable year ended December 31, 1996,
and the Company's organization and current and proposed method of operation
will enable it to continue to qualify as a REIT for its taxable year ended
December 31, 1996, and in the future; and
b. the descriptions of the law and the legal conclusions contained in
the Prospectus under the caption "Federal Income Tax Considerations" are
correct in all material respects, and the discussion thereunder does not
omit any material provision with respect to the matters covered.
I will not review the Company's compliance with the documents, assumptions,
and representations set forth above on a continuing basis. Accordingly, no
assurance can be given that the actual results of the Company's operations for
any given taxable year will satisfy the requirements for qualification and
taxation as a REIT.
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.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. I also consent to the references to Peter G. Aylward, A
Professional Corporation under the caption "Federal Income Tax Considerations"
in the Prospectus. In giving this consent, I do not admit that I am in the
category of persons whose consent is required by Section 7 of the 1933 Act or
the rules and regulations promulgated thereunder by the Securities and Exchange
Commission.
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. I 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 may not be relied upon for any purpose
by any other person without our express written consent.
Very truly yours,
/s/ Peter G. Aylward
Peter G. Aylward
10
<PAGE>
LEASE AGREEMENT
between
HOST FUNDING, INC.
and
CROSSROADS HOSPITALITY TENANT COMPANY, L.L.C.
October 15, 1995
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT (hereinafter called this "Lease"), made as of
the 15th day of October, 1995, by and between HOST FUNDING, INC., a Maryland
corporation (hereinafter called "Lessor") and CROSSROADS HOSPITALITY TENANT
COMPANY, L.L.C., a Delaware limited liability company (hereinafter called
"Lessee"), provides as follows.
WITNESSETH:
, Lessor holds and owns clear and marketable title to a hotel
commonly known as the [Name of Hotel]("Leased Property", as more fully
described in Section 1.1 hereof) and certain other hotel properties
(hereinafter sometimes referred to individually as a "Hotel" and collectively
as the "Hotels") and is entering into other similar leases (hereinafter
sometimes referred to individually as a "Lease" and collectively as the
"Leases") with Lessee covering the other Hotels.
In furtherance of the consummation of such series of transactions,
Lessor and Lessee wish to enter into this Lease and that certain Master
Agreement, dated of even date herewith (the "Master Agreement") by and among
the Lessor, the Lessee and Crossroads Hospitality Company, L.L.C.
("Crossroads").
NOW, THEREFORE, Lessor, in consideration of the payment of rent by
Lessee and the other covenants and agreements to be performed by Lessee, and
upon the terms and conditions hereinafter stated, does hereby rent and lease
unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased
Property.
SECTION 1.
1.1 LEASED PROPERTY. The Leased Property is comprised
of Lessor's interest in the following:
1.1.1 the land or ground leasehold interest described in
Exhibit "A" attached hereto and by reference incorporated herein (the "Land");
1.1.2 all buildings, structures and other improvements of
every kind including, but not limited to, alleyways and connecting tunnels,
sidewalks, utility pipes, conduits and lines (on-site and offsite), parking
areas and roadways appurtenant to such buildings and structures presently
situated upon the Land (collectively, the "Leased Improvements");
<PAGE>
1.1.3 all easements, rights and appurtenances relating to
the Land and the Leased Improvements;
1.1.4 all equipment, machinery, fixtures, and other
items of property required or incidental to the use of the Leased
Improvements as a hotel, including all components thereof, now and hereafter
permanently affixed to or incorporated into the Leased Improvements,
including, without limitation, all furnaces, boilers, heaters, electrical
equipment, heating, plumbing, lighting, ventilating, refrigerating,
incineration, air and water pollution control, waste disposal, air-cooling
and air-conditioning systems and apparatus, sprinkler systems and fire and
theft protection equipment, all of which to the greatest extent permitted by
law are hereby deemed by the parties hereto to constitute real estate,
together with all replacements, modifications, alterations and additions
thereto (collectively, the "Fixtures");
1.1.5 all furniture and furnishings, Inventory and all
other items of personal property (excluding Inventory and other personal
property owned by Lessee) located on, and used in connection, with the
operation of the Leased Improvements as a hotel, together with all
replacements, modifications, alterations and additions thereto; and
1.1.6 all existing leases of space within the Leased
Property (including any security deposits or collateral held by Lessor
pursuant thereto).
EXCEPT AS OTHERWISE EXPRESSLY STATED HEREIN, THE LEASED PROPERTY IS DEMISED
IN ITS PRESENT CONDITION WITHOUT REPRESENTATION OR WARRANTY BY LESSOR AND
SUBJECT TO THE RIGHTS OF PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF
TITLE INCLUDING ALL COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER
MATTERS OF RECORD INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF
FINANCING INSTRUMENTS, MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND
INCLUDING OTHER MATTERS WHICH WOULD BE DISCLOSED BY AN INSPECTION OF THE
LEASED PROPERTY OR BY AN ACCURATE SURVEY THEREOF.
1.2 TERM.
(A) The term of the Lease (the "Term") shall commence on the
closing date of the public offering described in the Form S-11 Registration
Statement filed by Lessor with the Securities and Exchange Commission on
November___, 1995 (the "Commencement Date") and shall end on the fifteenth
annual anniversary of the last day of the month in which the Commencement
Date occurs, unless sooner terminated in accordance with the provisions
hereof. Because of the lack of certainty of the actual date of the
Commencement Date, the Lessor shall provide to Lessee at least five (5) days
prior written notice of the Commencement Date. Notwithstanding the foregoing,
if the Commencement Date does not occur on or before December 31, 1995, the
Lessee may terminate this Lease by providing to the Lessor five (5) days
prior written notice of termination.
2
<PAGE>
(B) In addition to the other termination provisions contained in
this Lease, this Lease shall terminate if: (a) the Lessor shall have sold
the Leased Property to a third party that is not an Affiliate, (b) the
Lessor shall have provided to the Lessee Notice as set forth in Section 43
hereof of termination, (c) if the obligations of the Lessor shall not have
been expressly assumed by a purchaser approved by the Lessee and, the Lessor
shall have paid to the Lessee a lease cancellation fee (the " Lease
Cancellation Fee") or accrued but unpaid Negative Base Rent, as applicable
all as more fully described on EXHIBIT "B" attached hereto and made a part
hereof.
SECTION 2 - DEFINITIONS.
For all purposes of this Lease, except as otherwise expressly
provided or unless the context otherwise requires, (a) the terms defined in
this Section have the meanings assigned to them in this Section and include
the plural as well as the singular, (b) all accounting terms not otherwise
defined herein have the meanings assigned to them in accordance with
generally accepted accounting principles and the Uniform System as are at the
time applicable, (c) all references in this Lease to designated "Sections"
and other subdivisions are to the designated Sections and other subdivisions
of this Lease, and (d) the words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Lease as a whole and not to any
particular Section or other subdivision:
ADDITIONAL CHARGES: As defined in Section 3.5 of this Lease.
AFFILIATES: As used in this Lease the term "Affiliate" of a person
shall mean (a) any person that, directly or indirectly, controls or is
controlled by or is under common control with such person, (b) any other
person that owns, beneficially, directly or indirectly, five percent or more
of the outstanding capital stock, shares or equity interests of such person,
or (c) any officer, director, employee, partner or trustee of such person or
any person controlling, controlled by or under common control with such
person (excluding trustees and persons serving in similar capacities who are
not otherwise an Affiliate of such person). The term "person" means and
includes individuals, corporations, general and limited partnerships, stock
companies or associations, joint ventures, associations, companies, trusts,
banks, trust companies, land trusts, business trusts, or other entities and
governments and agencies and political subdivisions thereof. For the
purposes of this definition, "control" (including the correlative meanings of
the terms "controlled by" and "under common control with"), as used with
respect to any person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of
such person, through the ownership of voting securities, partnership
interests or other equity interests.
AWARD: As defined in Section 15.1.3 of this Lease.
BASE MANAGEMENT FEE: An amount equal to six percent (6%) of Gross
Revenues (as defined in the Uniform System) which shall be an imputed amount
retained by Lessee as a management fee and charged as a Gross Operating
Expense of the Hotel.
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BASE RATE: The rate of interest announced publicly by Bank of
America in San Francisco, California from time to time, as such bank's base
rate. If no such rate is announced or becomes discontinued, then such other
rate as Lessor may reasonably designate.
BASE RENT: As defined in Section 3.1(A) of this Lease.
BREAK-EVEN THRESHOLD: Such amount of Gross Revenues for the Leased
Property as set forth on Exhibit E attached hereto and made a part hereof.
CAPITAL EXPENDITURE BUDGET: As defined in Section 40 of this Lease.
CAPITAL EXPENDITURE RESERVE ACCOUNT: As defined in Section 40 of
this Lease.
CERCLA: The Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
CODE: The Internal Revenue Code of 1986, as amended.
COMMENCEMENT DATE: As defined in Section 1.2(A) of the Lease.
CONDEMNATION, CONDEMNOR: As defined in Section 15.1 of this Lease.
DATE OF TAKING: As defined in Section 15.1(2) of this Lease.
ENCUMBRANCE: As defined in Section 35.1 of this Lease.
ENVIRONMENTAL AUTHORITY: Any department, agency or other body or
component of any Government that exercises any form of jurisdiction or
authority under any Environmental Law.
ENVIRONMENTAL AUTHORIZATION: Any license, permit, order, approval,
consent, notice, registration, filing or other form of permission or
authorization required under any Environmental Law.
ENVIRONMENTAL LAWS: All applicable federal, state, local and
foreign laws and regulations relating to pollution of the environment
(including without limitation, ambient air, surface water, ground water, land
surface or subsurface strata), including without limitation laws and
regulations relating to emissions, discharges, Releases or threatened
Releases of Hazardous Materials or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials. Environmental Laws include, but are not
limited to CERCLA, FIFRA, RCRA, SARA and TSCA.
ENVIRONMENTAL LIABILITIES: Any and all obligations to pay the
amount of any judgment or settlement, the cost of complying with any
settlement, judgment or order for injunctive or other
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equitable relief, the cost of compliance or corrective action in response to
any notice, demand or request from an Environmental Authority, the amount of
any civil penalty or criminal fine, and any court costs and reasonable
amounts for attorneys' fees, fees for witnesses and experts, and costs of
investigation and preparation for defense of any claim or any Proceeding,
regardless of whether such Proceeding is threatened, pending or completed,
that may be or have been asserted against or imposed upon Lessor, Lessee, any
Predecessor, the Leased Property or any property used therein and arising out
of:
(a) Failure of Lessee, Lessor, any Predecessor or the Leased
Property to comply at any time with all Environmental Laws;
(b) Presence of any Hazardous Materials on, in, under, at or in
any way affecting the Leased Property;
(c) A Release at any time of any Hazardous Materials on, in, at,
under in any way affecting the Leased Property;
(d) Identification of Lessee, Lessor or any Predecessor as a
potentially responsible party under CERCLA or under any Environmental Law
similar to CERCLA;
(e) Presence at any time of any above-ground and/or underground
storage tanks, as defined in RCRA or in any applicable Environmental Law on,
in, at or under the Leased Property or any adjacent site or facility; or
(f) Any and all claims for injury or damage to persons or
property arising out of exposure to Hazardous Materials originating or
located at the Leased Property, or resulting from operation thereof or any
adjoining property.
EVENT OF DEFAULT: As defined in Section 16.1 of this Lease.
FACILITY: The hotel and/or other facility offering lodging and
other services or amenities being operated or proposed to be operated on the
Leased Property.
FAIR MARKET RENTAL: The fair market rental of the Leased Property
means the rental which a willing tenant not compelled to rent would pay a
willing landlord not compelled to lease for the use and occupancy of such
Leased Property pursuant to the Lease for the term in question, (a) assuming
that Lessee is not in default thereunder, and (b) determined in accordance
with the appraisal procedures set forth in Section 34 or in such other manner
as shall be mutually acceptable to Lessor and Lessee.
FAIR MARKET VALUE: The fair market value of the Leased Property
means an amount equal to the price that a willing buyer not compelled to buy
would pay a willing seller not compelled to sell for such Leased Property,
(a) assuming the same is unencumbered by this Lease, (b) determined in
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accordance with the appraisal procedures set forth in Section 34 or in such
other manner as shall be mutually acceptable to Lessor and Lessee, (c)
assuming that such seller must pay customary closing costs and title
premiums, and (d) taking into account the positive or negative effect on the
value of the Leased Property attributable to the interest rate, amortization
schedule, maturity date, prepayment penalty and other terms and conditions of
any encumbrance that is assumed by the transferee. In addition, in
determining the Fair Market Value with respect to damaged or destroyed Leased
Property, such value shall be determined as if such Leased Property had not
been so damaged or destroyed.
FIFRA: The Federal Insecticide, Fungicide, and Rodenticide Act, as
amended.
FINANCIALS: For any Fiscal Year or other accounting period for
Lessee, statements of earnings and retained earnings and of changes in
financial position for such period and for the period from the beginning of
the respective Fiscal Year to the end of such period and the related balance
sheet as at the end of such period, together with the notes thereto, all in
reasonable detail and setting forth in comparative form the corresponding
figures for the corresponding period in the preceding Fiscal Year, and
prepared in accordance with generally accepted accounting principles and
audited by independent certified public accountants acceptable to Lessor in
its sole discretion.
FISCAL YEAR: The 12-month period from January 1 to December 31.
FIXTURES: As defined in Section 1.1.4 of this Lease.
FRANCHISE AGREEMENT: Any franchise agreement or license agreement
with a franchisor under which the Facility is operated.
FF&E: All furniture, fixtures, equipment, wall coverings, and hotel
systems located at, or used in connection with the Leased Property, together
with all replacements therefor and additions thereto, including, without
limitation, (i) all equipment and systems required for the operation of
kitchens and bars, if any, laundry and dry cleaning facilities, (ii) office
equipment, (iii) dining room wagons, materials handling equipment, cleaning
and engineering equipment, (iv) telephone and computerized accounting systems
and (v) vehicles.
GOVERNING STATE LAW: The laws of the State in which the Leased
Property is situated shall govern this Agreement.
GOVERNMENT: The United States of America, any state, district or
territory thereof, any foreign nation, any state, district, department,
territory or other political division thereof, or any political subdivision
of any of the foregoing.
GROSS OPERATING EXPENSES: All expenses incurred in the ordinary
course of operating the Leased Property as defined in the Uniform System.
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GROSS OPERATING PROFIT: The amount by which Gross Revenues exceeds
Gross Operating Expenses as such calculation is more fully described in the
Uniform System.
GROSS REVENUES: All receipts, revenues, income and proceeds of
sales of every kind received by Tenant directly or indirectly from the
operation of the Leased Property as more fully described in the Uniform
System.
HAZARDOUS MATERIALS: All chemicals, pollutants, contaminants,
wastes and toxic substances, including without limitation:
(a) Solid or hazardous waste, as defined in RCRA or in any
Environmental Law;
(b) Hazardous substances, as defined in CERCLA or in any
Environmental Law;
(c) Toxic substances, as defined in TSCA or in any Environmental
Law;
(d) Insecticides, fungicides, or rodenticides, as defined in FIFRA
or in any Environmental Law; and
(e) Gasoline or any other petroleum product or byproduct,
polychlorinated biphenols, asbestos and urea formaldehyde.
IMPOSITIONS: Collectively, all taxes (including, without
limitation, all ad valorem, sales and use, single business, gross receipts,
transaction privilege, rent or similar taxes as the same relate to or are
imposed upon Lessee or its business conducted upon the Leased Property)
assessments (including, without limitation, all assessments for public
improvements or benefit, whether or not commenced or completed prior to the
date hereof provided that said improvements are completed within the Term and
whether or not to be completed within the Term), ground rents, water, sewer
or other rents and charges, excises, tax inspection, authorization and
similar fees and all other governmental charges, in each case whether general
or special, ordinary or extraordinary, or foreseen or unforeseen, of every
character in respect of the Leased Property or the business conducted thereon
by Lessee, (including all interest and penalties thereon caused by any
failure in payment by Lessee), which at any time prior to, during or with
respect to the Term hereof may be assessed or imposed on or with respect to
or be a lien upon (a) Lessor's interest in the Leased Property, (b) the
Leased Property, or any part thereof or any rent therefrom or any estate,
right, title or interest therein, or (c) any occupancy, operation, use or
possession of, or sales from, or activity conducted on or in connection with
the Leased Property, or the leasing or use of the Leased Property or any part
thereof by Lessee. Notwithstanding the foregoing or anything otherwise
contained in this definition of Impositions or elsewhere in this Lease or in
the Master Agreement shall be construed to require Lessee to prepare tax
returns or reports for, or pay (1) any tax based on net income (whether
denominated as a franchise or capital stock or other tax) imposed on Lessor
or any other person, or (2) any net revenue tax of Lessor or any other
person, or (3) any tax imposed with respect to the sale, exchange or other
disposition by Lessor of any Leased Property or the proceeds thereof, (4) any
real
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estate or personal property taxes imposed upon the Lessor's property
including but not limited to the Leased Property or (5) any single business,
gross receipts (including any tax on any rent received by Lessor from
Lessee), transaction, privilege or similar taxes as the same relate to or are
imposed upon Lessor, except to the extent that any tax, assessment, tax levy
or charge that Lessee is obligated to pay pursuant to the first sentence of
this definition and that is in effect at any time during the Term hereof is
totally or partially repealed, and a tax, assessment, tax levy or charge set
forth in clause (1) or (2) is levied, assessed or imposed expressly in lieu
thereof.
INDEMNIFIED PARTY: Either a Lessee Indemnified Party or a Lessor
Indemnified Party.
INDEMNIFYING PARTY: Any party obligated to indemnify an Indemnified
Party pursuant to Sections 8.3 or 23.1 of this Lease.
INSURANCE REQUIREMENTS: All terms of any insurance policy required
by this Lease and all requirements of the issuer of any such policy.
INVENTORY: All "Inventories of Merchandise" and "Inventories of
Supplies" as defined in the Uniform System of Accounts for Hotels (8th
Revised Edition, 1986) as published by the Hotel Association of New York
City, Inc., as same may hereafter be revised.
LAND: As defined in Section 1 of this Lease.
LEASE: This Lease.
LEASED IMPROVEMENTS: LEASED PROPERTY: Each as defined in Section 1
of this Lease.
LEGAL REQUIREMENTS: All federal, state, county, municipal and other
governmental statutes, laws, rules, orders, regulations, ordinances,
judgments, decrees and injunctions affecting either the Leased Property or
the maintenance, construction, use or alteration thereof (whether by Lessee
or otherwise), whether or not hereafter enacted and in force, including (a)
all laws, rules or regulations pertaining to the environment, occupational
health and safety and public health, safety or welfare, and (b) any laws,
rules or regulations that may (1) require repairs, modifications or
alterations in or to the Leased Property, or (2) in any way adversely affect
the use and enjoyment thereof; and all permits, licenses and authorizations
and regulations relating thereto and all covenants, agreements, restrictions
and encumbrances contained in any instruments, either of record or known to
Lessee (other than encumbrances created by Lessor without the consent of
Lessee), at any time in force affecting the Leased Property.
LESSEE: The Lessee designated on this Lease and its permitted
successors and assigns.
LESSEE INDEMNIFIED PARTY: Lessee, any Affiliate of Lessee, any
other Person against whom any claim for indemnification may be asserted
hereunder as a result of a direct or indirect ownership interest (including a
stockholder's interest or partnership interest) in Lessee, the officers,
directors,
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stockholders, employees, agents and representatives of Lessee and any
partner, corporate stockholder, agent, or representative of Lessee, and the
respective heirs, personal representatives, successors and assigns of any
such officer, director, partner, stockholder, employee, agent or
representative.
LESSOR: The Lessor designated on this Lease and its successors and
assigns.
LESSOR INDEMNIFIED PARTY: Lessor, any Affiliate of Lessor, any
other Person against whom any claim for indemnification may be asserted
hereunder as a result of a direct or indirect ownership interest (including a
stockholder's or partnership interest) in Lessor, the officers, directors,
stockholders, employees, agents and representatives of the general partner of
Lessor and any partner, agent, or representative of Lessor, and the
respective heirs, personal representatives, successors and assigns of any
such officer, director, partner, stockholder, employee, agent or
representative.
MINIMUM PRICE: The sum of (a) the equity in the Leased Property at
the time of acquisition of the Leased Property by Lessor (i.e., that portion
of the acquisition price of the Leased Property paid by Lessor in cash and/or
the original exchange value of its common shares) as more fully described on
Exhibit I attached hereto and made a part hereof, plus (b) other capital
expenditures on the Leased Property by Lessor after the date hereof, plus (c)
the unpaid principal balance of all encumbrances against the Leased Property
at the time of purchase of the Leased Property by Lessee, less (x) all
proceeds received by Lessor from any financing or refinancing of the Leased
Property after the date hereof (after payment of any debt refinanced and net
of any costs and expenses incurred in connection with such financing or
refinancing, including, without limitation, loan points, commitment fees and
commissions and legal fees) and (y) the net amount (after deduction of all
reasonable legal fees and other costs and expenses, including without
limitation expert witness fees, incurred by Lessor in connection with
obtaining any such proceeds or award) of all insurance proceeds received by
Lessor andAwards received by Lessor from any Partial Taking of the Leased
Property that are not applied to restoration.
NEGATIVE BASE RENT. To the extent that at any time during the first
four (4) years after the Commencement Date the Property Cash Flow from the
Leased Property is less than the Base Rent, then Lessee will be allowed to
accrue the difference as Negative Base Rent. The Negative Base Rent shall be
cumulative but shall not bear interest.
NOTICE: A notice given pursuant to Section 33 of this Lease.
OFFICER'S CERTIFICATE: A certificate of Lessee signed by the chief
financial officer or another officer authorized so to sign by the board of
directors or by-laws of Lessee, or any other person whose power and authority
to act has been authorized by delegation in writing by any such officer.
OVERDUE RATE: On any date, a rate equal to the Base Rate plus 2%
per annum, but in no event greater than the maximum rate then permitted under
applicable law.
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PAYMENT DATE: Any due date for the payment of any installment of
Base Rent.
PERCENTAGE RENT: As defined in Section 3.1(B) of this Lease.
PERSON: Any Government, natural person, corporation, partnership or
other legal entity.
PREDECESSOR: Any Person whose liabilities arising under any
Environmental Law have or may have been retained or assumed by Lessee, either
contractually or by operation of law, relating to the Leased Property.
PRIMARY INTENDED USE: As defined in Section 7.2.2 of this Lease.
PROCEEDING: Any judicial action, suit or proceeding (whether civil
or criminal), any administrative proceeding (whether formal or informal), any
investigation by a governmental authority or entity (including a grand jury),
and any arbitration, mediation or other non-judicial process for dispute
resolution.
PROPERTY CASH FLOW: Gross Operating Profit less capital
expenditures, the amount of the imputed Base Management Fee and property
insurance required pursuant to Section 13 hereof.
RCRA: The Resource Conservation and Recovery Act, as amended.
REAL ESTATE TAXES: All real estate taxes, including general and
special assessments, if any, which are imposed upon the Land, and any
improvements thereon.
REJECTABLE OFFER PRICE: An amount equal to the greater of (a) the
Fair Market Value, determined as of the applicable purchase date, or (b) the
Minimum Price.
RELEASE: A "Release" as defined in CERCLA or in any Environmental
Law, unless such Release has been properly authorized and permitted in
writing by all applicable Environmental Authorities or is allowed by such
Environmental Law without authorizations or permits.
RENT: Collectively, the Base Rent, Percentage Rent, and Additional
Charges.
SARA: The Superfund Amendments and Reauthorization Act of 1986, as
amended.
STATE: The State or Commonwealth of the United States in which the
Leased Property is located.
TAKING: A taking or voluntary conveyance during the Term hereof of
all or part of the Leased Property, or any interest therein or right accruing
thereto or use thereof, as the result of, or
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in settlement of, any Condemnation or other eminent domain proceeding
affecting the Leased Property whether or not the same shall have actually
been commenced.
TERM: As defined in Section 1.2(A) of this Lease.
TSCA: The Toxic Substances Control Act, as amended.
UNECONOMIC FOR ITS PRIMARY INTENDED USE: A state or condition of
the Facility such that in the good faith judgment of Lessee, reasonably
exercised and evidenced by the resolution of the board of directors or other
governing body of Lessee, the Facility cannot be operated on a commercially
practicable basis for its Primary Intended Use, taking into account, among
other relevant factors, the number of usable rooms and projected revenues and
changes in the Competitive Set of the Leased Property, such that Lessee
intends to, and shall, complete the cessation of operations from the Leased
Facility. For purposes of this Lease, the term "Competitive Set" shall mean
the properties described on Exhibit "C" attached hereto and made a part
hereof.
UNIFORM SYSTEM: Shall mean the Uniform System of Accounts for
Hotels (8th Revised Edition, 1986) as published by the Hotel Association of
New York City, Inc., as same may hereafter be revised.
UNSUITABLE FOR ITS PRIMARY INTENDED USE: A state or condition of
the Facility such that, in the good faith judgment of Lessee, reasonably
exercised and evidenced by the resolution of the board of directors or other
governing body of Lessee, due to casualty damage or loss through
Condemnation, the Facility cannot function as an integrated hotel facility
consistent with standards applicable to a well maintained and operated hotel.
SECTION 3.
3.1 RENT. Lessee will pay to Lessor in lawful money of the
United States of America which shall be legal tender for the payment of
public and private debts, in immediately available funds, at Lessor's address
set forth in Section 33 hereof or at such other place or to such other
Person, as Lessor from time to time may designate in a Notice, all Base Rent,
Percentage Rent and Additional Charges, during the Term, as follows:
(A) BASE RENT: Beginning with January, 1996, in
consecutive monthly installments, on or before the tenth day of each calendar
month of the Term ("Base Rent") an amount corresponding to the amounts set
forth on EXHIBIT D attached hereto and made a part hereof; provided, however,
Tenant shall pay on January 10, 1996, all amounts of Base Rent due through
December 31, 1995; provided, further, however, that the first and last
monthly payments of Base Rent shall be pro-rated as to any partial month
(subject to adjustment as provided in Sections 5.2, 14.5, 15.3, 15.5, and
15.6); and
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(B) PERCENTAGE RENT: For each Fiscal Year during the
Term commencing with the Fiscal Year beginning January 1, 1996, Tenant shall
pay percentage rent ("Percentage Rent")on a quarterly basis within twenty
(20) days after the end of each calendar quarter and in an amount calculated
in accordance with the formula set forth on EXHIBIT E attached hereto and
made a part hereof.
(C) OFFICER'S CERTIFICATES: Additionally, an Officer's
Certificate shall be delivered to Lessor quarterly, together with such
quarterly Percentage Rent payment, setting forth the calculation of such rent
payment for such quarter within 20 days after each of the first three
quarters of each Fiscal Year (or part thereof) in the Term. Such quarterly
payments shall be based on the formula set forth on EXHIBIT E.
In addition, on or before March 31 of each year, commencing with
March 31, 1997, Lessee shall deliver to Lessor an Officer's Certificate
reasonably acceptable to Lessor setting forth the computation of the actual
Percentage Rent that accrued for each quarter of the Fiscal Year that ended
on the immediately preceding December 31 and shall pay Percentage Rent to
Lessor, if due and payable, for the last quarter of the applicable Fiscal
Year. Additionally, if the annual Percentage Rent due and payable for any
Fiscal Year (as shown in the applicable Officer's Certificate) exceeds the
amount actually paid as Percentage Rent by Lessee for such year, Lessee also
shall pay such excess to Lessor at the time such certificate is delivered. If
the Percentage Rent actually due and payable for such Fiscal Year is shown by
such certificate to be less than the amount actually paid as Percentage Rent
for the applicable Fiscal Year, Lessor shall reimburse such amount to Lessee.
The obligation to pay Percentage Rent shall survive the expiration
or earlier termination of the Term, and a final reconciliation, taking into
account, among other relevant adjustments, any adjustments which are accrued
after such expiration or termination date but which related to Percentage
Rent accrued prior to such termination date, and Lessee's good faith best
estimate of the amount of any unresolved contractual allowances, shall be
made not later than two years after such expiration or termination date, but
Lessee shall advise Lessor within 60 days after such expiration or
termination date of Lessee's best estimate at that time of the approximate
amount of such adjustments, which estimate shall not be binding on Lessee or
have any legal effect whatsoever.
3.2 CONFIRMATION OF PERCENTAGE RENT. Lessee shall utilize, or
cause to be utilized, an accounting system for the Leased Property in
accordance with its usual and customary practices, and in accordance with
generally accepted accounting principles and the Uniform System, that will
accurately record all data necessary to compute Percentage Rent, and Lessee
shall retain, for at least four years after the expiration of each Fiscal
Year (and in any event until the reconciliation described in Section 3.1(c)
for such Fiscal Year has been made), reasonably adequate records conforming
to such accounting system showing all data necessary to compute Percentage
Rent for the applicable Fiscal Years. Lessor, at its expense (except as
provided hereinbelow), shall have the right from time to time by its
accountants or representatives to audit the information that formed the basis
for the data set forth in any Officer's Certificate provided under Section
3.1(c) and, in connection with such
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audits, to examine all Lessee's records (including supporting data and sales
and excise tax returns) reasonably required to verify Percentage Rent,
subject to any prohibitions or limitations on disclosure of any such data
under Legal Requirements. If any such audit discloses a deficiency in the
payment of Percentage Rent, and either Lessee agrees with the result of such
audit or the matter is otherwise determined or compromised, Lessee shall
forthwith pay to Lessor the amount of the deficiency, as finally agreed or
determined. If any such audit discloses that the Percentage Rent actually
due from Lessee for any Fiscal Year exceed those reported by Lessee by more
than 10%, Lessee shall pay the cost of such audit and examination. Any
proprietary information obtained by Lessor pursuant to the provisions of this
Section shall be treated as confidential, except that such information may be
used, subject to appropriate confidentiality safeguards, in any litigation
between the parties and except further that Lessor may disclose such
information to prospective lenders for the Leased Property. The obligations
of Lessee contained in this Section shall survive the expiration or earlier
termination of this Lease.
3.3 ANNUAL BUDGET. The Lessee shall submit the Annual Budget for
1996 to the Lessor for Lessor's approval by December 31, 1995. For all
Fiscal Years thereafter, not later than sixty (60) days prior to the
commencement of each Fiscal Year, Lessee shall submit the Annual Budget to
Lessor for Lessor's approval. The Annual Budget for 1996 shall contain the
following:
(a) Lessee's reasonable estimate of Gross Revenues
(including room rates), Gross Operating Expenses, and Gross Operating Profits
for the forthcoming Fiscal Year itemized on schedules prepared by Lessee, as
same may be revised or replaced from time to time by Lessee and approved by
Lessor, together with the assumptions, in narrative form, forming the basis
of such schedules.
(b) The Capital Expenditure Budget described in Section 40
hereof.
(c) A cash flow projection.
(d) A narrative description of the program for advertising
and marketing the Leased Property for the forthcoming Fiscal Year containing
a detailed budget itemization of the proposed advertising expenditures by
category and the assumptions, in narrative form forming the basis of such
budget itemization.
Notwithstanding the foregoing, if Lessor and Lessee are unable to
agree upon the Annual Budget or any details thereof, the final Annual Budget
shall be determined by arbitration in accordance with the provisions of
SECTION 42 hereof, it being understood that only those details, line items or
portions of the Annual Budget which are in dispute shall be the subject of
such arbitration. Pending the conclusion of any such arbitration proceeding,
the Annual Budget for all purposes under this Lease shall be the Annual
Budget for the prior Fiscal Year, modified by increasing the Lease expenses
by a factor of ten percent (10%). Lessor and Lessee agree that arbitration
shall be the sole procedure for resolving any dispute regarding the Annual
Budget. Lessee shall diligently pursue all feasible measures to enable the
Leased Property to adhere to the Annual Budget, provided, however,
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Lessor acknowledges and agrees that Lessee will not be responsible for any
variances from the Annual Budget.
3.4 BOOKS AND RECORDS. Lessee shall keep full and adequate
books of account and other records reflecting the results of operation of the
Leased Property on an accrual basis, all in accordance with the Uniform
System and generally accepted accounting principles and the obligations of
Lessee under this Lease Agreement. The books of account and all other
records relating to or reflecting the operation of the Leased Property shall
be kept either at the Leased Property or at Lessee's offices in Orlando,
Florida and/or Pittsburgh, Pennsylvania and shall be available to Lessor and
its representatives and its auditors or accountants, at all reasonable times
for examination, audit, inspection, and transcription. All of such books and
records pertaining to the Leased Property including, without limitation,
books of account, guest records and front office records, at all times shall
be the property of Lessor and shall not be removed from the Leased Property
or Lessor's offices by Lessee without Lessor's Approval. For at least seven
(7) years after the termination of this Lease upon the prior written approval
of Lessor which shall not be unreasonably withheld or delayed, the Lessor
shall provide to Lessee access to all such books and records during
reasonable business hours and upon reasonable notice.
3.5 ADDITIONAL CHARGES. In addition to the Base Rent and
Percentage Rent, (a) Lessee also will pay and discharge as and when due and
payable all other amounts, liabilities, obligations and Impositions that
Lessee agrees to pay under this Lease, and (b) in the event of any failure on
the part of Lessee to pay any of those items referred to in clause (a) of
this Section 3.5, Lessee also will promptly pay and discharge every fine,
penalty, interest and cost that may be added for non-payment or late payment
of such items (the items referred to in clauses (a) and (b) of this Section
3.5 being additional rent hereunder and being referred to herein collectively
as the "Additional Charges"), and Lessor shall have all legal, equitable and
contractual rights, powers and remedies provided either in this Lease or by
statute or otherwise in the case of non-payment of the Additional Charges as
in the case of non-payment of the Base Rent and Percentage Rent. Subject to
the other terms and conditions of this Lease, if any installment of Base
Rent, Percentage Rent or Additional Charges (but only as to those Additional
Charges that are payable directly to Lessor) shall not be paid on its due
date, Lessee will pay Lessor on demand, as Additional Charges, a late charge
(to the extent permitted by law) computed at the Overdue Rate on the amount
of such installment, from the due date of such installment to the date of
payment thereof. To the extent that Lessee pays any Additional Charges to
Lessor pursuant to any requirement of this Lease, Lessee shall be relieved of
its obligation to pay such Additional Charges to the entity to which they
would otherwise be due and Lessor shall pay same from monies received from
Lessee.
3.6 NET LEASE PROVISION. Subject to the other provisions
contained within this Lease and the Lessee's express rights to abatement of
Rent, the Rent shall be paid absolutely net to Lessor, so that this Lease
shall yield to Lessor the full amount of the installments of Rent throughout
the Term, all as more fully set forth in Section 5, but subject to any other
provisions of this Lease that expressly provide for adjustment or abatement
of Rent or other charges or expressly provide that certain expenses or
maintenance shall be paid or performed by Lessor.
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SECTION 4
4.1 PAYMENT OF IMPOSITIONS. Subject to Section 12 relating to
permitted contests, Lessee will pay, or cause to be paid, all Impositions
(excluding Real Estate Taxes and personal property taxes imposed upon the
Leased Property and all of the Lessor's other property) before any fine,
penalty, interest or cost may be added for non-payment, such payments to be
made directly to the taxing or other authorities where feasible, and will
promptly furnish to Lessor copies of official receipts or other satisfactory
proof evidencing such payments. Lessee's obligation to pay such Impositions
shall be deemed absolutely fixed upon the date such Impositions become a lien
upon the Leased Property or any part thereof. If any such Imposition may, at
the option of the taxpayer, lawfully be paid in installments (whether or not
interest shall accrue on the unpaid balance of such Imposition), Lessee may
exercise the option to pay the same (and any accrued interest on the unpaid
balance of such Imposition) in installments and in such event, shall pay such
installments during the Term hereof (subject to Lessee's right of contest
pursuant to the provisions of Section 12) as the same respectively become due
and before any fine, penalty, premium, further interest or cost may be added
thereto. Lessor, at its expense, shall, to the extent required or permitted
by applicable law, prepare and file all tax returns in respect of Lessor's
net income, gross receipts, sales and use, single business, transaction
privilege, rent, ad valorem, franchise taxes, Real Estate Taxes and taxes on
its capital stock, and Lessee, at its expense, shall, to the extent required
or permitted by applicable laws and regulations, prepare and file all other
tax returns and reports in respect of any Imposition as may be required by
governmental authorities and pay all amounts due pursuant to such filings and
reports. If any refund shall be due from any taxing authority in respect of
any Imposition paid by Lessee, the same shall be paid over to or retained by
Lessee if no Event of Default shall have occurred hereunder and be
continuing. If an Event of Default shall have occurred and be continuing, any
such refund shall be paid over to or retained by Lessor. Any such funds
retained by Lessor due to an Event of Default shall be applied as provided in
Section 16. Lessor and Lessee shall, upon request of the other, provide such
data as is maintained by the party to whom the request is made with respect
to the Leased Property as may be necessary to prepare any required returns
and reports. Lessor shall file all personal property tax returns, including
tax payments, in such jurisdictions where it is legally required to so file.
Lessor will maintain and prepare all cost and depreciation records necessary
for filing returns for any property so classified as personal property.
Where Lessor is legally required to file personal property tax returns,
Lessor shall provide Lessee with copies of assessment notices in sufficient
time for Lessee to file a protest.
4.2 NOTICE OF IMPOSITIONS. Lessor shall give prompt Notice to
Lessee of all Impositions payable by Lessee hereunder of which Lessor at any
time has knowledge, provided that Lessor's failure to give any such Notice
shall in no way diminish Lessee's obligations hereunder to pay such
Impositions, but such failure shall obviate any default hereunder for a
reasonable time after Lessee receives Notice of any Imposition which it is
obligated to pay during the first taxing period applicable thereto.
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4.3 ADJUSTMENT OF IMPOSITIONS. Impositions imposed in respect
of the tax-fiscal period during which the Term terminates shall be adjusted
and prorated between Lessor and Lessee, whether or not such Imposition is
imposed before or after such termination, and Lessee's obligation to pay its
prorated share thereof after termination shall survive such termination.
4.4 UTILITY CHARGES. After the Commencement Date, Lessee will
be solely responsible for maintaining utility services to the Leased Property
and will pay or cause to be paid all charges for electricity, gas, oil,
water, sewer and other utilities used in the Leased Property after the
Commencement Date and during the Term; provided, however, Lessor shall
provide to Lessee any and all amounts necessary as security deposits to
obtain such utility service.
4.5 INSURANCE PREMIUMS. Lessee will pay or cause to be paid all
premiums for the insurance coverages required to be maintained by it under
Section 13.
4.6 FRANCHISE FEES. Lessee will pay or cause to be paid all
franchise fees due and owing in accordance with the terms and conditions of
the Franchise Agreement.
SECTION 5.
5.1 NO TERMINATION, ABATEMENT, ETC. Except as otherwise
specifically provided in this Lease, and except for loss of the Franchise
Agreement solely by reason of any action or inaction by Lessor, Lessee, to
the extent permitted by law, shall remain bound by this Lease in accordance
with its terms and shall neither take any action without the written consent
of Lessor to modify, surrender or terminate the same, nor seek nor be
entitled to any abatement, deduction, deferment or reduction of the Rent, or
set off against the Rent.
5.2 ABATEMENT PROCEDURES. In the event of a Partial Taking as
described in Section 15.5 and/or a Temporary Taking as described in Section
15.6, the Lease shall not terminate, but the Base Rent shall be abated in the
manner and to the extent that is fair, just and equitable to both Lessee and
Lessor, taking into consideration, among other relevant factors, the number
of usable rooms, the amount of square footage, or the revenues affected by
such Partial Taking and/or a Temporary Taking and the allocation to the
parties of any Award. If Lessor and Lessee are unable to agree upon the
amount of such abatement within 30 days after such Partial Taking and/or
Temporary Taking, the matter may be submitted by either party to arbitration
in accordance with the provisions of Section 42 hereof for resolution.
SECTION 6
6.1 OWNERSHIP OF THE LEASED PROPERTY. Lessee acknowledges that
the Leased Property is the property of Lessor and that Lessee has only the
right to the possession and use of the Leased Property upon the terms and
conditions of this Lease.
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6.2 LESSEE'S PERSONAL PROPERTY. Lessee will acquire and
maintain throughout the Term such Inventory as is required to operate the
Leased Property in the manner contemplated by this Lease. Lessee may (and
shall as provided hereinbelow), at its expense, install, affix or assemble or
place on any parcels of the Land or in any of the Leased Improvements, any
items of personal property (including Inventory) owned by Lessee. Lessee, at
the commencement of the Term, and from time to time thereafter, shall provide
Lessor with an accurate list of all such items of Lessee's personal property
(collectively, the "Lessee's Personal Property"). Lessee may, subject to the
first sentence of this Section 6.2 and the conditions set forth below, remove
any of Lessee's Personal Property set forth on such list at any time during
the Term or upon the expiration or any prior termination of the Term. All of
Lessee's Personal Property, other than Inventory, not removed by Lessee
within sixty (60) days following the expiration or earlier termination of
the Term shall be considered abandoned by Lessee and may be appropriated,
sold, destroyed or otherwise disposed of by Lessor without first giving
Notice thereof to Lessee, without any payment to Lessee and without any
obligation to account therefor. Lessee will, at its expense, restore the
Leased Property to the condition required by Section 9.1.3, including repair
of all damage to the Property caused by the removal of Lessee's Personal
Property, whether effected by Lessee or Lessor. Notwithstanding the
foregoing, upon the expiration or earlier termination of the Term, Lessee
shall sell and Lessor, or its designee, shall purchase all Inventory on hand
at the Leased Property at the time of such expiration or termination for a
sale price equal to the fair market value of such Inventory, as evidenced by
invoices, receipts, or other reasonable documentation. Lessee may make such
financing arrangements, title retention agreements, leases or other
agreements with respect to the Lessee's Personal Property as it sees fit
provided that Lessee first advises Lessor of any such arrangement and such
arrangement expressly provides that in the event of Lessee's default
thereunder, Lessor (or its designee) may assume Lessee's obligations and
rights under such arrangement.
6.3 LESSOR'S REPRESENTATIONS. Lessor represents and warrants
that (a) Lessor has good, clear and marketable title to the Leased Property,
(b) Lessor has full authority to grant to the Lessee the leasehold interest
described in this Lease, (c) the Leased Property is free from any material
defects and (d) the Leased Property is zoned, and all governmental approvals
have been obtained, for the current uses of the Leased Property as a hotel.
In addition, Lessor agrees to deliver to Lessee a current title report on the
Leased Property verifying the accuracy of the representations contained in
this Section 6.3.
6.4 BALANCE SHEET ON COMMENCEMENT AND TERMINATION OF LEASE.
Upon the Commencement Date, the Lessor shall deliver possession of the Leased
Property along with levels of cash on hand of not less than $___________,
inventory at levels no less than those set forth on EXHIBIT J attached hereto
and made a part hereof, amounts sufficient to satisfy all outstanding
vacation liabilities, working capital, capital funds, sufficient equipment
and other assets satisfactory to the Lessee as of the Commencement Date for
the Leased Property. The Lessor shall deliver to the Lessee a balance sheet
and financial statements for the Leased Property balanced to the satisfaction
of the Lessee as of such Commencement Date. The Lessor shall certify that
all such financial statements are prepared in accordance with the Uniform
System and Generally Accepted
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Accounting Principles and completely and accurately reflect the financial
position of the Leased Property in all material respects. Lessor agrees to
indemnify, defend and hold harmless Lessee for any and all claims,
liabilities, damages, actions, costs and expenses (including attorneys fees)
arising prior to the Commencement Date regardless of whether such claims,
liabilities, damages, actions, costs and expenses are disclosed in the
financial statements delivered by Lessor to Lessee. In addition, Lessor
shall terminate or satisfy all obligations under all equipment and space
leases and satisfy all outstanding payables at the Leased Property as of the
Commencement Date. Upon the termination of the Lease, the Lessee shall
assign to the Lessor all assets and liabilities (including but not limited to
all liabilities pursuant to service contracts and leases but excluding the
funds in the Capital Expenditure Reserve Account which shall be split 50-50
between the Lessor and the Lessee) and Lessor shall execute instruments,
reasonably requested by Lessee, evidencing such assumption of liabilities by
the Lessor.
Section 6.5 Lessee represents and warrants that (a) Lessee is a
validly existing limited liability company organized under the laws of the
State of Delaware and is qualified to do business in all states in which it
is required to so qualify due to the nature of its business activities and
(b) Lessee has the requisite power and authority to enter into this Lease.
Section 6.6 LESSOR'S LIEN. Lessor is granted a lien and
security interest on all Lessee's Personal Property now or hereinafter placed
in or upon the Leased Property, and such lien and security interest shall
remain attached to such lessee's Personal Property until payment in full of
all Rent and satisfaction of all of Lessee's obligations hereunder; provided,
however, Lessor shall subordinate its lien and security interest to that of
any non-Affiliate of Lessee which finances such Lessee's Personal Property or
any non-affiliate conditional seller of such Lessee's Personal Property, the
terms and conditions of such subordination to be satisfactory to lessor in
the exercise of reasonable discretion. Lessee shall, upon the request of
Lessor, execute such financing statements or other documents or instruments
reasonably requested by Lessor to perfect the lien and security interest
herein granted.
SECTION 7.
7.1 CONDITION OF THE LEASED PROPERTY. Lessee acknowledges
receipt and delivery of possession of the Leased Property. Lessee has
examined and otherwise has knowledge of the condition of the Leased Property
and has found the same to be satisfactory for its purposes hereunder. In
addition, to the extent permitted by law, Lessor hereby grants to Lessee the
right to proceed against any Predecessor in title for breaches of warranties
or representations or for latent defects in the Leased Property. Lessor
shall fully cooperate with Lessee in the prosecution of any such claim, in
Lessor's or Lessee's name. Without limiting the Lessor's representations and
warranties contained in this Lease or in the Master Agreement, the Lessor
reiterates its disclaimer of warranty contained in Section 1.1.6 hereof.
7.2 USE OF THE LEASED PROPERTY.
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7.2.1 Lessee covenants that it will proceed with all due
diligence and will exercise its diligent efforts to maintain all approvals
needed to use and operate the Leased Property and the Facility under
applicable local, state and federal law.
7.2.2 Lessee shall use or cause to be used the Leased
Property only as a hotel facility, and for such other uses as may be
necessary or incidental to such use or such other use as otherwise approved
by Lessor (the "Primary Intended Use"). Lessee shall not use the Leased
Property or any portion thereof for any other use without the prior written
consent of Lessor which consent may be granted, denied or conditioned in
Lessor's sole discretion. No use shall be made or permitted to be made and
no act shall be done or permitted to be done of, or on, the Leased Property,
which will cause the cancellation or increase the premium of any insurance
policy covering the Leased Property or any part thereof (unless another
adequate policy satisfactory to Lessor is available and Lessee pays any
premium increase), nor shall Lessee sell or permit to be kept, used or sold
in or about the Leased Property any article which may be prohibited by law or
fire underwriter's regulations. Lessee shall, at its sole cost, comply with
all of the requirements pertaining to the Leased Property of any insurance
board, association, organization or company necessary for the maintenance of
insurance, as herein provided, covering the Leased Property and Lessee's
Personal Property.
7.2.3 Subject to the provisions of Sections 14, 15, 21
and 22, Lessee covenants and agrees that during the Term it will (1) operate
continuously the Leased Property as a hotel facility, (2) keep in full force
and effect and comply with all the provisions of Franchise Agreements, if any
(3) not terminate or amend Franchise Agreements, if any, without the prior
written consent of Lessor which shall not be unreasonably withheld or
delayed, and (4) maintain appropriate certifications and licenses for such
use.
7.2.4 Lessee shall not commit or suffer to be committed
any waste on the Leased Property, or in the Facility, nor shall Lessee cause
or permit any nuisance thereon.
7.2.5 Lessee shall neither suffer nor permit the Leased
Property or any portion thereof, to be used in such a manner as (1) might
reasonably tend to impair Lessor's title thereto or to any portion thereof,
or (2) may reasonably make possible a claim or claims of adverse usage or
adverse possession by the public, as such, or of implied dedication of the
Leased Property or any portion thereof, except as necessary in the ordinary
and prudent operation of the Facility on the Leased Property.
7.2.6 Except as may be agreed upon in writing in advance
by the parties, neither the Lessor nor any of its Affiliates shall own, or
have any interest in, any hotel or motel property that is within a five mile
radius of the Leased Property. In addition, neither the Lessor nor any of
its Affiliates shall operate or manage any hotel or motel property that is
within a five mile radius of any hotel or motel property in which Lessee or
an Affiliate of Lessee has an interest on the date Lessor would otherwise
commence owning, possessing an interest in, operating or managing such
property. Other than hotels or motels owned, managed, operated or in which
Lessee has an interest as of the
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Commencement Date, the Lessee agrees that it shall not manage, operate or own
any interest in any hotel or motel property that is within a five (5) mile
radius of the Leased Property.
7.3 LESSOR TO GRANT EASEMENTS Lessor will, from time to time,
so long as no Event of Default has occurred and is continuing, at the request
of Lessee and at Lessee's cost and expense (but subject to the approval of
Lessor, which approval shall not be unreasonably withheld or delayed), (a)
grant easements and other rights in the nature of easements with respect to
the Leased Property to third parties, (b) release existing easements or other
rights in the nature of easements which are for the benefit of the Leased
Property, (c) dedicate or transfer unimproved portions of the Leased Property
for road, highway or other public purposes, (d) execute petitions to have the
Leased Property annexed to any municipal corporation or utility district, (e)
execute amendments to any covenants and restrictions affecting the Leased
Property, and (f) execute and deliver to any person any instrument
appropriate to confirm or effect such grants, releases, dedications,
transfers, petitions and amendments (to the extent of its interest in the
Leased Property), but only upon delivery to Lessor of an Officer's
Certificate stating that such grant, release, dedication, transfer, petition
or amendment is not detrimental to the proper conduct of the business of
Lessee on the Leased Property and does not materially reduce the value of the
Leased Property.
SECTION 8.
8.1 COMPLIANCE WITH LEGAL AND INSURANCE REQUIREMENTS, ETC.
Subject to 8.3 2 below and Section 12 relating to permitted contests, Lessee,
at its expense, will promptly (a) materially comply with all applicable Legal
Requirements and Insurance Requirements in respect of the use, operation,
maintenance, repair and restoration of the Leased Property, and (b) procure,
maintain and comply with all appropriate licenses and other authorizations
required for any use of the Leased Property and Lessee's Personal Property
then being made, and for the proper erection, installation, operation and
maintenance of the Leased Property or any part thereof.
8.2 LEGAL REQUIREMENT COVENANTS. Subject to Section 8.3.2
below, Lessee covenants and agrees that the Leased Property and Lessee's
Personal Property shall not be used for any unlawful purpose, and that Lessee
shall not permit or suffer to exist any unlawful use of the Leased Property
by others. Lessee shall acquire and maintain all appropriate licenses,
certifications, permits and other authorizations and approvals required to
operate the Leased Property in its customary manner for the Primary Intended
Use, and any other lawful use conducted on the Leased Property as may be
permitted from time to time hereunder. Lessee further covenants and agrees
that Lessee's use of the Leased Property and maintenance, alteration, and
operation of the same, and all parts thereof, shall at all times conform to
all Legal Requirements, unless the same are finally determined by a court of
competent jurisdiction to be unlawful (and Lessee shall cause all such
sub-tenants, invitees or others so to comply with all Legal Requirements).
Lessee may, however, upon prior Notice to Lessor, contest the legality or
applicability of any such Legal Requirement or any licensure or certification
decision if Lessee maintains such action in good faith, with due diligence,
without prejudice to Lessor's rights hereunder, and at Lessee's sole expense.
If by the terms of any such Legal Requirement compliance therewith pending
the prosecution of any such Proceeding may
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legally be delayed without the incurrence of any lien, charge or liability of
any kind against the Facility or Lessee's leasehold interest therein and
without subjecting Lessee or Lessor to any liability, civil or criminal, for
failure so to comply therewith, Lessee may delay compliance therewith until
the final determination of such Proceeding. If any lien, charge or civil or
criminal liability would be incurred by reason of any such delay, Lessee, on
the prior written consent of Lessor, which consent shall not be unreasonably
withheld, may nonetheless contest as aforesaid and delay as aforesaid
provided that such delay would not subject Lessor to criminal liability and
Lessee both (a) furnishes to Lessor security reasonably satisfactory to
Lessor against any loss or injury by reason of such contest or delay, and (b)
prosecutes the contest with due diligence and in good faith.
8.3 ENVIRONMENTAL COVENANTS. Lessor and Lessee (in addition to,
and not in diminution of, Lessee's covenants and undertakings in Sections 8.1
and 8.2 hereof) covenant and agree as follows:
8.3.1 At all times hereafter until such time as all
liabilities, duties or obligations of Lessee to the Lessor under the Lease
have been satisfied in full, Lessee shall fully comply with all Environmental
Laws applicable to the Leased Property and the operations thereon. Lessee
agrees to give Lessor prompt written notice of (1) all Environmental
Liabilities; (2) all pending, threatened or anticipated Proceedings, and all
notices, demands, requests or investigations, relating to any Environmental
Liability or relating to the issuance, revocation or change in any
Environmental Authorization required for operation of the Leased Property;
(3) all Releases at, on, in, under or in any way affecting the Leased
Property, or any Release known by Lessee at, on, in or under any property
adjacent to the Leased Property; and (4) all facts, events or conditions that
could reasonably lead to the occurrence of any of the above-referenced
matters.
8.3.2 Lessor hereby agrees to defend, indemnify and hold
harmless any and all Lessee Indemnified Parties from and against any and all
Environmental Liabilities other than Environmental Liabilities which were
caused by the grossly negligent acts or grossly negligent failures to act of
Lessee. As a condition precedent to the effectiveness of this Lease, the
Lessor shall deliver to the Lessee Phase I environmental studies regarding
the Leased Property performed by an engineering firm acceptable to Lessee and
stating that the Leased Property is in compliance with all applicable
Environmental Laws to the satisfaction of Lessee.
8.3.3 Lessee hereby agrees to defend, indemnify and hold
harmless any and all Lessor Indemnified Parties from and against any and all
Environmental Liabilities caused by the acts or grossly negligent failures to
act of Lessee.
8.3.4 If any Proceeding is brought against any
Indemnified Party in respect of an Environmental Liability with respect to
which such Indemnified Party may claim indemnification under either Section
8.3.2 or 8.3.3, the Indemnifying Party, upon request, shall at its sole
expense resist and defend such Proceeding, or cause the same to be resisted
and defended by counsel designated by the Indemnified Party and approved by
the Indemnifying Party, which approval shall not be unreasonably withheld;
provided, however, that such approval shall not be required in the case
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of defense by counsel designated by any insurance company undertaking such
defense pursuant to any applicable policy of insurance. Each Indemnified
Party shall have the right to employ separate counsel in any such Proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel will be at the sole expense of such Indemnified Party unless such
counsel has been approved by the Indemnifying Party, which approval shall not
be unreasonably withheld. The Indemnifying Party shall not be liable for any
settlement of any such Proceeding made without its consent, which shall not
be unreasonably withheld, but if settled with the consent of the Indemnifying
Party, or if settled without its consent if its consent shall be unreasonably
withheld, or if there be a final, nonappealable judgment for an adversary
party in any such Proceeding, the Indemnifying Party shall indemnify and hold
harmless the Indemnified Parties from and against any liabilities incurred by
such Indemnified Parties by reason of such settlement or judgment.
8.3.5 At any time any Indemnified Party has reason to
believe circumstances exist which could reasonably result in an Environmental
Liability, upon reasonable prior written notice to Lessee stating such
Indemnified Party's basis for such belief, an Indemnified Party shall be
given immediate access to the Leased Property (including, but not limited to,
the right to enter upon, investigate, drill wells, take soil borings,
excavate, monitor, test, cap and use available land for the testing of
remedial technologies), Lessee's employees, and to all relevant documents and
records regarding the matter as to which a responsibility, liability or
obligation is asserted or which is the subject of any Proceeding; provided
that such access may be conditioned or restricted as may be reasonably
necessary to ensure compliance with law and the safety of personnel and
facilities or to protect confidential or privileged information. All
Indemnified Parties requesting such immediate access and cooperation shall
endeavor to coordinate such efforts to result in as minimal interruption of
the operation of the Leased Property as practicable.
8.3.6 The indemnification rights and obligations provided
for in this Section 8 shall be in addition to any indemnification rights and
obligations provided for elsewhere in this Lease.
8.3.7 The indemnification rights and obligations provided
for in this Section 8 shall survive the termination of this Agreement.
For purposes of this Section 8.3, all amounts for which any
Indemnified Party seeks indemnification shall be computed net of (a) any
actual income tax benefit resulting therefrom to such Indemnified Party, (b)
any insurance proceeds received (net of tax effects) with respect thereto,
and (c) any amounts recovered (net of tax effects) from any third parties
based on claims the Indemnified Party has against such third parties which
reduce the damages that would otherwise be sustained; provided that in all
cases, the timing of the receipt or realization of insurance proceeds or
income tax benefits or recoveries from third parties shall be taken into
account in determining the amount of reduction of damages. Each Indemnified
Party agrees to use its reasonable efforts to pursue, or assign to Lessee or
Lessor, as the case may be, any claims or rights it may have against any
third party which would materially reduce the amount of damages otherwise
incurred by such Indemnified Party.
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Notwithstanding anything to the contrary contained in this
Agreement, if Lessor shall become entitled to the possession of the Leased
Property by virtue of the termination of the Lease or repossession of the
Leased Property, then Lessor may assign its indemnification rights under
Section 8.3 of this Agreement (but not any other rights hereunder) to any
Person to whom the Lessor subsequently transfers the Leased Property, subject
to the following conditions and limitations, each of which shall be deemed to
be incorporated into the terms of such assignment, whether or not
specifically referred to therein:
(1) The indemnification rights referred to in this Section
may be assigned only if a known Environmental Liability then exists or if a
Proceeding is then pending or, to the knowledge of Lessee or Lessor, then
threatened with respect to the Leased Property;
(2) Such indemnification rights shall be limited to
Environmental Liabilities relating to or specifically affecting the Leased
Property; and
(3) Any assignment of such indemnification rights shall be
limited to the immediate transferee of Lessor, and shall not extend to any
such transferee's successors or assigns.
SECTION 9.
9.1 MAINTENANCE AND REPAIR.
9.1.1 Lessee will keep the Leased Property and all
private roadways, sidewalks and curbs appurtenant thereto that are under
Lessee's control, including windows and plate glass, parking lots,
mechanical, electrical and plumbing systems and equipment (including conduit
and ductware), and non-load bearing interior walls, in good order and repair,
except for ordinary wear and tear, and, except as otherwise provided in
Section 9.1.2, Section 14, Section 15 or Section 40, with reasonable
promptness, make all necessary and appropriate repairs, replacements, and
improvements thereto of every kind and nature, whether interior or exterior,
ordinary or extraordinary, foreseen or unforeseen or arising by reason of a
condition existing prior to the commencement of the Term of this Lease
(concealed or otherwise), or required by any governmental agency having
jurisdiction over the Leased Property, except as to the structural elements
of the Leased Improvements. Lessee, however, shall be permitted to prosecute
claims against Lessor's Predecessor(s) in title for breach of any
representation or warranty or for any latent defects in the Leased Property
to be maintained by Lessee unless Lessor is already diligently pursuing such
a claim. All repairs shall, to the extent reasonably achievable, be at least
equivalent in quality to the original work. Lessee will not take or omit to
take any action, the taking or omission of which might materially impair the
value or the usefulness of the Leased Property or any part thereof for its
Primary Intended Use.
9.1.2 In addition, Lessor shall be required to bear the
cost of maintaining any underground utilities and the structural elements of
the Leased Improvements, including the roof of the Facility unless caused by
the negligent acts or willful misconduct of Lessee.
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9.1.3 Nothing contained in this Lease and no action or
inaction by Lessor shall be construed as (1) constituting the request of
Lessor, expressed or implied, to any contractor, subcontractor, laborer,
materialman or vendor to or for the performance of any labor or services or
the furnishing of any materials or other property for the construction,
alteration, addition, repair or demolition of or to the Leased Property or
any part thereof, or (2) giving Lessee any right, power or permission to
contract for or permit the performance of any labor or services or the
furnishing of any materials or other property in such fashion as would permit
the making of any claim against Lessor in respect thereof or to make any
agreement that may create, or in any way be the basis for any right, title,
interest, lien, claim or other encumbrance upon the estate of Lessor in the
Leased Property, or any portion thereof.
9.1.4 Lessee will, upon the expiration or prior
termination of the Term, vacate and surrender the Leased Property to Lessor
in the substantially same condition in which the Leased Property was
originally received from Lessor, except as repaired, rebuilt, restored,
altered or added to as permitted or required by the provisions of this Lease
and except for ordinary wear and tear (subject to the obligation of Lessee
under Section 9.1.1 hereof to maintain the Leased Property in good order and
repair, as would a prudent owner, during the entire Term of the Lease), or
damage by casualty or Condemnation (subject to the obligations of Lessee to
restore or repair as set forth in the Lease.)
9.2 ENCROACHMENTS, RESTRICTIONS, ETC. If any of the Leased
Improvements, at any time, materially encroach upon any property, street or
right-of-way adjacent to the Leased Property, or violate the agreements or
conditions contained in any lawful restrictive covenant or other agreement
affecting the Leased Property, or any part thereof, or impair the rights of
others under any easement or right-of-way to which the Leased Property is
subject, then promptly upon the request of Lessor or at the behest of any
person affected by any such encroachment, violation or impairment, provided
that Lessee was not responsible for such encroachment violations or
impairments then Lessor shall, at its expense, subject to its right to
contest the existence of any encroachment, violation or impairment and in
such case, in the event of an adverse final determination, either (a) obtain
valid and effective waivers or settlements of all claims, liabilities and
damages resulting from each such encroachment, violation, or impairment,
whether the same shall affect Lessor or Lessee, or (b) make such changes in
the Leased Improvements, and take such other actions as Lessee in the good
faith exercise of its judgment deems reasonably practicable to remove such
encroachment, and to end such violation or impairment, including, if
necessary, the alteration, of any of the Leased Improvements, and in any
event take all such actions as may be necessary in order to be able to
continue the operation of the Leased Improvements for the Primary Intended
Use substantially in the manner and to the extent the Leased Improvements
were operated prior to the assertion of such violation, impairment or
encroachment. Any such alteration shall be made in conformity with the
applicable requirements of Section 10. Lessee's obligations under this
Section 9.2 shall be in addition to and shall in no way discharge or diminish
any obligation of any insurer under any policy of title or other insurance
held by Lessor. Should Lessee be responsible for said encroachment violation
or impairment then the requirements of (a) and (b) as specified above shall
apply to Lessee, and not Lessor or Lessee.
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SECTION 10.
10.1 ALTERATIONS. Using funds in the Capital Expenditure Reserve
Account or such other funds provided by Lessor pursuant to Section 40 hereof,
Lessee shall have the right to make additions, modifications or improvements
to the Leased Property from time to time as Lessee, in its discretion, may
deem to be desirable for its permitted uses and purposes, provided that such
action will not significantly alter the character or purposes or
significantly detract from the value or operating efficiency thereof and will
not significantly impair the revenue-producing capability of the Leased
Property or adversely affect the ability of the Lessee to comply with the
provisions of this Lease. Lessee agrees not to make any material alterations
to the Leased Property without the prior written consent of the Lessor, which
consent shall not be unreasonably withheld or delayed.
10.2 SALVAGE. All materials which are scrapped or removed in
connection with the making of repairs required by Section 9 or 10 shall be or
become the property of Lessor.
10.3 JOINT USE AGREEMENTS. If Lessee constructs additional
improvements that are connected to the Leased Property or share maintenance
facilities, HVAC, electrical, plumbing or other systems, utilities, parking
or other amenities, the parties shall enter into a mutually agreeable
cross-easement or joint use agreement to make available necessary services
and facilities in connection with such additional improvements, to protect
each of their respective interests in the properties affected, and to provide
for separate ownership, use, and/or financing of such improvements.
SECTION 11.
11.1 LIENS. Subject to the provision of Section 12 relating to
permitted contests, Lessee will not directly or indirectly create or allow to
remain and will promptly discharge at its expense any lien, encumbrance,
attachment, title retention agreement or claim upon the Leased Property or
any attachment, levy, claim or encumbrance in respect of the Rent, not
including, however, (a) this Lease, (b) the matters, if any, included as
exceptions in the title policy insuring Lessor's interest in the Leased
Property, (c) restrictions, liens and other encumbrances which are consented
to in writing by Lessor or any easements granted pursuant to the provisions
of Section 7.3 of this Lease, (d) liens for those taxes upon Lessor which
Lessee is not required to pay hereunder, (e) subleases permitted by Section
24 hereof, (f) liens for Impositions or for sums resulting from noncompliance
with Legal Requirements so long as (1) the same are not yet payable or are
payable without the addition of any fine or penalty, or (2) such liens are in
the process of being contested as permitted by Section 12, (g) liens of
mechanics, laborers, materialmen, suppliers or vendors for sums either
disputed or not yet due provided that (1) the payment of such sums shall not
be postponed under any related contract for more than 60 days after the
completion of the action giving rise to such lien and such reserve or other
appropriate provisions as shall be required by law or generally accepted
accounting principles
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shall have been made therefor, or (2) any such liens are in the process of
being contested as permitted by Section 12 hereof, (h) any liens which are
the responsibility of Lessor pursuant to the provisions of Section 35 of this
Lease and (i) any liens created or allowed, directly or indirectly, by the
actions or inactions of Lessor.
SECTION 12.
12.1 PERMITTED CONTESTS. Lessee shall have the right to contest
the amount or validity of any Imposition to be paid by Lessee or any Legal
Requirement or Insurance Requirement or any lien, attachment, levy,
encumbrance, charge or claim ("Claims") not otherwise permitted by Section
11, by appropriate legal proceedings in good faith and with due diligence
(but this shall not be deemed or construed in any way to relieve, modify or
extend Lessee's covenants to pay or its covenants to cause to be paid any
such charges at the time and in the manner as in this Section provided), on
condition, however, that such legal proceedings shall not operate to relieve
Lessee from its obligations hereunder and shall not cause the sale or risk
the loss of the Leased Property, or any part thereof, or cause Lessor or
Lessee to be in default under any mortgage, deed of trust or security deed
encumbering the Leased Property or any interest therein. Lessor agrees to
join in any such proceedings if the same be required to legally prosecute
such contest of the validity of such Claims; provided, however, that Lessor
shall not thereby be subjected to any liability for the payment of any costs
or expenses in connection with any proceedings brought by Lessee; and Lessee
covenants to indemnify and hold harmless Lessor from any such costs or
expenses. Lessee shall be entitled to any refund of any Claims and such
charges and penalties or interest thereon which have been paid by Lessee or
paid by Lessor and for which Lessor has been fully reimbursed. In the event
that Lessee fails to pay any Claims when due or to provide the security
therefor as provided in this paragraph and to diligently prosecute any
contest of the same, Lessor may, upon ten days advance Notice to Lessee, pay
such charges together with any interest and penalties and the same shall be
repayable by Lessee to Lessor as Additional Charges at the next Payment Date
provided for in this Lease. Provided, however, that should Lessor reasonably
determine that the giving of such Notice would risk loss to the Leased
Property or cause damage to Lessor, then Lessor shall give such Notice as is
practical under the circumstances. Lessor reserves the right to contest any
of the Claims at its expense not pursued by Lessee. Lessor and Lessee agree
to cooperate in coordinating the contest of any claims.
SECTION 13.
13.1 INSURANCE COVERAGE. Lessee shall provide and maintain
insurance sufficient to furnish to Lessor and Lessee reasonable and adequate
protection in the management and operation of the Leased Property. Such
insurance shall provide coverage for fire and extended coverage, worker's
compensation, general liability and business interruption (for such length of
time as would be required with the exercise of due diligence and dispatch to
rebuild, repair or replace such part of the Leased Property as has been
destroyed or damaged), all as more particularly set forth on the attached
EXHIBIT F. All insurance shall be in the name of Lessor and Lessee as the
insureds and shall contain riders and endorsements adequately protecting the
interests of Lessee and Lessor as they may
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appear including, without limitation, provisions for at least twenty (20)
days' notice to Lessee and Lessor of cancellation or of any material change
therein. Prior to the Commencement Date and the commencement of each Fiscal
Year thereafter, Lessee shall furnish Lessor with certificates evidencing the
insurance coverages required pursuant to EXHIBIT F and with evidence of the
payment of premiums therefor.
13.2 WAIVER OF SUBROGATION - LESSOR ASSUMES RISK OF ADEQUACY.
Lessee shall have all policies of insurance provide that the insurance
company will have no right of subrogation against either party hereto, their
agents or employees. Other than insurance coverages required to be provided
by Lessee pursuant to this Lease, Lessor assumes all risks in connection
with the adequacy of any insurance or self-insurance program, and subject to
the provisions of SECTION 23 hereof, waives any claim against Lessee for any
liability, costs or expenses arising out of any uninsured claim, in part or
in full, of any nature whatsoever.
SECTION 14.
14.1 INSURANCE PROCEEDS. Subject to the provisions of Section
14.6, all proceeds payable by reason of any loss or damage to the Leased
Property, or any portion thereof, and insured under any policy of insurance
required by Section 13 of this Lease shall be paid to Lessor and held in
trust by Lessor in an interest-bearing account, shall be made available, if
applicable, for reconstruction or repair, as the case may be, of any damage
to or destruction of the Leased Property, or any portion thereof, and, if
applicable, shall be paid out by Lessor from time to time for the reasonable
costs of such reconstruction or repair upon satisfaction of the reasonable
terms and conditions specified by Lessor. Any excess proceeds of insurance
remaining after the completion of the restoration or reconstruction of the
Leased Property shall be paid to Lessee. If neither Lessor nor Lessee is
required or elects to repair and restore, and the Lease is terminated without
purchase by Lessee as described in Sections 14.2, 14.3, 14.5 and 14.7 hereof,
all such insurance proceeds shall be retained by Lessor. If this Lease
terminates in accordance with this Section 14.1, Lessor shall have no
obligation to pay the Lease Cancellation Fee so long as the Lessee receives
payment of the full amount of outstanding Negative Base Rent out of the
insurance proceeds. All salvage resulting from any risk covered by
insurance shall belong to Lessor.
14.2 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION COVERED
BY INSURANCE.
Except as provided in Section 14.6, if during the Term the
Leased Property is totally or partially destroyed by a risk covered by the
insurance described in Section 13 and the Facility thereby is rendered
Unsuitable for its Primary Intended Use, Lessee shall, at Lessee's option,
either (a) restore the Facility to substantially the same condition as
existed immediately before the damage or destruction and otherwise in
accordance with the terms of the Lease, (b) offer to acquire the Leased
Property from Lessor for a purchase price equal to the Rejectable Offer Price
of the Leased Property, or (c) give Lessor written notice of a termination of
the Lease. If Lessee restores the Facility, the insurance proceeds shall be
paid out by Lessor from time to time for the reasonable costs of such
restoration and any excess proceeds remaining after such restoration shall be
paid to
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Lessee. If Lessee acquires the Leased Property, Lessee shall receive the
insurance proceeds. If Lessor does not accept Lessee's offer so to purchase
the Leased Property within 90 days, Lessee may withdraw its offer to purchase
the Leased Property and, if so withdrawn, Lessee may terminate the Lease with
respect to the Leased Property without further liability hereunder and Lessor
shall be entitled to retain all insurance proceeds. Likewise, if Lessee gives
Lessor written notice of a termination, as set forth in clause (c) above,
then Lessee may terminate the Lease with respect to the Leased Property
without further liability hereunder and Lessor shall be entitled to retain
all insurance proceeds. If this Lease terminates pursuant to this Section
14.2, the Lessee shall pay all Rent due through the date of such termination.
14.3 Except as provided in Section 14.6, if during the Term the
Leased Property is partially destroyed by a risk covered by the insurance
described in Section 13, but the Facility is not thereby rendered Unsuitable
for its Primary Intended Use, Lessee shall, using such insurance proceeds,
restore the Facility to substantially the same condition as existed
immediately before the damage or destruction and otherwise in accordance with
the terms of the Lease. Such damage or destruction shall not terminate this
Lease; provided, however, that if Lessee cannot within a reasonable time
obtain all necessary government approvals, including building permits,
licenses and conditional use permits, after diligent efforts to do so, to
perform all required repair and restoration work and to operate the Facility
for its Primary Intended Use in substantially the same manner as that
existing immediately prior to such damage or destruction and otherwise in
accordance with the terms of the Lease, Lessee may (a) give lessor written
Notice of termination of the Lease or (b) offer to purchase the Leased
Property for a purchase price equal to the Rejectable Offer Price of the
Leased Property determined without regard to such damage or destruction. If
Lessee makes such offer and Lessor does not accept the same, Lessee shall
withdraw such offer to purchase the Leased Property and, if so withdrawn,
Lessee may terminate the Lease with respect to the Leased Property without
further liability hereunder and Lessor shall be entitled to retain all
insurance proceeds. If Lessee restores the Facility, the insurance proceeds
shall be paid out by Lessor from time to time for the reasonable costs of
such restoration, and any excess proceeds remaining after such restoration
shall be paid to Lessee. If this Lease terminates pursuant to this Section
14.3, the Lessee shall pay all Rent due through the date of such termination.
14.4 If Lessor accepts Lessee's offer to purchase the Leased
Property under this Section, this Lease shall terminate as to the Leased
Property upon payment of the purchase price, and Lessor shall remit to Lessee
all insurance proceeds pertaining to the Leased Property being held in trust
by Lessor.
14.5 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION NOT
COVERED BY INSURANCE. Except as provided in Section 14.6, if during the Term
the Facility is totally or materially destroyed by a risk not covered by the
insurance described in Section 13, whether or not such damage or destruction
renders the Facility Unsuitable for its Primary Intended Use, Lessee at its
option shall either (a) using the funds in the Capital Expenditure Reserve
Account or funds provided by Lessor pursuant to Section 40 hereof without any
obligation on the part of Lessor to provide funds in excess of those in the
Capital Expenditure Reserve Account, restore the Facility to
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substantially the same condition it was in immediately before such damage or
destruction and such damage or destruction shall not terminate this Lease, or
(b) offer to purchase the Leased Property for a purchase price equal to the
Rejectable Offer Price of the Leased Property without regard to such damage
or destruction; provided, however, the term and conditions contained in
Section 43 hereof shall supersede this Section 14.5(b) if applicable, or (c)
give Lessor written notice of a termination of the Lease. If such damage or
destruction is not material, Lessee shall restore the Facility to
substantially the same condition as existed immediately before the damage or
destruction and otherwise in accordance with the terms of the Lease using the
FF&E Reserves or funds provided by Lessor pursuant to Section 40 hereof. If
Lessor does not accept Lessee's offer so to purchase the Leased Property
within 90 days, Lessee may withdraw its offer to purchase the Leased Property
and, if so withdrawn, Lessee may terminate the Lease with respect to the
Leased Property without further liability hereunder. Likewise, if Lessee
gives Lessor written notice of a termination, as set forth in clause (c)
above, then Lessee may terminate the Lease with respect to the Leased
Property without further liability hereunder and Lessor shall be entitled to
retain all insurance proceeds. If this Lease terminates pursuant to this
Section 14.5, the Lessee shall pay all Rent due through the date of such
termination.
14.6 LESSEE'S PROPERTY. All insurance proceeds payable by reason
of any loss of or damage to any of Lessee's Personal Property shall be paid
to Lessee; provided, however, no such payments shall diminish or reduce the
insurance payments otherwise payable to or for the benefit of Lessor
hereunder.
14.7 DAMAGE NEAR END OF TERM. Notwithstanding any provisions of
Section 14.2 or 14.3 appearing to the contrary, if damage to or destruction
of the Facility rendering the FacilityUnsuitable for its Primary Intended Use
occurs during the last 24 months of the Term, then Lessee shall have the
right to terminate this Lease by giving written notice to Lessor within 30
days after the date of damage or destruction, whereupon all accrued Rent
shall be paid immediately, and this Lease shall automatically terminate five
days after the date of such notice. In such event, Lessor shall be entitled
to retain all insurance proceeds paid pursuant to such damage excluding
business interruption insurance.
SECTION 15.
15.1 DEFINITIONS.
15.1.1 "Condemnation" means a Taking resulting from (1)
the exercise of any governmental power, whether by legal proceedings or
otherwise, by a Condemnor, and (2) a voluntary sale or transfer by Lessor to
any Condemnor, either under threat of condemnation or while legal proceedings
for condemnation are pending.
15.1.2 "Date of Taking" means the date the Condemnor has
the right to possession of the property being condemned.
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15.1.3 "Award" means all compensation, sums or anything of
value awarded, paid or received on a total, partial or temporary
Condemnation.
15.1.4 "Condemnor" means any public or quasi-public
authority, or private corporation or individual, having the power of
Condemnation.
15.2 PARTIES' RIGHTS AND OBLIGATIONS. If during the Term there
is any Condemnation of all or any part of the Leased Property or any interest
in this Lease, the rights and obligations of Lessor and Lessee shall be
determined by this Section 15.
15.3 TOTAL TAKING. If title to the fee of the whole of the
Leased Property is condemned by any Condemnor, subject to the provisions of
Section 15.7, this Lease shall cease and terminate as of the Date of Taking
by the Condemner. If title to the fee of less than the whole of the Leased
Property is so taken or condemned, which nevertheless renders the Leased
Property Unsuitable or Uneconomic for its Primary Intended Use, Lessee and
Lessor shall each have the option, by Notice to the other, at any time prior
to the Date of Taking, to terminate this Lease as of the Date of Taking. If
this Lease terminates in accordance with this Section 15.3, Lessor shall have
no obligation to pay the Lease Cancellation Fee so long as the Lessee
receives payment of the full amount of outstanding Negative Base Rent out of
the Award. Upon such date, if such Notice has been given, this Lease shall
thereupon cease and terminate. All Base Rent, Percentage Rent and Additional
Charges paid or payable by Lessee hereunder shall be apportioned as of the
Date of Taking, and Lessee shall promptly pay Lessor such amounts. In the
event of any such termination, the provisions of Section 15.7 shall apply.
15.4 ALLOCATION OF AWARD. The total Award made with respect to
the Leased Property or for loss of rent, or for Lessor's loss of business
beyond the Term, shall be solely the property of and payable to Lessor. Any
Award made for loss of business during the remaining Term, if any, for the
taking of Lessee's Personal Property, or for removal and relocation expenses
of Lessee in any such proceedings shall be the sole property of and payable
to Lessee. In any Condemnation proceedings Lessor and Lessee shall each seek
its Award in conformity herewith, at its respective expense; provided,
however, neither party shall initiate, prosecute or acquiesce in any
proceedings that may result in a diminution of any Award payable to the other
party.
15.5 PARTIAL TAKING. If title to less than the whole of the
Leased Property is condemned, and the Leased Property is still suitable for
its Primary Intended Use, and not Uneconomic for its Primary Intended Use,
and if Lessee or Lessor are is entitled but elects not to terminate this
Lease as provided in Section 15.3, Lessee at its cost shall with all
reasonable dispatch restore the untaken portion of any Leased Improvements so
that such Leased Improvements constitute a complete architectural unit of the
same general character and condition (as nearly as may be possible under the
circumstances) as the Leased Improvements existing immediately prior to the
Condemnation. Lessor shall contribute to the cost of restoration that part
of its Award specifically allocated to such restoration, if any, together
with severance and other damages awarded for the taken Leased Improvements;
provided, however, that the amount of such contribution shall not exceed such
cost.
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15.6 TEMPORARY TAKING. If the whole or any part of the Leased
Property or of Lessee's interest under this Lease is condemned by any
Condemner and is rendered Unsuitable for its Primary Intended Use for its
temporary use or occupancy, and Lessee shall either (a) using the Capital
Expenditure Reserve Account or funds provided by Lessor pursuant to Section
40 hereof without any obligation on the part of Lessor to provide funds in
excess of those in the Capital Reserve Account, restore the Facility to
substantially the same condition it was in immediately before such taking and
such taking shall not terminate this Lease, or (b) offer to purchase the
Leased Property for a purchase price equal to the Rejectable Offer Price of
the Leased Property without regard to such taking, or (c) give Lessor written
notice of termination of the Lease. If such taking does not render the
Leased Property Unsuitable for its Primary Intended Use, Lessee shall restore
the Facility to substantially the same condition as existed immediately
preceding the taking and otherwise in accordance with the terms of this Lease
using the FF&E Reserve or funds provided by Lessor pursuant to Section 40
hereof. If restoration is required hereunder, Lessor shall contribute to the
cost of such restoration that portion of its entire Award that is
specifically allocated to such restoration in the judgment or order of the
court, if any, and Lessee shall fund the balance of such costs (out of the
FF&E Reserve or other funds provided by Lessor pursuant to Section 40 hereof)
in advance of restoration in a manner reasonably satisfactory to Lessor and
in an amount not to exceed any Award.
15.7 LESSEE'S OFFER. In the event of the termination of this
Lease as provided in Section 15.3, Lessee may offer to acquire the Leased
Property from Lessor for a purchase price equal to the Rejectable Offer Price
of the Leased Property without regard to such Taking and, if accepted, Lessee
shall receive the entire Award. If Lessor does not accept Lessee's offer to
purchase the Leased Property, Lessee shall withdraw its offer to purchase the
Leased Property and, if so withdrawn, Lessee may terminate the Lease with
respect to the Leased Property without further liability hereunder, except
for payment of Rent as provided in the penultimate sentence of Section 15.3
or for matters which by their express terms survive termination of this Lease
and Lessor shall be entitled to retain the Award except as provided in
Section 15.4 of this Lease.
SECTION 16.
16.1 EVENTS OF DEFAULT. If any one or more of the following
events (individually, an "Event of Default") occurs:
16.1.1 if an Event of Default occurs under any of the
Leases between Lessor and Lessee or any Affiliate of Lessee; or
16.1.2 if Lessee fails to make payment of the Base Rent
when the same becomes due and payable for a period of ten days after receipt
by the Lessee of Notice from the Lessor thereof;
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16.1.3 if Lessee fails to make payment of quarterly
Percentage Rent when the same becomes due and payable and such condition
continues for a period of thirty (30) days after the end of the applicable
quarter;
16.1.4 if either party fails to observe or perform any
term, covenant or condition of this Lease and such failure is not cured by
such party within a period of 30 days after receipt by such party of Notice
thereof from the other party, unless such failure cannot with due diligence
be cured within a period of 30 days, in which case it shall not be deemed an
Event of Default if such party proceeds promptly and with due diligence to
cure the failure and diligently completes the curing thereof provided,
however, in no event shall such cure period extend beyond 90 days after such
Notice; or
16.1.5 if either party shall file a petition in bankruptcy
or reorganization for an arrangement pursuant to any federal or state
bankruptcy law or any similar federal or state law, or shall be adjudicated a
bankrupt or shall make an assignment for the benefit of creditors or shall
admit in writing its inability to pay its debts generally as they become due,
or if a petition or answer proposing the adjudication of either party 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 such
party shall be adjudicated a bankrupt and such adjudication shall not be
vacated or set aside or stayed within 60 days after the entry of an order in
respect thereof, or if a receiver of such party or of the whole or
substantially all of the assets of such party shall be appointed in any
proceeding brought by either party or if any such receiver, trustee or
liquidator shall be appointed in any proceeding brought against such party
and shall not be vacated or set aside or stayed within 60 days after such
appointment; or
16.1.6 if either party is liquidated or dissolved, or
begins proceedings toward such liquidation or dissolution, or, in any manner,
permits the sale or divestiture of substantially all of its assets; or
16.1.7 if the estate or interest of either party in the
Leased Property or any part thereof is voluntarily or involuntarily
transferred, assigned, conveyed, levied upon or attached in any proceeding
(unless such party is contesting such lien or attachment in good faith in
accordance with Section 12 hereof); or
16.1.8 if, except as a result of damage, destruction or a
partial, total or temporary Condemnation, either party voluntarily ceases
operations on the Leased Property for a period in excess of 30 days;
16.1.9 if, an event of default has been declared by the
franchisor under any Franchise Agreement with respect to the Facility on the
Leased Premises as a result of any action or failure to act by either party
or any Person with whom either party contracts for management services at the
Facility; or
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16.1.10 if, Lessor, Lessee or Crossroads fail to perform
any of the terms or conditions contained in the Master Agreement.
then, and in any such event, the other party may exercise
one or more remedies available to it herein or at law or in equity, including
but not limited to its right to terminate this Lease by giving the other
party not less than ten days' Notice of such termination.
If litigation is commenced with respect to any alleged
default under this Lease, the prevailing party in such litigation shall
receive, in addition to its damages incurred, such sum as the court shall
determine as its reasonable attorneys' fees, and all costs and expenses
incurred in connection therewith.
16.2 SURRENDER. If an Event of Default by the Lessee
occurs and is continuing, whether or not this Lease has been terminated
pursuant to Section 16.1, Lessee shall, if requested by Lessor so to do,
immediately surrender to Lessor the Leased Property including, without
limitation, any and all books, records, files, licenses, permits and keys
relating thereto, and quit the same and Lessor may enter upon and repossess
the Leased Property by reasonable force, summary proceedings, ejectment or
otherwise, and may remove Lessee and all other persons and any and all
personal property from the Leased Property, subject to rights of any hotel
guests and to any requirement of law.
16.3 DAMAGES. Lessee shall forthwith pay to Lessor, as
and for liquidated and agreed current damages for Lessee's default or early
termination of the Lease, the Termination Fee defined in the Master
Agreement, any and all accrued and unpaid Rent through the date of
termination of this Lease and such other sums due to Lessor pursuant to Lease
as a result of such termination expressly required by this Lease unless
otherwise superceded by the Master Agreement.
SECTION 17. Intentionally Deleted.
SECTION 18.
LESSOR'S RIGHT TO CURE LESSEE'S DEFAULT. If Lessee fails to make
any payment or to perform any act required to be made or performed under this
Lease including, without limitation, Lessee's failure to comply with the
terms of any Franchise Agreement, and fails to cure the same within the
relevant time periods provided in Section 16.1, Lessor, without waiving or
releasing any obligation of Lessee, and without waiving or releasing any
obligation or default, may (but shall be under no obligation to) at any time
thereafter make such payment or perform such act for the account and at the
expense of Lessee, and may, to the extent permitted by law, enter upon the
Leased Property for such purpose and take all such action as, in Lessor's
opinion, may be necessary or appropriate therefor. No such entry shall be
deemed an eviction of Lessee. All sums so paid by Lessor and all costs and
expenses (including, without limitation, reasonable attorneys' fees and
expenses, in each case to the extent permitted by law) so incurred, together
with a late charge thereon (to the extent permitted by law) at the Overdue
Rate from the date on which such sums or expenses are paid or
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incurred by Lessor, shall be paid by Lessee to Lessor on demand. The
obligations of Lessee and rights of Lessor contained in this Article shall
survive the expiration or earlier termination of this Lease.
SECTION 19.
PROVISIONS RELATING TO PURCHASE OF THE LEASED PROPERTY. If Lessee
purchases the Leased Property from Lessor pursuant to the terms and
conditions of this Lease, Lessor and Lessee shall have first entered into a
purchase and sale agreement mutually agreed upon by Lessor and Lessee.
SECTION 20.
20.1 PERSONAL PROPERTY LIMITATION. Anything contained in this
Lease to the contrary notwithstanding, the average of the adjusted tax bases
of the items of personal property that are leased to the Lessee under this
Lease at the beginning and at the end of any Fiscal Year shall not exceed 15%
of the average of the aggregate adjusted tax bases of the Leased Property at
the beginning and at the end of such Fiscal Year. This Section 20.1 is
intended to ensure that the Rent qualifies as "rents from real property",
within the meaning of Section 856(d) of the Code, or any similar or successor
provisions thereto, and shall be interpreted in a manner consistent with such
intent
20.2 SUBLEASE RENT LIMITATION. Anything contained in this Lease
to the contrary notwithstanding, Lessee shall not sublet the Leased Property
on any basis such that the rental to be paid by the sublessee thereunder
would be based, in whole or in part, on either (a) the income or profits
derived by the business activities of the sublessee, or (b) any other formula
(if as a result of such a sublease based on (a) and/or (b) above, any portion
of the Rent would fail to qualify as "rents from real property" within the
meaning of Section 856(d) of the Code, or any similar or successor provision
thereto).
20.3 SUBLEASE TENANT LIMITATION. Anything contained in this
Lease to the contrary notwithstanding, Lessee shall not sublease the Leased
Property to any Person in which Lessor, owns, directly or indirectly, a 10%
or more interest, within the meaning of Section 856(d)(2)(B) of the Code, or
any similar or successor provisions thereto.
20.4 LESSEE OWNERSHIP LIMITATION. Anything contained in this
Lease to the contrary notwithstanding, neither Lessee nor an Affiliate of the
Lessee shall acquire, directly or indirectly, a 10% or more interest in
Lessor, within the meaning of Section 856(d)(2)(B) of the Code, or any
similar or successor provision thereto.
20.5 LESSEE OFFICER AND EMPLOYEE LIMITATION. Anything contained
in this Lease to the contrary notwithstanding, none of the officers or
employees of the Lessee (or any Person who furnishes or renders services to
the tenants of the Leased Property, or manages or operates the Leased
Property) shall be officers or employees of Lessor, (or any Person who serves
as an advisor
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of Lessor). In addition, if a Person serves as both (a) a director of the
Lessee (or any Person who furnishes or renders services to the tenants of the
Leased Property, or manages or operates the Leased Property), and (b) a
director and officer (or employee) of Lessor, (or any Person who serves as an
advisor of Lessor) that Person shall not receive any compensation for serving
as a director of the Lessee (or any Person who furnishes or renders services
to the tenants of the Leased Property, or manages or operates the Leased
Property).
20.6 PAYMENTS TO AFFILIATES. Notwithstanding anything contained
in this Lease to the contrary, the Lessee shall make no payments to
Affiliates as Gross Operating Expenses unless set forth in the Annual Budget
or otherwise agreed to by Lessor.
SECTION 21.
21.1 HOLDING OVER. If Lessee for any reason remains in
possession of the Leased Property after the expiration or earlier termination
of the Term, such possession shall be as a tenant at sufferance during which
time Lessee shall pay as rental each month two times the aggregate of (a)
one-twelfth of the aggregate Base Rent and Percentage Rent payable with
respect to the last Fiscal Year of the Term, (b) all Additional Charges
accruing during the applicable month, and (c) all other sums, if any, payable
by Lessee under this Lease with respect to the Leased Property. During such
period, Lessee shall be obligated to perform and observe all of the terms,
covenants and conditions of this Lease, but shall have no rights hereunder
other than the right, to the extent given by law to tenancies at sufferance,
to continue its occupancy and use of the Leased Property. Nothing contained
herein shall constitute the consent, express or implied, of Lessor to the
holding over of Lessee after the expiration or earlier termination of this
Lease.
SECTION 22.
22.1. RISK OF LOSS. During the Term, except as otherwise
specified herein, the risk of loss or of decrease in the enjoyment and
beneficial use of the Leased Property in consequence of the damage or
destruction thereof by fire, the elements, casualties, thefts, riots, wars or
otherwise, or in consequence of foreclosures, attachments, levies or
executions (other than those caused by Lessee and those claiming from,
through or under Lessee) is assumed by Lessor, and, in the absence of gross
negligence, willful misconduct or breach of this Lease by Lessee, Lessee
shall in no event be answerable or accountable therefor; provided, however,
nothing contained in this Section 22.1 shall entitle the Lessee to any
abatement of Rent unless expressly provided for in this Lease.
SECTION 23.
23.1 LESSOR INDEMNIFICATION. Notwithstanding the existence of
any insurance, and without regard to the policy limits of any such insurance
or self-insurance, but subject to Section 8, Lessor will protect, indemnify,
hold harmless and defend Lessee from and against all liabilities,
obligations,
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claims, damages, penalties, causes of action, costs and expenses (including,
without limitation, reasonable attorneys' fees and expenses), imposed upon
or incurred by or asserted against Lessee Indemnified Parties by reason of:
(a) any Impositions that are the obligations of Lessor pursuant to the
applicable provisions of this Lease, (b) any failure on the part of Lessor
to perform or comply with any of the terms of this Lease, (c) any liability,
action, claim, damage, cost or expense arising prior to the Commencement Date
of this Lease, and (d) the gross negligence, willful misconduct or fraud by
Lessor.
23.2 LESSEE INDEMNIFICATION. Lessee shall, indemnify, hold
harmless and defend Lessor Indemnified Parties from and against all
liabilities, obligations, claims, damages, penalties, causes of action, costs
and expenses imposed upon or incurred by or asserted against Lessor
Indemnified Parties as a result of (a) the gross negligence, willful
misconduct or fraud by Lessee arising in connection with this Lease, (b) any
failure on the part of Lessee to perform or comply with any of the terms of
this Lease, (c) any Impositions that are the obligations of Lessor pursuant
to the applicable provisions of this Lease, and (d) any liability, action,
claim, damage, cost or expense arising after to the Commencement Date of this
Lease.
23.3 NON-INDEMNIFIABLE CLAIMS. To the extent that neither
Section 23.1 nor Section 23.2 applies to any liability, action, claim,
damage, cost or expense arising out of the operation of the Leased Property,
such liability, action, claim, damage, cost or expense shall be paid as a
Gross Operating Expense deducted from Gross Revenues for purposes of
calculating the Break-Even Threshold.
23.4 INDEMNIFICATION PROCEDURE. Any amounts that become payable
by an Indemnifying Party under this Section shall be paid within ten days
after liability therefor on the part of the Indemnifying Party is determined
by litigation or otherwise, and if not timely paid, shall bear a late charge
(to the extent permitted by law) at the Overdue Rate from the date of such
determination to the date of payment. An Indemnifying Party, at its expense,
shall contest, resist and defend any such claim, action or proceeding
asserted or instituted against the Indemnified Party. The Indemnified Party,
at its expense, shall be entitled to participate in any such claim, action,
or proceeding, and the Indemnifying Party may not compromise or otherwise
dispose of the same without the consent of the Indemnified Party, which may
not be unreasonably withheld.
23.5 SURVIVAL OF INDEMNIFICATION OBLIGATIONS. Lessee's or
Lessor's liability for a breach of the provisions of this Section shall
survive any termination of this Lease.
SECTION 24.
24.1 SUBLETTING AND ASSIGNMENT BY LESSEE. Subject to the
provisions of Section 20 and Section 24.2 so long as a Default does not exist
on the part of the Lessee and any other express conditions or limitations set
forth herein, Lessee may, in its sole discretion (a) assign this Lease or
sublet all or any part of the Leased Property to an Affiliate of Lessee or
any person or entity with,
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or into whom, Lessee merges or consolidates, or (b) sublet any retail or
restaurant portion of the Leased Improvements in the normal course of the
Primary Intended Use; provided that any subletting to any party other than an
Affiliate of Lessee shall not individually as to any one such subletting, or
in the aggregate, materially diminish the actual or potential Percentage Rent
payable under this Lease. In the case of a subletting, the sublessee shall
comply with the provisions of Section 24.2, and in the case of an assignment,
the assignee shall assume in writing and agree to keep and perform all of the
terms of this Lease on the part of Lessee to be kept and performed and shall
be, and become, jointly and severally liable with Lessee for the performance
thereof. Notwithstanding the above, Lessee may assign the Lease to an
Affiliate without the consent of Lessor; provided that any such assignee
assumes in writing and agrees to keep and perform all of the terms of the
Lease on the part of Lessee to be kept and performed and shall be and become
jointly and severally liable with Lessee for the performance thereof. In
case of either an assignment or subletting made during the Term, Lessee shall
remain primarily liable, as principal rather than as surety, for the prompt
payment of the Rent and for the performance and observance of all of the
covenants and conditions to be performed by Lessee hereunder. An original
counterpart of each such sublease and assignment and assumption, duly
executed by Lessee and such sublessee or assignee, as the case may be, in
form and substance satisfactory to Lessor, shall be delivered promptly to
Lessor. So long as an Event of Default does not exist on the part of the
Lessee, the Lessee shall have the right to assign this Lease to an
unaffiliated third party transferee if such transferee has a net worth in
excess of one million dollars ($1,000,000); provided, however, that (i) the
Lessee must give Lessor forty five (45) days written notice of such
assignment; (ii) such unaffiliated third party transferee shall assume all
the Lessee's obligations and rights under this Lease;(iii) the Lessee and/or
the unaffiliated third party transferee must pay any and all outstanding Rent
owed to Lessor; and (iv) such unaffiliated third party transferree must
acknowledge in writing that any and all references to Negative Base Rent
shall be deemed deleted herefrom.
24.2 ATTORNMENT. Lessee shall insert in each sublease permitted
under Section 24.1 provisions to the effect that (a) such sublease is subject
and subordinate to all of the terms and provisions of this Lease and to the
rights of Lessor hereunder, (b) if this Lease terminates before the
expiration of such sublease, the sublessee thereunder will, at Lessor's
option, attorn to Lessor and waive any right the sublessee may have to
terminate the sublease or to surrender possession thereunder as a result of
the termination of this Lease, and (c) if the sublessee receives a written
Notice from Lessor or Lessor's assignees, if any, stating that an uncured
Event of Default exists under this Lease, the sublessee shall thereafter be
obligated to pay all rentals accruing under said sublease directly to the
party giving such Notice, or as such party may direct. All rentals received
from the sublessee by Lessor or Lessor's assignees, if any, as the case may
be, shall be credited against the amounts owing by Lessee under this Lease.
24.3 SUBLETTING AND ASSIGNMENT BY LESSOR. Other than in
accordance with Section 1.2(B), Lessor shall not assign this Lease to any
other person or entity without the prior written approval of Lessee.
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SECTION 25.
OFFICER'S CERTIFICATES; FINANCIAL STATEMENTS: LESSOR'S ESTOPPEL
CERTIFICATES AND COVENANTS.
(a) At any time and from time to time upon not less than 20
days Notice by Lessor, Lessee will furnish to Lessor an Officer's Certificate
certifying that this Lease is unmodified and in full force and effect (or
that this Lease is in full force and effect as modified and setting forth the
modifications), the date to which the Rent has been paid, whether to the
knowledge of Lessee there is any existing default or Event of Default exists
thereunder by Lessor or Lessee, and such other information as may be
reasonably requested by Lessor. Any such certificate furnished pursuant to
this Section may be relied upon by Lessor, any lender and any prospective
purchaser of the Leased Property.
(b) Lessee will furnish the following statements to Lessor:
(1) with reasonable promptness, such information
respecting the financial condition and affairs of Lessee including
audited financial statements prepared by Coopers & Lybrand, L.L.C.
or such other certified independent accounting firm as may be
approved by Lessor, as Lessor may reasonably request from time to
time, provided, however that in the absence of special and/or
nonrecurring circumstances Lessee shall only be required to furnish
audited financial information to Lessor no more than once per Fiscal
Year; and
(2) the most recent Financials of Lessee within 25
days after each quarter of any Fiscal Year (or, in the case of the
final quarter in any Fiscal Year, the most recent audited Financials
of Lessee within 60 days); and
(3) or about the 15th day of each month, a
detailed profit and loss statement for the Leased Property for the
preceding month, a balance sheet for the Leased Property as of the
end of the preceding month, and a detailed accounting of Gross
Revenues for the Leased Property for the preceding month, each in
form acceptable to Lessor.
(4) on an annual basis, copies of all reports
submitted to governmental authorities and agencies (including but
not limited to reports relating to sales, use and occupancy taxes)
and any franchisor.
(c) At any time and from time to time upon not less than 20
days notice by Lessee, Lessor will furnish to Lessee or to any person
designated by Lessee an estoppel certificate certifying that this Lease is
unmodified and in full force and effect (or that this Lease is in full force
and effect as modified and setting forth the modifications), the date to
which Rent has been paid, whether to the knowledge of Lessor there is any
existing default or Event of Default on Lessee's part hereunder, and such
other information as may be reasonably requested by Lessee.
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Notwithstanding the foregoing, the costs of such audit shall be paid
for as a Gross Operating Expense and deducted from Gross Revenues except as
otherwise stated herein.
SECTION 26.
LESSOR'S RIGHT TO INSPECT. Lessee shall permit Lessor and its
authorized representatives as frequently as reasonably requested by Lessor to
inspect the Leased Property and Lessee's accounts and records pertaining
thereto and make copies thereof, during usual business hours upon reasonable
advance notice, subject only to any business confidentiality requirements
reasonably requested by Lessee.
SECTION 27.
NO WAIVER. No failure by Lessor or Lessee to insist upon the strict
performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof, and no acceptance of full or partial
payment of Rent during the continuance of any such breach, shall constitute a
waiver of any such breach or of any such term. To the extent permitted by
law, no waiver of any breach shall affect or alter this Lease, which shall
continue in full force and effect with respect to any other then existing or
subsequent breach.
SECTION 28.
REMEDIES CUMULATIVE. To the extent permitted by law, each legal,
equitable or contractual right, power and remedy of Lessor or Lessee now or
hereafter provided either in this Lease or by statute or otherwise shall be
cumulative and concurrent and shall be in addition to every other right,
power and remedy and the exercise or beginning of the exercise by Lessor or
Lessee of any one or more of such rights, powers and remedies shall not
preclude the simultaneous or subsequent exercise by Lessor or Lessee of any
or all of such other rights, powers and remedies.
SECTION 29.
ACCEPTANCE OF SURRENDER. No surrender to Lessor of the Leased
Property or any part thereof, or of any interest therein, shall be valid or
effective unless agreed to and accepted in writing by Lessor and no act by
Lessor or any representative or agent of Lessor, other than such a written
acceptance by Lessor, shall constitute an acceptance of any such surrender.
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SECTION 30.
NO MERGER OF TITLE. There shall be no merger of this Lease or of
the leasehold estate created hereby by reason of the fact that the same
person or entity may acquire, own or hold, directly or indirectly: (a) this
Lease or the leasehold estate created hereby or any interest in this Lease or
such leasehold estate, and (b) the fee estate in the Leased Property.
SECTION 31.
CONVEYANCE BY LESSOR. If Lessor or any successor owner of the
Leased Property conveys the Leased Property in accordance with the terms
hereof other than as security for a debt, and the grantee or transferee of
the Leased Property expressly assumes all obligations of Lessor hereunder
arising or accruing from and after the date of such conveyance or transfer,
Lessor or such successor owner, as the case may be, shall thereupon be
released from all future liabilities and obligations of Lessor under this
Lease arising or accruing from and after the date of such conveyance or other
transfer as to the Leased Property and all such future liabilities and
obligations shall thereupon be binding upon the new owner; provided, however,
that in the event of such a conveyance by Lessor, Lessee may offset against
the Base Rent otherwise due hereunder an amount equal to the annual increases
in property taxes incurred by Lessee solely by reason of said conveyance from
Lessor to successor owner.
SECTION 32.
QUIET ENJOYMENT. So long as Lessee pays all Rent as the same
becomes due and complies with all of the terms of this Lease and performs its
obligations hereunder, in each case within the applicable grace periods, if
any, Lessee shall peaceably and quietly have, hold and enjoy the Leased
Property for the Term hereof, free of any claim or other action by Lessor or
anyone claiming by, through or under Lessor, but subject to all liens and
encumbrances subject to which the Leased Property was conveyed to Lessor or
hereafter consented to by Lessee or provided for herein. Notwithstanding the
foregoing, Lessee shall have the right by separate and independent action to
pursue any claim it may have against Lessor as a result of a breach by Lessor
of the covenant of quiet enjoyment contained in this Section.
SECTION 33.
NOTICES. All notices, demands, requests, consents, approvals and
other communications ("Notice" or "Notices") hereunder shall be in writing
and personally served or mailed (by registered or certified mail, return
receipt requested and postage prepaid), addressed to Lessor at its principal
office, as indicated in the signature page hereof, Attention: President, and
addressed to Lessee as indicated in the signature page hereof, or to such
other address or addresses as either party may
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hereafter designate. Personally delivered Notice shall be effective upon
receipt, and Notice given by mail shall be complete at the time of deposit in
the U.S. Mail system, but any prescribed period of Notice and any right or
duty to do any act or make any response within any prescribed period or on a
date certain after the service of such Notice given by mail shall be extended
five days.
SECTION 34.
APPRAISERS. If it becomes necessary to determine the Fair Market
Value or Fair Market Rental of the Leased Property for any purpose of this
Lease, the party required or permitted to give Notice of such required
determination shall include in the Notice the name of a person selected to
act as appraiser on its behalf. Within 10 days after Notice, Lessor (or
Lessee, as the case may be) shall by Notice to Lessee (or Lessor, as the case
may be) appoint a second person as appraiser on its behalf. The appraisers
thus appointed, each of whom must be a member of the American Institute of
Real Estate Appraisers (or any successor organization thereto) with at least
five years experience in the State appraising property similar to the Leased
Property, shall, within 45 days after the date of the Notice appointing the
first appraiser, proceed to appraise the Leased Property to determine the
Fair Market Value or Fair Market Rental thereof as of the relevant date
(giving effect to the impact, if any, of inflation from the date of their
decision to the relevant date); provided, however, that if only one appraiser
shall have been so appointed, then the determination of such appraiser shall
be final and binding upon the parties. To the extent consistent with sound
appraisal practice as then existing at the time of any such appraisal, such
appraisal shall be made on a basis consistent with the basis on which the
Leased Property was appraised for purposes of determining its Fair Market
Value at the time the Leased Property was acquired by Lessor. If two
appraisers are appointed and if the difference between the amounts so
determined does not exceed 5%, then the Fair Market Value or Fair Market
Rental shall be an amount equal to 50% of the sum of the amounts so
determined. If the difference between the amounts so determined exceeds 5%,
then such two appraisers shall have 20 days to appoint a third appraiser. If
no such appraiser shall have been appointed within such 20 days or within 90
days of the original request for a determination of Fair Market Value or Fair
Market Rental, whichever is earlier, either Lessor or Lessee may apply to any
court having jurisdiction to have such appointment made by such court. Any
appraiser appointed by the original appraisers or by such court shall be
instructed to determine the Fair Market Value or Fair Market Rental within 45
days after appointment of such appraiser. Thereafter, the three (3)
appraisals shall be reviewed and the determination of the appraiser which
differs most in the terms of dollar amount from the determinations of the
other two appraisers shall be excluded, and 50% of the sum of the remaining
two determinations shall be final and binding upon Lessor and Lessee as the
Fair Market Value or Fair Market Rental of the Leased Property, as the case
may be. This provision for determining by appraisal shall be specifically
enforceable to the extent such remedy is available under applicable law, and
any determination hereunder shall be final and binding upon the parties
except as otherwise provided by applicable law. Lessor and Lessee shall each
pay the fees and expenses of the appraiser appointed by it and each shall pay
one-half of the fees and expenses of the third appraiser and one-half of all
other costs and expenses incurred in connection with each
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appraisal. In the event that the Lessor and the Lessee agree upon a single
appraiser, the Lessee and the Lessor shall each pay one-half of the fees and
expenses of such appraiser.
SECTION 35.
35.1 LESSOR MAY GRANT LIENS. Without the consent of Lessee,
Lessor may, subject to the terms and conditions set forth below in these
Sections 16, 16.1 and 35.1, from time to time, directly or indirectly, create
or otherwise cause to exist any lien, encumbrance or title retention
agreement ("Encumbrance") upon the Leased Property, or any portion thereof or
interest therein, whether to secure any borrowing or other means of financing
or refinancing. Any such Encumbrance shall (a) contain the right to prepay
(whether or not subject to a prepayment penalty); (b) provide that it is
subject to the rights of Lessee under this Lease; (c) contain the Agreement
by the holder of the Encumbrance that it will (1) give Lessee the same
notice, if any, given to of Lessor of any default or acceleration of any
obligation underlying any such Encumbrance or any sale in foreclosure under
such Encumbrance, (2) permit Lessee to cure any such default on Lessor's
behalf within any applicable cure period, and Lessee shall be reimbursed by
Lessor for any and all costs incurred in effecting such cure, including
without limitation out-of-pocket costs incurred to effect any such cure
(including reasonable attorneys' fees) and (3) permit Lessee to appear by its
representative and to bid at any sale in foreclosure made with respect to any
such Encumbrance. Upon the request of Lessor, Lessee shall subordinate this
Lease to the lien of a new mortgage on the Leased Property, on the condition
that the proposed mortgagee executes a non-disturbance and attornment
agreement recognizing this Lease, and agreeing, for itself and its successors
and assigns, to comply with the provisions of this Section 35.
35.2 LESSEE'S RIGHT TO CURE. Subject to the provisions of
Sections 16, 16.1 and 35.3, if Lessor breaches any covenant to be performed
by it under this Lease, Lessee, after Notice to and demand upon Lessor,
without waiving or releasing any obligation hereunder, and in addition to all
other remedies available to Lessee, may (but shall be under no obligation at
any time thereafter to) make such payment or perform such act for the account
and at the expense of Lessor. All sums so paid by Lessee and all costs and
expenses (including, without limitation, reasonable attorneys' fees) so
incurred, together with interest thereon at the Overdue Rate from the date on
which such sums or expenses are paid or incurred by Lessee, shall be paid by
Lessor to Lessee on demand or, following entry of a final, nonappealable
judgment against Lessor for such sums, may be offset by Lessee against the
Base Rent payments next accruing or coming due. The rights of Lessee
hereunder to cure and to secure payment from Lessor in accordance with this
Section 35.2 shall survive the termination of this Lease with respect to the
Leased Property.
35.3 BREACH BY LESSOR. If an Event of Default exists on the
part of Lessor, Lessee, without waiving or releasing any obligations
hereunder, and in addition to all other remedies available to Lessee at law
or in equity, may purchase the Leased Property from Lessor for a purchase
price equal to the then Fair Market Value. If Lessee elects to purchase the
Property it shall deliver a Notice thereof to Lessor specifying a settlement
date to occur not less than 90 days subsequent to
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the date of such Notice on which it shall purchase the Leased Property, and
the same shall be thereupon conveyed in accordance with the provisions of
Section 19.
SECTION 36.
36.1 MISCELLANEOUS. Anything contained in this Lease to the
contrary notwithstanding, all claims against, and liabilities of, Lessee or
Lessor arising prior to any date of termination of this Lease shall survive
such termination. If any term or provision of this Lease or any application
thereof is invalid or unenforceable, the remainder of this Lease and any
other application of such term or provisions shall not be affected thereby.
If any late charges or any interest rate provided for in any provision of
this Lease are based upon a rate in excess of the maximum rate permitted by
applicable law, the parties agree that such charges shall be fixed at the
maximum permissible rate. Neither this Lease nor any provision hereof may be
changed, waived, discharged or terminated except by a written instrument in
recordable form signed by Lessor and Lessee. All the terms and provisions of
this Lease shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns. The headings in this
Lease are for convenience of reference only and shall not limit or otherwise
affect the meaning hereof. This Lease shall be governed by and construed in
accordance with the laws of the State, but not including its conflicts of
laws rules.
36.2 TRANSFER OF LICENSES. Upon the expiration or earlier
termination of the Term, Lessee shall use diligent and good faith efforts (i)
to transfer to Lessor or Lessor's nominee all licenses, equipment leases,
operating permits and other governmental authorizations and all service
contracts, including contracts with governmental or quasi-governmental
entities, that may be necessary for the operation of the Facilities
(collectively, "Licenses"), or (ii) if such transfer is prohibited by law or
Lessor otherwise elects, to cooperate with Lessor or Lessor's nominee in
connection with the processing by Lessor or Lessor's nominee of any
applications for, all Licenses; provided, in either case, that the costs and
expenses of any such transfer or the processing of any such application shall
be paid by Lessor or Lessor's nominee. In addition, Lessee agrees to use
diligent and good faith efforts to assist Lessor in obtaining any consents
necessary for the assignment of the Franchise Agreement. Lessor and Lessee
agree to execute whatever instruments are necessary to effect the assumption
by the Lessor of all such licenses, equipment leases, operating permits and
service contracts.
36.3 WAIVER OF PRESENTMENT, ETC.. Lessee waives all
presentments, demands for payment and for performance, notices of
nonperformance, protests, notices of protest, notices of dishonor, and
notices of acceptance and waives all notices of the existence, creation, or
incurring of new or additional obligations, except as expressly granted
herein, and except as expressly provided in Section 16 herein.
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SECTION 37.
MEMORANDUM OF LEASE. Lessor and Lessee shall promptly upon the
request of either enter into a short form memorandum of this Lease, in form
suitable for recording under the laws of the State. Lessee shall pay all
costs and expenses of recording such memorandum of this Lease.
SECTION 38.
LESSOR'S OBLIGATION TO PURCHASE ASSETS OF LESSEE. Effective on not
less than 90 days prior Notice given at any time within 180 days before the
expiration of the Term, but not later than 90 days prior to such expiration,
or upon such shorter Notice period as shall be appropriate if this Lease is
terminated prior to its expiration date, Lessor shall purchase and/or assume
all (but not less than all) of the assets and liabilities of Lessee, tangible
and intangible, relating to the Leased Property (other than this Lease), at
the expiration or termination of this Lease for an amount (payable in cash on
the expiration date of this Lease) equal to the fair market value thereof as
appraised in conformity with Section 34, except that the appraisers need not
be members of the American Institute of Real Estate Appraisers, but rather
shall be appraisers having at least ten years experience in valuing similar
assets. Notwithstanding any such purchase, Lessor shall obtain no rights to
any trade name or logo owned, licensed or used by the Lessee in connection
with the Leased Property or the Franchise Agreement unless a separate
agreement as to such use is executed by the applicable parties.
SECTION 39.
COMPLIANCE WITH FRANCHISE AGREEMENT. On or before the Commencement
Date, the Lessor shall deliver to the Lessee any existing Franchise Agreement
applicable to the Leased Property along with an estoppel certificate from the
franchisor certifying, among other things, that no default exists under the
Franchise Agreement, the current physical condition of the Leased Property
satisfies the current quality standards of the franchisor and that all
franchise fees and other payments or obligations of the current franchisee
under the Franchise Agreement are current. It is the intent of the parties
hereto that Lessee shall comply in every respect with the provisions of the
Franchise Agreement so as to avoid any default thereunder during the term of
this Agreement. Lessor and Lessee agree to cooperate fully with each other in
the event it becomes necessary to obtain a Franchise Agreement extension or
modification or a new franchise for the property.
SECTION 40.
CAPITAL EXPENDITURES AND RESERVES
(A) INITIAL CAPITAL PROJECTS. On or before the Commencement
Date, the Lessor will complete, or provide to Lessee sufficient funds to
complete, all capital projects described in the existing capital expenditure
budgets more fully described in EXHIBIT "G" attached hereto and made a part
hereof.
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(B) Not later than sixty (60) days prior to the commencement of
each Fiscal Year, Lessee shall submit to Lessor for Lessor's approval
pursuant to the provisions of Section 3.3 hereof, a Capital Expenditure
Budget as part of Lessee's submission to Lessor of the Annual Budget. The
Capital Expenditure Budget shall include without limitation, the expenditures
required, necessary and/or anticipated for the repair, replacement or
refurbishment of carpet, soft goods, FF&E and structural and mechanical
items, alterations to the Leased Property (but only in accordance with
Section 10.1 hereof, reconstruction in the event of damages or destruction of
the Leased Property (but only in accordance with Section 14 hereof),
restoration pursuant to a Taking (but only in accordance with Section 15 of
this Lease), other required or desirable capital improvements to the Leased
Property or any of the components, other required or desired working capital,
and such other items characterized as capital expenditures under the Uniform
System (excluding, however, items required to be maintained at Lessor's cost
pursuant to Section 9.1.2 of this Lease. Lessee shall maintain a separate
interest bearing account referred to as the Capital Expenditure Reserve
Account from which all costs and expenses reflected in an approved Capital
Expenditure Budget should be paid. Lessor shall, on or before the
Commencement Date, fund into the Capital Expenditure Reserve Account an
amount equal to $100.00 per room contained within the Leased Property.
Lessor will have no further funding obligations with regard to any Capital
Expenditure Budget and/or the Capital Expenditure Reserve Account whatsoever,
except as specifically otherwise set forth in this Section 40 or in this
Lease. Within twenty (20) days after the end of each calendar quarter of
each fiscal year hereof, commencing with the calendar quarter ending December
31, 1995 and within twenty (20) days after the end of each succeeding quarter
thereafter during the Term hereof, Lessee shall, out of Property Cash Flow
from the Lease Property, fund into the Capital Expenditure Reserve Account,
an amount equal to $125.00 per room contained within the Leased Property;
provided, this amount will be increased annually by the percentage increase
of the average daily room rate for the Leased Property. Irrespective of any
future increases or decreased in the average daily room rate for the Leased
Premises during the Term hereof, Lessee must each quarter during the Term
hereof fund into the Capital Expenditure Reserve Account a minimum of $125.00
per room contained within the Leased Premises, BUT, Lessee shall never be
required to fund into the Capital Expenditure Reserve Account more than
$250.00 per room per quarter. Lessee understands and agrees that after the
approval by Lessor of any annual Capital Expenditure Budget, no monies can be
expended from the Capital Expenditure Reserve Account for the applicable year
which were not reflected in that year's annual Capital Expenditure Budget (or
if such expenditures were reflected on the applicable budget, but were
underestimated) without the prior written consent of Lessor, which will not
be unreasonably withheld or delayed. Lessee agrees during the Term hereof to
provide to Lessor monthly reports as to the expenditures made from the
Capital Expenditure Reserve Account for the operations of the Leased Property
for the immediately preceding month. Lessee further agrees and does hereby
grant to Lessor, to secure the full and complete performance by Lessee of its
obligations under this Lease, grant to Lessor a security interest in the
Capital Expenditure Reserve Account, and, upon default by Lessee under this
Lease or termination of this Lease, the Capital Expenditure Reserve Account
and the proceeds therefrom shall, at Lessor's option, be delivered to Lessor.
Lessor and Lessee hereby approve the Capital Expenditure Budget for the
Fiscal Year 1996 for the Leased Property attached hereto as EXHIBIT "H" and
made a part hereof.
45
<PAGE>
(C) Lessor represents and warrants, to the best of its
knowledge, that the Leased Property is in full compliance with the Americans
With Disabilities Act and all rules and regulations promulgated thereunder or
in connection therewith (the "ADA Act") and has received no notice from any
governmental authority, or complaint for allegation from any third party
asserting that the Leased Property is not in full compliance with the ADA Act.
SECTION 41.
FORCE MAJEURE. Notwithstanding anything contained herein to the
contrary, both the Lessor and the Lessee shall be excused from performance of
all terms and conditions under this Lease (including the Lessee's obligation
to pay Base Rent) in the event of any act of God, acts of war, acts of
terrorism, civil disturbance, labor strikes, governmental action (including
condemnation proceedings), or other causes beyond the reasonable control of
Lessor or Lessee (including, but not limited to, changes in the Competitive
Set of any Leased Property or in the market in which the Leased Property is
located) which have a significant adverse effect upon the financial
performance of the Leased Property. Lessee agrees to make good faith efforts
to provide to Lessor as much advance notice of such events as practical if
Lessee has actual knowledge that such an event likely will occur. If such a
force majeure event occurs, the Lessor and Lessee shall negotiate in good
faith to agree upon a new rental structure to reflect the adverse effect upon
the financial performance of the Leased Property. If the Lessor and the
Lessee cannot agree upon a new rental structure within thirty (30) days after
the occurrence of a force majeure event, the Lessee shall have the option to
terminate the Lease without the payment of any termination fee; provided,
however, the Lessee shall be obligated to pay all Rent due through the date
of termination. Notwithstanding anything contained herein to the contrary,
the termination by the Lessee of the Lease pursuant to a force majeure event
described in this Section 41 shall not be deemed to be an exercise by the
Lessee of the Initial Without Cause Termination Right.
SECTION 42
ARBITRATION. In the event a dispute should arise concerning the
interpretation or application of any of the provisions of this Agreement,
the parties agree the dispute shall be submitted to arbitration of the
American Arbitration Association, except as modified by this SECTION 42. The
Arbitration Tribunal shall be formed of three (3) Arbitrators each of which
shall have at least five (5) years' experience in hotel operation, management
or ownership, one (1) to be appointed by each party and the third (3rd) to be
appointed by the American Arbitration Association. The arbitration shall
take place in Pittsburgh, Pennsylvania, and shall be conducted in the English
language. The arbitration award shall be final and binding upon the parties
hereto and subject to no appeal, and shall deal with the question of costs of
arbitration and all matters related thereto. Judgment upon the award rendered
may be entered into any court having jurisdiction, or applications may be
made to such court for an order of enforcement.
46
<PAGE>
SECTION 43
RIGHT OF FIRST REFUSAL. If Lessor shall have received a bona fide
offer to purchase the Leased Property, and Lessor desires to sell the Leased
Property pursuant to the terms of such offer, Lessor shall give Notice
thereof to Lessee, stating the name and full identity of the prospective
purchaser, including the names and addresses of the owners of the capital
stock, partnership interests or other proprietary interests of such
prospective purchaser, if such information is reasonably available to Lessor,
the price, and all other terms and conditions of such proposed sale, together
with all other information with respect thereto which is requested by Lessee
and reasonably available to Lessor. Within thirty (30) days after receipt by
Lessee of such Notice from Lessor, Lessee shall elect by written notice to
Lessor one of the following alternatives:
(A) To purchase the Leased Property or to purchase the stock at
the same price and upon the same terms and conditions as those set forth in
the Notice from Lessor to Lessee. In such event, Lessor and Lessee shall
promptly enter into an agreement for sale at the price and on terms
consistent with such Notice from Lessor to Lessee.
(B) To consent to such sale and to the assignment of this Lease
to such purchaser, if such sale is in fact consummated; provided, however,
that concurrently with the consummation of such sale, the purchaser shall in
writing under an assumption agreement in form and substance reasonably
satisfactory to Lessee assume and agree to perform and comply in accordance
with the terms of this Lease. An executed copy of said assumption agreement
shall be promptly delivered by Lessor to Lessee. Lessor shall give to Lessee
not less than thirty (30) days Notice of the date on which such sale is to
be consummated in order to give Lessee an opportunity to be present.
(C) To refuse consent to such offer to purchase; provided,
however, such consent shall not be unreasonably withheld if such prospective
purchaser is, in Lessee's judgment, financially capable and sufficiently
reputable to enable such prospective purchaser to perform the terms and
conditions of this Lease. If Lessee shall withhold its consent to any such
purchase and Lessor shall nonetheless consummate such transaction, Lessee
shall be entitled to immediately terminate the Lease and all obligations of
Lessee shall immediately cease.
SECTION 44
Unless otherwise expressly stated herein, any reference to a
required consent or approval by either the Lessor or the Lessee shall be
deemed to refer to an approval or consent which shall not be unreasonably
withheld or delayed.
47
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease by their
duly authorized officers as of the date first above written.
LESSOR
HOST FUNDING, INC.,
a Maryland corporation
By:______________________________
Title:___________________________
LESSEE
CROSSROADS HOSPITALITY TENANT
COMPANY, L.L.C.
a Delaware limited liability company
By:______________________________
Title:___________________________
48
<PAGE>
EXHIBIT LIST
Exhibit A Description of Land/Ground Leasehold Interest Section 1.1
Exhibit B Schedule of Lease Cancellation Fee Section 1.2(B)(i)
Exhibit C Competitive Set Section 2
Exhibit D Base Rent Section 3.1(A)
Exhibit E Percentage Rent Section 3.1(B)
Exhibit F Insurance Section 13.1
Exhibit G Existing Capital Expenditure Projects Section 40(A)
Exhibit H FF&E Reserve Section 40(B)
Exhibit I Minimum Price Section 2
Exhibit J Amount of Cash On Hand Section 6.4
49
<PAGE>
EXHIBIT A
DESCRIPTION OF LAND/GROUND LEASEHOLD INTEREST
POPLAR BLUFF, MISSOURI
TRACT ONE: All that part of Lot 4 of Seifert and Hays Subdivision and a part of
Lot 3 of the Amendment to the plat of Boyet Subdivision in the Northeast Quarter
of the Southeast Quarter of Section 29, Township 25 North, Range 6 East of the
Fifth Principal Meridian, in the City of Poplar Bluff, Missouri, Butler County,
Missouri, which is described as follows:
From the Northwest corner of said Northeast Quarter of the Southeast Quarter
measure South 00 degrees 56 minutes West along and with West line of said
40 acre tract a distance of 20.00 feet to the Northwest corner of said Lot 4
of Seifert and Hays Subdivision and the POINT OF THE BEGINNING; thence, South
03 degrees 35 minutes East a distance of 58.68 feet; thence, South 24 degrees
44 minutes East a distance of 69.77 feet; thence, South 43 degrees 37 minutes
East a distance of 84.68 feet; thence, North 42 degrees 32 minutes East a
distance of 105.47 feet to a right-of-way marker on the Westerly right-of-way
line of U.S. Highway 67; thence, South 32 degrees 07 minutes East along and
with said right-of-way line 301.16 feet to the Southeast corner of said
Lot 4; thence continue South 32 degrees 07 minutes East along and with said
right-of-way line and the easterly line of said Lot 3 of Boyet Subdivision a
distance of 59.7 feet to the North line of Lot 1 of Boyet Subdivision; thence,
North 88 degrees 57 minutes West along and with said North line and the
extension thereof a distance of 361.3 feet to the West Line of said Northeast
Quarter of the Southeast Quarter; thence, North 00 degrees 56 minutes East a
distance of 59.8 feet to the Northwest Corner of said Boyet Subdivision thence,
North 00 degrees 58 minutes East along and with the West line of said Northeast
Quarter of the Southeast Quarter a distance of 345.0 feet to the POINT OF
BEGINNING.
TRACT TWO: A non-exclusive easement appurtenant to Tract One for roadway
purposes as established in the instrument recorded in Book 656 at Page 921 in
the office of the Recorder of Deeds, Butler County, Missouri, over the following
property: All that part of the Northwest Quarter of the Southeast Quarter of
Section 29, Township 25 North, Range 6 East of the Fifth Principal Meridian, in
the City of Poplar Bluff, Missouri, Butler County, Missouri, which is described
as follows:
Beginning at a point on the East line of said Northwest Quarter of the Southeast
Quarter, said point being 20 feet South of the Northeast corner of said 40 acre
tract; thence South 00 degrees 56 minutes West along and with the East line of
said forty-acre tract a distance of 639.8 feet; thence South 89 degrees 47
minutes West a distance of 50 feet; thence North 00 degrees 56 minutes East a
distance of 639.8 feet to a point on the South right of way line of Oak Grove
Road; thence North 89 degrees 47 minutes East along and with said right of way
line a distance of 50 feet to the Point of Beginning.
TRACT THREE: A non-exclusive easement appurtenant to Tract One for roadway
purposes as established in the instrument recorded in Book 586 at Page 591 in
the office of the Recorder of Deeds, Butler County, Missouri, over the
following property: The Easterly 30 feet of Lot 1 of the Amendment to the Plat
of Boyet Subdivision, as recorded in the Office of the Recorder of Deeds in and
for Butler County, Missouri.
<PAGE>
EXHIBIT B
MINIMUM BASE MANAGEMENT FEE SCHEDULE
The Minimum Base Management Fee for each of the Hotels subject to the
Leases is as follows:
Minor $41,140
Poplar Bluff $35,700
Sommerset $23,120
Rock Falls $37,760
San Diego $62,280
<PAGE>
EXHIBIT B - LEASE CANCELLATION FEE
In the event Lessor sells the Leased Property and Lessor's
purchaser does not assume Lessee's obligations under this Lease,
Lessee shall agree to cancel this Lease upon its receipt of a
Lease Cancellation Fee as follows:
First Determine: LEASED PROPERTY CASH FLOW: Property Cash Flow LESS real
estate taxes paid with respect to the Leased Property for
the 12 calendar months immediately preceding the closing of
the Leased Property sale.
Then Determine: LESSEE CASH FLOW: Leased Property Cash Flow LESS all Rent
paid or payable by Lessee under this Lease for the 12
calendar months immediately preceding the closing of the
Leased Property sale.
Then Determine: LESSOR CASH FLOW: All Rent paid or payable to Lessor under
this Lease for the 12 calendar months immediately preceding
the closing of the Leased Property sale.
Then Determine: NET OPERATING INCOME: Lessee Cash Flow PLUS Lessor Cash
Flow.
Then Determine: LESSEE'S PERCENTAGE OF NET OPERATING INCOME:
Lessee Cash Flow DIVIDED BY Net Operating Income.
Then Determine: LEASED PROPERTY SALE PROCEEDS AVAILABLE FOR DISTRIBUTION:
Sales price for the Leased Property LESS all expenses of
Lessor reasonably associated with such sale LESS Lessor's
adjusted property basis in the Leased Property (original
purchase price paid by Lessor for the Leased Property PLUS
an annual non-compounding 13% return on said original
purchase price), and LESS all Rent paid or payable to Lessor
under this Lease from the Commencement Date through the
closing of the Leased Property sale.
Lastly, Determine: LEASE CANCELLATION FEE: Lessee's Percentage of Net
Operating Income MULTIPLIED BY Leased Property Sale Proceeds
Available for Distribution.
Lessee will receive all or a portion of the Lease Cancellation Fee
calculated by using the above formula determined by the date during the Term
upon which the Leased Property is sold, as follows:
Years 1 to 10 of the Term. Lessee receives 100% of the Lease Cancellation Fee
<PAGE>
Year 11 of the Term. Lessee receives 90% of the Lease Cancellation Fee
Year 12 of the Term. Lessee receives 80% of the Lease Cancellation Fee
Year 13 of the Term. Lessee receives 70% of the Lease Cancellation Fee
Year 14 of the Term. Lessee receives 60% of the Lease Cancellation Fee
Year 15 of the Term. Lessee receives 50% of the Lease Cancellation Fee
Notwithstanding anything contained in this Exhibit B or this Lease to the
contrary, if the Leased Property is sold prior to the tenth (10) year of the
Term of this Lease, Lessee will, as consideration for cancellation of the Lease
incident to the sale of the Leased Property, be paid an amount equal to the
GREATER OF (a) the accrued but unpaid Negative Base Rent (but only Negative Base
Rent accrued but unpaid for first four (4) years after the Commencement Date)
PLUS the Base Management Fee for the twelve (12) months immediately preceding
the closing of the Leased Property sale, or (b) the Lease Cancellation Fee, as
determined above.
<PAGE>
EXHIBIT C
COMPETITIVE SET
POPLAR BLUFF, MISSOURI
Drury Inn
US 60 & Us 67 North
Poplar Bluff, MO
Holiday Inn
2115 North Westwood
Poplar Bluff, MO
Pear Tree Inn by Drury
US 60 and US 67 North
Poplar Bluff, MO
ROCK FALLS, ILLINOIS
RAMADA INN STERLING
ROUTE 88 AT I-88 EXIT 41
ROCK FALLS, ILLINOIS 61071
SOMERSET, KENTUCKY
SOMERSET LODGE
725 US HWY 27
SOMERSET, KY
HOLIDAY INN SOMERSET
606 SOUTH US HWY 27
SOMERSET, KY
BEST WESTERN PARKWAY INN
101 NORTH US HWY 27
SOMERSET, KY
DAYS INN
US HWY 27
SOMERSET, KY (UNDER CONSTRUCTION)
HOLIDAY MOTEL
US HWY 27
SOMERSET, KY
<PAGE>
MINOR/SIKESTON
HOLIDAY INN
2602 REAR E, MALONE ST
SIKESTON, MO 63801
RAMADA INN
I-55 & US 62 EAST
SIKESTON, MO 63801
HAMPTON INN
1330 SOUTH MAIN
SIKESTON, MO 63801
ECONO LODGE
110 S. INTERSTATE I-55
SIKESTON, MO 63801
BEST WESTERN COACH HOUSE INN AND SUITES
220 SOUTH INTERSTATE DRIVE
SIKESTON, MO 63801
EL CAPRI MOTEL
531 N MAIN ST
SIKESTON, MO 63801
MIDTOWNER MOTEL
833 E MALONE
SIKESTON, MO 63801
DRURY INN
I-55 & US 62 EAST
SIKESTON, MO 63801
HATFIELD INN
I-55 & US 62 EAST
SIKESTON, MO 63801
<PAGE>
SAN DIEGO, CA
DAYS INN MISSION BAY
2575 CLAIREMONT DRIVE
SAN DIEGO, CA 92117
DAYS INN SEA WORLD
3350 ROSECRANS BLVD
SAN DIEGO, CA 92110
HOLIDAY INN EXPRESS
3950 JUPITER ST
SAN DIEGO, CA 92110
COMFORT INN SEA WORLD
4610 DESOTO ST
SAN DIEGO, CA 92109
COMFORT INN MISSION BAY
3747 MIDWAY DRIVE
SAN DIEGO, CA 92110
<PAGE>
EXHIBIT D BASE RENT SCHEDULE
<TABLE>
<CAPTION>
MINER POPLAR SOMMER- ROCK SAN
BLUFF SET FALLS DIEGO
<S> <C> <C> <C> <C> <C>
ANNUAL BASE RENT $ $ $ $ $
AVERAGE MONTHLY BASE RENT $ $ $ $ $
MONTHLY BASE RENT
PAYMENT SCHEDULE
JANUARY $12,500 $8,500 $3,500 $7,500 $12,000
FEBRUARY $12,500 $9,500 $3,750 $8,500 $12,000
MARCH $18,500 $16,500 $6,000 $16,500 $16,500
APRIL $22,108 $19,000 $8,500 $19,000 $20,000
MAY $25,000 $20,000 $9,500 $20,000 $22,000
JUNE $28,500 $23,000 $14,500 $23,000 $24,000
JULY $33,000 $25,000 $18,250 $25,000 $36,000
AUGUST $33,000 $25,000 $18,250 $25,000 $42,000
SEPTEMBER $30,900 $20,000 $14,050 $20,000 $24,500
OCTOBER $24,552 $16,000 $10,500 $16,500 $24,000
NOVEMBER $13,500 $11,000 $4,000 $11,000 $12,000
DECEMBER $11,240 $8,500 $1,500 $8,500 $5,000
TOTAL BASE RENT PAID $265,300 $202,000 $112,300 $200,500 $250,000
</TABLE>
BASE RENT INCLUDES PROPERTY TAXES
<PAGE>
EXHIBIT E - PERCENTAGE RENT SCHEDULE (MINER)
For each Fiscal Year during the Term commencing with the Fiscal Year
January 1, 1996, Lessee shall pay to Lessor percentage rent ("Percentage Rent")
on a quarterly basis within twenty (20) days after the end of each calendar
quarter in an amount calculated by the following formula:
The amount equal to the Percentage Rent Gross Revenues Computation
LESS
An amount equal to the cumulative Percentage Rent paid for the
applicable Fiscal Year through the calendar quarter for which this
calculation is being made
EQUALS
Percentage Rent payable for the applicable calendar quarter.
For the purposes of this formula, the Percentage Rent Gross Revenues
Computation is an amount equal to the total of (a) 35% of the first $200,000 of
cumulative Gross Revenues for the applicable Fiscal Year through the calendar
quarter for which the calculation is being made in excess of $660,000 (the
"Break-Even Threshold"), and (b) 40% of all amounts of cumulative Gross Revenues
for the applicable Fiscal Year through the calendar quarter for which this
calculation is being made in excess of $860,000. For the purposes of this
calculation, the Break-Even Threshold shall be increased by 2% per Fiscal Year
during the Term hereof.
It is understood and agreed that if at any time during the first four (4)
years after the Commencement Date, Lessee has, through appropriate Officer's
Certificate, certified that Lessee has or is incurring Negative Base Rent, then
fifty percent (50%) of the amount calculated above as Percentage Rent shall be
applied to Negative Base Rent until Negative Base Rent is paid in full and the
remaining fifty percent (50%) shall be paid by Lessee to Lessor as Percentage
Rent. Notwithstanding anything contained in the immediately preceding sentence
or in this Lease to the contrary, Lessee acknowledges and agrees that if at any
time during the first four (4) years after the Commencement date Negative Base
Rent has been paid in full and at all times after such first four (4) year
period, Lessee shall not be allowed to use any portion of the Percentage Rent,
as calculated above, to offset and/or pay the Negative Base Rent, but, rather,
all such Percentage Rent, as calculated above, shall be paid in full to Lessor.
<PAGE>
EXHIBIT E - PERCENTAGE RENT SCHEDULE (POPLAR BLUFF)
For each Fiscal Year during the Term commencing with the Fiscal Year
beginning January 1, 1996, Lessee shall pay to Lessor percentage rent
("Percentage Rent") on a quarterly basis within twenty (20) days after the end
of each calendar quarter in an amount calculated by the following formula:
The amount equal to the Percentage Rent Gross Revenues Computation
LESS
An amount equal to the cumulative Percentage Rent paid for the
applicable Fiscal Year through the calendar quarter for which this
calculation is being made
EQUALS
Percentage Rent payable for the applicable calendar quarter.
For the purposes of this formula, the Percentage Rent Gross Revenues
Computation is an amount equal to the total of (a) 35% of the first $100,000 of
cumulative Gross Revenues for the applicable Fiscal Year through the calendar
quarter for which the calculation is being made in excess of $555,000 (the
"Break-Even Threshold"), and (b) 37% of all amounts of cumulative Gross Revenues
for the applicable Fiscal Year through the calendar quarter for which this
calculation is being made in excess of $655,000. For the purposes of this
calculation, the Break-Even Threshold shall be increased by 2% per Fiscal Year
during the Term hereof.
It is understood and agreed that if at any time during the first four (4)
years after the Commencement Date, Lessee has, through appropriate Officer's
Certificate, certified that Lessee has or is incurring Negative Base Rent, then
fifty percent (50%) of the amount calculated above as Percentage Rent shall be
applied to Negative Base Rent until Negative Base Rent is paid in full and the
remaining fifty percent (50%) shall be paid by Lessee to Lessor as Percentage
Rent. Notwithstanding anything contained in the immediately preceding sentence
or in this Lease to the contrary, Lessee acknowledges and agrees that if at any
time during the first four (4) years after the Commencement date Negative Base
Rent has been paid in full and at all times after such first four (4) year
period, Lessee shall not be allowed to use any portion of the Percentage Rent,
as calculated above, to offset and/or pay the Negative Base Rent, but, rather,
all such Percentage Rent, as calculated above, shall be paid in full to Lessor.
<PAGE>
EXHIBIT E - PERCENTAGE RENT SCHEDULE (ROCK FALLS)
For each Fiscal Year during the Term commencing with the Fiscal Year
beginning January 1, 1996, Lessee shall pay to Lessor percentage rent
("Percentage Rent") on a quarterly basis within twenty (20) days after the end
of each calendar quarter in an amount calculated by the following formula:
The amount equal to the Percentage Rent Gross Revenues Computation
LESS
An amount equal to the cumulative Percentage Rent paid for the
applicable Fiscal Year through the calendar quarter for which this
calculation is being made
EQUALS
Percentage Rent payable for the applicable calendar quarter.
For the purposes of this formula, the Percentage Rent Gross Revenues
Computation is an amount equal to the total of (a) 28.75% of the first $200,000
of cumulative Gross Revenues for the applicable Fiscal Year through the calendar
quarter for which the calculation is being made in excess of $580,000 (the
"Break-Even Threshold"), and (b) 35% of all amounts of cumulative Gross Revenues
for the applicable Fiscal Year through the calendar quarter for which this
calculation is being made in excess of $780,000. For the purposes of this
calculation, the Break-Even Threshold shall be increased by 3% per Fiscal Year
during the Term hereof.
It is understood and agreed that if at any time during the first four (4)
years after the Commencement Date, Lessee has, through appropriate Officer's
Certificate, certified that Lessee has or is incurring Negative Base Rent, then
fifty percent (50%) of the amount calculated above as Percentage Rent shall be
applied to Negative Base Rent until Negative Base Rent is paid in full and the
remaining fifty percent (50%) shall be paid by Lessee to Lessor as Percentage
Rent. Notwithstanding anything contained in the immediately preceding sentence
or in this Lease to the contrary, Lessee acknowledges and agrees that if at any
time during the first four (4) years after the Commencement date Negative Base
Rent has been paid in full and at all times after such first four (4) year
period, Lessee shall not be allowed to use any portion of the Percentage Rent,
as calculated above, to offset and/or pay the Negative Base Rent, but, rather,
all such Percentage Rent, as calculated above, shall be paid in full to Lessor.
<PAGE>
EXHIBIT E - PERCENTAGE RENT SCHEDULE (SAN DIEGO)
For each Fiscal Year during the Term commencing with the Fiscal Year
beginning January 1, 1996, Lessee shall pay to Lessor percentage rent
("Percentage Rent") on a quarterly basis within twenty (20) days after the end
of each calendar quarter in an amount calculated by the following formula:
The amount equal to the Percentage Rent Gross Revenues Computation
LESS
An amount equal to the cumulative Percentage Rent paid for the
applicable Fiscal Year through the calendar quarter for which this
calculation is being made
EQUALS
Percentage Rent payable for the applicable calendar quarter.
For the purposes of this formula, the Percentage Rent Gross Revenues
Computation is an amount equal to the total of (a) 30% of the first $100,000 of
cumulative Gross Revenues for the applicable Fiscal Year through the calendar
quarter for which the calculation is being made in excess of $1,050,000 (the
"Break-Even Threshold"), and (b) 40% of all amounts of cumulative Gross Revenues
for the applicable Fiscal Year through the calendar quarter for which this
calculation is being made in excess of $1,150,000. For the purposes of this
calculation, the Break-Even Threshold shall be increased by 3% per Fiscal Year
during the Term hereof.
It is understood and agreed that if at any time during the first four (4)
years after the Commencement Date, Lessee has, through appropriate Officer's
Certificate, certified that Lessee has or is incurring Negative Base Rent, then
fifty percent (50%) of the amount calculated above as Percentage Rent shall be
applied to Negative Base Rent until Negative Base Rent is paid in full and the
remaining fifty percent (50%) shall be paid by Lessee to Lessor as Percentage
Rent. Notwithstanding anything contained in the immediately preceding sentence
or in this Lease to the contrary, Lessee acknowledges and agrees that if at any
time during the first four (4) years after the Commencement date Negative Base
Rent has been paid in full and at all times after such first four (4) year
period, Lessee shall not be allowed to use any portion of the Percentage Rent,
as calculated above, to offset and/or pay the Negative Base Rent, but, rather,
all such Percentage Rent, as calculated above, shall be paid in full to Lessor.
<PAGE>
EXHIBIT E - PERCENTAGE RENT SCHEDULE (SOMMERSET)
For each Fiscal Year during the Term commencing with the Fiscal Year
beginning January 1, 1996, Lessee shall pay to Lessor percentage rent
("Percentage Rent") on a quarterly basis within twenty (20) days after the end
of each calendar quarter in an amount calculated by the following formula:
The amount equal to the Percentage Rent Gross Revenues Computation
LESS
An amount equal to the cumulative Percentage Rent paid for the
applicable Fiscal Year through the calendar quarter for which this
calculation is being made
EQUALS
Percentage Rent payable for the applicable calendar quarter.
For the purposes of this formula, the Percentage Rent Gross Revenues
Computation is an amount equal to the total of (a) 32% of the first $200,000 of
cumulative Gross Revenues for the applicable Fiscal Year through the calendar
quarter for which the calculation is being made in excess of $410,000 (the
"Break-Even Threshold"), and (b) 35% of all amounts of cumulative Gross Revenues
for the applicable Fiscal Year through the calendar quarter for which this
calculation is being made in excess of $610,000.
It is understood and agreed that if at any time during the first four (4)
years after the Commencement Date, Lessee has, through appropriate Officer's
Certificate, certified that Lessee has or is incurring Negative Base Rent, then
fifty percent (50%) of the amount calculated above as Percentage Rent shall be
applied to Negative Base Rent until Negative Base Rent is paid in full and the
remaining fifty percent (50%) shall be paid by Lessee to Lessor as Percentage
Rent. Notwithstanding anything contained in the immediately preceding sentence
or in this Lease to the contrary, Lessee acknowledges and agrees that if at any
time during the first four (4) years after the Commencement date Negative Base
Rent has been paid in full and at all times after such first four (4) year
period, Lessee shall not be allowed to use any portion of the Percentage Rent,
as calculated above, to offset and/or pay the Negative Base Rent, but, rather,
all such Percentage Rent, as calculated above, shall be paid in full to Lessor.
<PAGE>
EXHIBIT F INSURANCE
The following are approximate costs for the property and casualty
insurance coverage for the Leased Property:
Location Property Boiler Liability Total
San Diego, CA $12,427 $989 $16,380 $29,776
The above costs are based on non-sprinklered, limited service
facilities. The quote is based on recent appraised values and
estimated business interruption values. The Leased Property will
participate in the Hartford property program which provides a
$1,000 policy deductible. The foregoing property insurance
estimate includes the price of earthquake coverage (with a
$10,000 policy deductible).
The excess/umbrella liability limits are $5 million per
occurrence.
The estimates are based on current market conditions and may
change with the property renewal.
<PAGE>
EXHIBIT F INSURANCE
The following are approximate costs for the property and casualty
insurance coverage for the Leased Property:
Location Property Boiler Liability Total
Somerset, KY $2,094 $809 $8,820 $11,723
The above costs are based on non-sprinklered, limited service
facilities. The quote is based on recent appraised values and
estimated business interruption values. The Leased Property will
participate in the Hartford property program which provides a
$1,000 policy deductible.
The excess/umbrella liability limits are $5 million per
occurrence.
The estimates are based on current market conditions and may
change with the property renewal.
<PAGE>
EXHIBIT F INSURANCE
The following are approximate costs for the property and casualty
insurance coverage for the Leased Property:
Location Property Boiler Liability Total
Rock Falls, IL $2,683 $898 $8,820 $12,401
The above costs are based on non-sprinklered, limited service
facilities. The quote is based on recent appraised values and
estimated business interruption values. The Leased Property will
participate in the Hartford property program which provides a
$1,000 policy deductible.
The excess/umbrella liability limits are $5 million per
occurrence.
The estimates are based on current market conditions and may
change with the property renewal.
<PAGE>
EXHIBIT F INSURANCE
The following are approximate costs for the property and casualty
insurance coverage for the Leased Property:
Location Property Boiler Liability Total
Minor, MO $3,318 $969 $8,820 $13,107
The above costs are based on non-sprinklered, limited service
facilities. The quote is based on recent appraised values and
estimated business interruption values. The Leased Property will
participate in the Hartford property program which provides a
$1,000 policy deductible.
The excess/umbrella liability limits are $5 million per
occurrence.
The estimates are based on current market conditions and may
change with the property renewal.
<PAGE>
EXHIBIT F INSURANCE
The following are approximate costs for the property and casualty
insurance coverage for the Leased Property:
Location Property Boiler Liability Total
Poplar Bluff, MO $2,446 $857 $8,820 $12,123
The above costs are based on non-sprinklered, limited service
facilities. The quote is based on recent appraised values and
estimated business interruption values. The Leased Property will
participate in the Hartford property program which provides a
$1,000 policy deductible.
The excess/umbrella liability limits are $5 million per
occurrence.
The estimates are based on current market conditions and may
change with the property renewal.
<PAGE>
Capital Projects Worksheet
Minor-Super 8
July 20, 1995
<TABLE>
<CAPTION>
Assumptions
State Sales Tax 7.8% $181,835 $0 $16,000
Freight 8.0%
Purchasing Fee 5.5%
Guest Room Cost Tax & Freight Fee Installation Unit Cost # Units Total On Order/Comp 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carpet (40 yd) $353 $56 $19 $250 $678 63 $42,715
Carpet pad $40 $6 $2 $49 63 $3,056
Vinyl $115 $18 $6 $300 $439 0 $0
Drapes $93 $15 $5 $120 $233 63 $14,664
Shears $38 $6 $2 $46 0 $0
Blackouts $42 $7 $2 $51 0 $0
Drapery rod $60 $9 $3 $73 0 $0
Double Bedspread $80 $13 $4 $97 37 $3,589
Queen Bedspread $85 $13 $5 $103 26 $2,680
King Bedspread $90 $14 $5 $109 0 $0
Double bed set $157 $25 $9 $190 99 $18,846
Queen bed set $180 $28 $10 $218 0 $0
King bed set $222 $35 $12 $269 0 $0
Door lock - Ving mechanical $185 $29 $10 $224 0 $0
Door lock - Ving Electronic $220 $35 $12 $267 66 $17,606
Television w/remote $300 $47 $17 $364 0 $0
Television w/o remote $320 $50 $18 $388 0 $0
Air conditioner $600 $95 $33 $728 6 $4,365
Case goods
Double head board (2) $136 $21 $7 $165 20 $3,298
Queen head board (2) $136 $21 $7 $165 0 $0
King head board $106 $17 $6 $129 0 $0
Double/Queen night stand (1) $108 $17 $6 $131 20 $2,619
King nightstand $93 $15 $5 $113 0 $0
Double/Queen wall lamp (1) $52 $8 $3 $63 20 $1,261
King wall lamp (2) $104 $16 $6 $126 0 $0
Dresser $217 $34 $12 $263 20 $5,262
Desk $173 $27 $10 $210 20 $4,195
Desk Chair $110 $17 $6 $133 20 $2,668
Art $75 $12 $4 $91 20 $1,819
Mirror $62 $10 $3 $75 20 $1,504
Lounge chair $200 $32 $11 $243 27 $6,548
Desk Lamp $34 $5 $2 $41 20 $825
Floor lamp $60 $9 $3 $73 20 $1,455
Guest Bath
Vinyl $25 $4 $1 $30 0 $0
Vanity $250 $39 $14 $303 10 $3,031
Tub $200 $32 $11 $243 10 $2,425
Public Area
Carpet (yard) High end $50 $8 $3 incl $61 0 $0
Carpet (yard) Low end $37 $6 $2 incl $45 310 $13,907
Vinyl (yard) $12 $2 $1 incl $15 0 $0
Systems - Major Maintenance
Property Management $0
F&B Point of Sale $0
Telephone $0
Repair Est. Wall $2,500 $2,500 $2,500
Replace Water Heater $7,500 $7,500
Replace Roof $15,000 $0
Parking lot resurface $5,000 $5,000
Property Management System $0 $0 $5,000
Parking lot restriping $3,500 $3,500 $3,500
Repaint Trim $5,000 $5,000 $5,000
</TABLE>
*water heater and roof replacement are shown for information purposes only
<PAGE>
Capital Projects Worksheet
Poplar Bluff MO - Super 8
July 20, 1995
<TABLE>
<CAPTION>
Assumptions
State Sales Tax 7.8% $249,261 $29,646 $69,901
Freight 8.0%
Purchasing Fee 5.5%
Guest Room Cost Tax & Freight Fee Installation Unit Cost # Units Total On Order/Comp 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carpet (40 yd) $353 $56 $19 $250 $678 63 $42,715
Carpet pad $40 $6 $2 $49 63 $3,056
Vinyl $115 $18 $6 $300 $439 0 $0
Drapes $93 $15 $5 $120 $233 63 $14,664 $14,664
Shears $38 $6 $2 $46 0 $0
Blackouts $42 $7 $2 $51 0 $0
Drapery rod $60 $9 $3 $73 0 $0
Double Bedspread $80 $13 $4 $97 37 $3,589 $3,589
Queen Bedspread $85 $13 $5 $103 26 $2,680 $2,680
King Bedspread $90 $14 $5 $109 0 $0
Double bed set $157 $25 $9 $190 99 $18,846
Queen bed set $180 $28 $10 $218 0 $0
King bed set $222 $35 $12 $269 0 $0
Door lock - Ving mechanical $185 $29 $10 $224 0 $0
Door lock - Ving Electronic $220 $35 $12 $267 66 $17,606
Television w/remote $300 $47 $17 $364 63 $22,916 $11,458 $11,458
Television w/o remote $320 $50 $18 $388 0 $0
Air conditioner $600 $95 $33 $728 50 $36,375 $18,188 $18,188
Case goods
Double head board (2) $136 $21 $7 $165 20 $3,298
Queen head board (2) $136 $21 $7 $165 0 $0
King head board $106 $17 $6 $129 0 $0
Double/Queen night stand (1) $108 $17 $6 $131 20 $2,619
King nightstand $93 $15 $5 $113 0 $0
Double/Queen wall lamp (1) $52 $8 $3 $63 20 $1,261
King wall lamp (2) $104 $16 $6 $126 0 $0
Dresser $217 $34 $12 $263 20 $5,262
Desk $173 $27 $10 $210 20 $4,195
Desk Chair $110 $17 $6 $133 20 $2,668 $2,668
Art $75 $12 $4 $91 20 $1,819
Mirror $62 $10 $3 $75 20 $1,504
Lounge chair $200 $32 $11 $243 27 $6,548 $729
Desk Lamp $34 $5 $2 $41 20 $825
Floor lamp $60 $9 $3 $73 20 $1,455
Guest Bath
Vinyl $25 $4 $1 $30 0 $0
Vanity $250 $39 $14 $303 10 $3,031
Tub $200 $32 $11 $243 10 $2,425 $2,425
Public Area
Carpet (yard) High end $50 $8 $3 include $61 0 $0
Carpet (yard) Low end $37 $6 $2 include $45 310 $13,907
Vinyl (yard) $12 $2 $1 include $15 0 $0
Systems - Major Maintenance
Property Management $0
F&B Point of Sale $0
Telephone $0
Repair Est. Wall $0 $0
Replace Water Heater $7,500 $7,500
Replace Roof $15,000 $15,000
Parking lot resurface $5,000 $5,000 $5,000
Property Management System $0 $0
Parking lot restriping $3,500 $3,500 $3,500
Repaint Trim $5,000 $5,000 $5,000
</TABLE>
*water heater and roof replacement are shown for information purposes only
*1995 HVAC and Televisons could be spread over 2 years
<PAGE>
Capital Projects Worksheet
Rock Falls IL - Super 8
July 20, 1995
<TABLE>
<CAPTION>
Assumptions
State Sales Tax 7.8% $226,919 $93,853 $38,616
Freight 8.0%
Purchasing Fee 5.5%
Guest Room Cost Tax & Freight Fee Installation Unit Cost # Units Total On Order/Comp 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carpet (40 yd) $353 $56 $19 $250 $678 63 $42,715 $42,715
Carpet pad $40 $6 $2 $49 63 $3,056 $3,056
Vinyl $115 $18 $6 $300 $439 0 $0
Drapes $93 $15 $5 $120 $233 63 $14,664
Shears $38 $6 $2 $46 0 $0
Blackouts $42 $7 $2 $51 0 $0
Drapery rod $60 $9 $3 $73 0 $0
Double Bedspread $80 $13 $4 $97 37 $3,589
Queen Bedspread $85 $13 $5 $103 26 $2,680
King Bedspread $90 $14 $5 $109 0 $0
Double bed set $157 $25 $9 $190 97 $18,465
Queen bed set $180 $28 $10 $218 0 $0
King bed set $222 $35 $12 $269 2 $538
Door lock - Ving mechanical $185 $29 $10 $224 0 $0
Door lock - Ving Electronic $220 $35 $12 $267 66 $17,606
Television w/remote $300 $47 $17 $364 63 $22,916 $14,544 $8,372
Television w/o remote $320 $50 $18 $388 0 $0
Air conditioner $600 $95 $33 $728 50 $36,375 $19,631 $16,744
Case goods
Double head board (2) $136 $21 $7 $165 20 $3,298
Queen head board (2) $136 $21 $7 $165 0 $0
King head board $106 $17 $6 $129 0 $0
Double/Queen night stand (1) $108 $17 $6 $131 20 $2,619
King nightstand $93 $15 $5 $113 0 $0
Double/Queen wall lamp (1) $52 $8 $3 $63 20 $1,261
King wall lamp (2) $104 $16 $6 $126 0 $0
Dresser $217 $34 $12 $263 20 $5,262
Desk $173 $27 $10 $210 20 $4,195
Desk Chair $110 $17 $6 $133 20 $2,668
Art $75 $12 $4 $91 20 $1,819
Mirror $62 $10 $3 $75 20 $1,504
Lounge chair $200 $32 $11 $243 27 $6,548
Desk Lamp $34 $5 $2 $41 20 $825
Floor lamp $60 $9 $3 $73 20 $1,455
Guest Bath
Vinyl $25 $4 $1 $30 0 $0
Vanity $250 $39 $14 $303 10 $3,031
Tub $200 $32 $11 $243 10 $2,425
Public Area
Carpet (yard) High end $50 $8 $3 incl $61 0 $0
Carpet (yard) Low end $37 $6 $2 incl $45 310 $13,907 $13,907
Vinyl (yard) $12 $2 $1 incl $15 0 $0
Systems - Major Maintenance
Property Management $0
F&B Point of Sale $0
Telephone $0
Repair Est. Wall $0 $0
Replace Water Heater $0 $0
Replace Roof $0 $0
Parking lot resurface $5,000 $5,000 $5,000
Property Management System $0 $0
Parking lot restriping $3,500 $3,500 $3,500
Repaint Trim $5,000 $5,000 $5,000
</TABLE>
<PAGE>
Capital Projects Worksheet
SOMERSET- Super 8
July 20, 1995
<TABLE>
<CAPTION>
Assumptions
State Sales Tax 7.8% $202,741 $729 $22,776
Freight 8.0%
Purchasing Fee 5.5%
Guest Room Cost Tax & Freight Fee Installation Unit Cost # Units Total On Order/Comp 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carpet (40 yd) $353 $56 $19 $250 $678 63 $42,715
Carpet pad $40 $6 $2 $49 63 $3,056
Vinyl $115 $18 $6 $300 $439 0 $0
Drapes $93 $15 $5 $120 $233 10 $2,328
Shears $38 $6 $2 $46 0 $0
Blackouts $42 $7 $2 $51 0 $0
Drapery rod $60 $9 $3 $73 0 $0
Double Bedspread $80 $13 $4 $97 20 $1,940
Queen Bedspread $85 $13 $5 $103 10 $1,031
King Bedspread $90 $14 $5 $109 0 $0
Double bed set $157 $25 $9 $190 20 $3,807
Queen bed set $180 $28 $10 $218 0 $0
King bed set $222 $35 $12 $269 0 $0
Door lock - Ving mechanical $185 $29 $10 $224 0 $0
Door lock - Ving Electronic $220 $35 $12 $267 66 $17,606
Television w/remote $300 $47 $17 $364 51 $18,551 $9,276
Television w/o remote $320 $50 $18 $388 0 $0
Air conditioner $600 $95 $33 $728 57 $41,468
Case goods
Double head board (2) $136 $21 $7 $165 10 $1,649
Queen head board (2) $136 $21 $7 $165 0 $0
King head board $106 $17 $6 $129 0 $0
Double/Queen night stand (1) $108 $17 $6 $131 10 $1,310
King nightstand $93 $15 $5 $113 0 $0
Double/Queen wall lamp (1) $52 $8 $3 $63 10 $631
King wall lamp (2) $104 $16 $6 $126 0 $0
Dresser $217 $34 $12 $263 10 $2,631
Desk $173 $27 $10 $210 10 $2,098
Desk Chair $110 $17 $6 $133 10 $1,334
Art $75 $12 $4 $91 10 $909
Mirror $62 $10 $3 $75 10 $752
Lounge chair $200 $32 $11 $243 10 $2,425
Desk Lamp $34 $5 $2 $41 10 $412
Floor lamp $60 $9 $3 $73 10 $728
Guest Bath
Vinyl $25 $4 $1 $30 0 $0
Vanity $250 $39 $14 $303 10 $3,031
Tub $200 $32 $11 $243 10 $2,425 $729
Public Area
Carpet (yard) High end $50 $8 $3 incl $61 0 $0
Carpet (yard) Low end $37 $6 $2 incl $45 310 $13,907
Vinyl (yard) $12 $2 $1 incl $15 0 $0
Systems - Major Maintenance
Property Management $0
F&B Point of Sale $0
Telephone $0
Repair Est. Wall $2,500 $0
Replace Water Heater $7,500 $7,500
Replace Roof $15,000 $15,000
Parking lot resurface $5,000 $5,000
Property Management System $0 $0 $5,000
Parking lot restriping $3,500 $3,500 $3,500
Repaint Trim $5,000 $5,000 $5,000
</TABLE>
*water heater and roof replacement are shown for information purposes only
<PAGE>
CAPITAL PROJECTS WORKSHEET
MISSION BAY - SUPER 8
JULY 20, 1995
<TABLE>
<CAPTION>
ASSUMPTIONS
STATE SALES TAX 7.8% $314,428 $10,000 $13,377
FREIGHT 8.0%
PURCHASING FEE 5.5%
GUEST ROOM COST TAX & FREIGHT FEE INSTALLATION UNIT COST # UNITS TOTAL ON ORDER/COMP 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carpet (40 yd) $353 $56 $19 $250 $678 50 $33,901
Carpet pad $40 $6 $2 $49 50 $2,425
Vinyl $115 $18 $6 $300 $439 40 $17,578
Drapes $93 $15 $5 $120 $233 60 $13,966
Shears $38 $6 $2 $46 0 $0
Blackouts $42 $7 $2 $51 0 $0
Drapery rod $60 $9 $3 $73 0 $0
Double Bedspread $80 $13 $4 $97 66 $6,402
[cad 170]$6,402
Queen Bedspread $85 $13 $5 $103 20 $2,061 $2,061
King Bedspread $90 $14 $5 $109 5 $546 $546
Double bed set $157 $25 $9 $190 100 $19,036
Queen bed set $180 $28 $10 $218 0 $0
King bed set $222 $35 $12 $269 5 $1,346
Door lock - Ving mechanical $185 $29 $10 $224 117 $26,245
Door lock - Ving Electronic $220 $35 $12 $267 0 $0
Television w/remote $300 $47 $17 $364 80 $29,100
Television w/o remote $320 $50 $18 $388 0 $0
Air conditioner $600 $95 $33 $728 36 $26,190 $4,368
Case goods
Double head board (2) $136 $21 $7 $165 40 $6,596
Queen head board (2) $136 $21 $7 $165 0 $0
King head board $106 $17 $6 $129 5 $643
Double/Queen night stand (1) $108 $17 $6 $131 40 $5,238
King nightstand $93 $15 $5 $113 5 $564
Double/Queen wall lamp (1) $52 $8 $3 $63 20 $1,261
King wall lamp (2) $104 $16 $6 $126 5 $631
Dresser $217 $34 $12 $263 25 $6,578
Desk $173 $27 $10 $210 25 $5,244
Desk Chair $110 $17 $6 $133 100 $13,338
Art $75 $12 $4 $91 20 $1,819
Mirror $62 $10 $3 $75 20 $1,504
Lounge chair $200 $32 $11 $243 20 $4,850
Desk Lamp $34 $5 $2 $41 20 $825
Floor lamp $60 $9 $3 $73 20 $1,455
Guest Bath
Vinyl $25 $4 $1 $30 0 $0
Vanity $250 $39 $14 $303 20 $6,063
Tub $200 $32 $11 $243 20 $4,850
Public Area
Carpet (yard) High end $50 $8 $3 incl $61 0 $0
Carpet (yard) Low end $37 $6 $2 incl $45 200 $8,973
Vinyl (yard) $12 $2 $1 incl $15 100 $1,455
Systems - Major Maintenance
Install Double Entrance Doors $2,000 $2,000
Rework Front Desk Work Station $2,000 $2,000
25 Mini Refrigerators $3,750 $3,750
Paint Exterior $7,000 $7,000
Replace Water Heater $7,500 $7,500
Replace Roof $15,000 $15,000
Parking lot resurface $8,000 $8,000
Property Management System $10,000 $10,000 $10,000
Parking lot restriping $3,500 $3,500
Repaint Trim $5,000 $5,000
</TABLE>
*Hotel needs one additional Water Heater during demand periods
<PAGE>
EXHIBIT H FF&E RESERVE
Lessee and Lessor agree to submit the FF&E Capital Expenditure
Budget for the Fiscal Year 1996 sixty (60) days after
commencement of the Lease.
<PAGE>
EXHIBIT I - MINIMUM PRICE SCHEDULE (MINER)
$2,930,000
<PAGE>
EXHIBIT I - MINIMUM PRICE SCHEDULE (POPLAR BLUFF)
$2,160,000
<PAGE>
EXHIBIT I - MINIMUM PRICE SCHEDULE (ROCK FALLLS)
$2,810,000
<PAGE>
EXHIBIT I - MINIMUM PRICE SCHEDULE (SAN DIEGO)
$2,810,000
<PAGE>
EXHIBIT I - MINIMUM PRICE SCHEDULE (SOMERSET)
$1,850,000
<PAGE>
EXHIBIT J BALANCE SHEET/AMOUNT OF CASH ON HAND MINOR, MO
Lessor and Lessee agree that the balance sheet will include the
following items:
1. Working Capital/Cash on Hand of $25,000.
2. Inventory levels to include a three (3) PAR for
all linen and terry.
3. Capital Funds as described in Section 40 A and
Section 40 B.
4. Payment of any accrued employee vacation benefits
5. Utility deposits and/or funds to pay for utility
deposits
6. Funds to pay for transfer of franchise licenses
<PAGE>
EXHIBIT J BALANCE SHEET/AMOUNT OF CASH ON HAND POPLAR BLUFF, MO
Lessor and Lessee agree that the balance sheet will include the
following items:
1. Working Capital/Cash on Hand of $25,000.
2. Inventory levels to include a three (3) PAR for
all linen and terry.
3. Capital Funds as described in Section 40 A and
Section 40 B.
4. Payment of any accrued employee vacation benefits
5. Utility deposits and/or funds to pay for utility
deposits
6. Funds to pay for transfer of franchise licenses
<PAGE>
EXHIBIT J BALANCE SHEET/AMOUNT OF CASH ON HAND SOMERSET, KY
Lessor and Lessee agree that the balance sheet will include the
following items:
1. Working Capital/Cash on Hand of $25,000.
2. Inventory levels to include a three (3) PAR for
all linen and terry.
3. Capital Funds as described in Section 40 A and
Section 40 B.
4. Payment of any accrued employee vacation benefits
5. Utility deposits and/or funds to pay for utility
deposits
6. Funds to pay for transfer of franchise licenses
<PAGE>
EXHIBIT J BALANCE SHEET/AMOUNT OF CASH ON HAND ROCK FALLS, IL
Lessor and Lessee agree that the balance sheet will include the
following items:
1. Working Capital/Cash on Hand of $25,000.
2. Inventory levels to include a three (3) PAR for
all linen and terry.
3. Capital Funds as described in Section 40 A and
Section 40 B.
4. Payment of any accrued employee vacation benefits
5. Utility deposits and/or funds to pay for utility
deposits
6. Funds to pay for transfer of franchise licenses
<PAGE>
EXHIBIT J BALANCE SHEET/AMOUNT OF CASH ON HAND SAN DIEGO, CA
Lessor and Lessee agree that the balance sheet will include the
following items:
1. Working Capital/Cash on Hand of $50,000.
2. Inventory levels to include a three (3) PAR for
all linen and terry.
3. Capital Funds as described in Section 40 A and
Section 40 B.
4. Payment of any accrued employee vacation benefits
5. Utility deposits and/or funds to pay for utility
deposits
6. Funds to pay for transfer of franchise licenses
<PAGE>
MASTER AGREEMENT
between
HOST FUNDING, INC.
CROSSROADS HOSPITALITY TENANT COMPANY, L.L.C.
and
CROSSROADS HOSPITALITY COMPANY, L.L.C.
October 15, 1995
<PAGE>
MASTER AGREEMENT
THIS MASTER AGREEMENT (this "Agreement"), dated as of October 15, 1995, by
and among HOST FUNDING, INC., a Maryland corporation ("Host"), CROSSROADS
HOSPITALITY TENANT COMPANY, L.L.C., a Delaware limited liability company
("Tenant") and CROSSROADS HOSPITALITY COMPANY, L.L.C., a Delaware limited
liability company ("Crossroads").
W I T N E S S E T H:
WHEREAS, Host holds and owns clear and marketable title to the hotel
properties listed on Exhibit "A" attached hereto and made a part hereof (the
"Hotels");
WHEREAS, contemporaneously with entering into this Agreement, Host is
entering into separate and individual lease agreements with Tenant pursuant to
which Host will lease each of the Hotels to Tenant (hereinafter referred to
individually as a "Lease," and collectively as the "Leases"). All capitalized
terms used herein as defined terms which are not defined herein but which are
defined in any of the Leases shall have the same meanings herein as are given
to them in the Leases in which such terms are defined;
WHEREAS, in furtherance of the consummation of the above-described lease
transactions, Host, Tenant and Crossroads wish to set forth in this Agreement
certain terms and conditions which shall apply to all of the Leases.
NOW, THEREFORE, in consideration of the mutual premises contained herein, and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by the parties hereto, the parties agree as follows:
Section 1. TERMINATION RIGHTS. Notwithstanding anything contained in any of
the Leases to the contrary, Tenant shall, upon the provision to Host of at least
ninety (90) days Notice, have the following termination rights with respect to
the Leases:
(A) Tenant shall have the right to terminate without cause and without
the payment of a Termination Fee (as defined below) any one of the Leases
during the initial five (5) years after the Commencement Date; provided,
however, in the event of a termination without cause pursuant to this
Section 1(A), Tenant shall be obligated to pay Host all Rent and other sums
due to Host with respect to the Lease being so terminated through the date
of such termination.
(B) In the event Tenant shall have terminated one of the Leases during
the initial five (5) years after the Commencement Date pursuant to
Section 1(A) above, Tenant shall have the right to terminate without cause
one more of the Leases during the initial five (5)
1
<PAGE>
years after the Commencement Date by paying to Host the sum of (i) the
applicable Termination Fee (as defined below) for the Lease being so
terminated, as is set forth in Section 1(F) below, and (ii) all Rent and
other sums due to Host with respect to the Lease being so terminated
through the date of such termination.
(C) In the event Tenant shall have terminated two of the Leases during
the initial five (5) years after the Commencement Date pursuant to Sections
1(A) and (B) above, Tenant may not terminate without cause any other Lease
during the initial five (5) years after the Commencement Date without
simultaneously therewith terminating all of the remaining Leases and paying
to Host the sum of (i) the applicable Termination Fee (as defined below) to
Host for each of the Leases being so terminated, as is set forth in Section
1(F) below, and (ii) all Rent and other sums due to Host with respect to each
of the Leases being so terminated through the date of such termination or
terminations.
(D) In addition to and notwithstanding any rights granted to Tenant in
Section 1(A) above, in the event Tenant has not terminated any of the Leases
during the initial three (3) years after the Commencement Date, Tenant shall
have the right to simultaneously terminate without cause and without the
payment of a Termination Fee (as defined below) all but not less than all of
the Leases then in effect after the third (3rd) anniversary of the
Commencement Date but on or prior to the fifth (5th) anniversary of the
Commencement Date; provided, however, in the event of a termination without
cause pursuant to this Section 1 (D), Tenant shall be obligated to pay Host
all Rent and other sums due to Host with respect to the Leases being so
terminated through the date of such termination.
(E) At any time after the fifth (5th) anniversary of the Commencement
Date Tenant shall have the right to terminate without cause and without the
payment of a Termination Fee (as defined below) any of the Leases; provided,
however, in the event of a termination without cause pursuant to this Section
1(E) Tenant shall be obligated to pay Host all Rent and other sums due to
Host with respect to each of the Leases being so terminated through the date
of such termination or terminations; provided further, however, that if
Tenant has, before or after the fifth (5th) anniversary of the Commencement
Date, previously terminated without cause two (2) of the Leases, Tenant may
not thereafter terminate without cause any other Lease without simultaneously
therewith terminating the remainder of the Leases and paying to Host all Rent
and other sums due to Host with respect to each of the Leases being so
terminated through the date of such termination or terminations.
(F) In the event that Tenant terminates any of the Leases pursuant to
Sections 1(B) or (C) above, Tenant shall pay to Host a termination fee or
termination fees (the "Termination Fee" or "Termination Fees") as follows:
(i) If the termination without cause pursuant to Sections 1(B)
and/or (C) above occurs prior to the third (3rd) anniversary of the
Commencement Date, the Termination Fee shall be in an amount equal to the
product of (x) the Base
2
<PAGE>
Management Fee earned during the first year after the Commencement Date
pursuant to the Lease or Leases being so terminated, multiplied by (y)
three (3). For purposes of calculating the Termination Fee due pursuant
to this Section 1(F)(i), if the termination without cause occurs during
the first year after the Commencement Date, the Base Management Fee
earned during the first year after the Commencement Date pursuant to the
Lease or Leases being so terminated, shall be in an amount equal to the
sum of (x) the Base Management Fee actually paid for the portion of such
first year through the date of termination for the Lease or Leases being
so terminated, and (y) the projected Base Management Fee to be paid from
the date of termination for the Lease or Leases being so terminated for
the remainder of such first year.
(ii) If the termination without cause pursuant to Sections 1(B)
and/or (C) above occurs after the third (3rd) anniversary of the
Commencement Date but prior to the fourth (4th) anniversary of the
Commencement Date, the Termination Fee shall be in an amount equal
to the product of (x) the Base Management Fee earned during the first
year after the Commencement Date pursuant to the Lease or Leases being
so terminated, multiplied by (y) two (2).
(iii) If the termination without cause pursuant to Sections 1(B)
and/or (C) above occurs after the fourth (4th) anniversary but on or
prior to the fifth (5th) anniversary of the Commencement Date, the
Termination Fee shall be in an amount equal to the Base Management Fee
earned during the first year after the Commencement Date pursuant to the
Lease or Leases being so terminated.
(iv) Notwithstanding anything contained in this Section 1(F) to the
contrary, Tenant and Crossroads understand and agree that in no event
shall the Base Management Fee for each of the Leases terminated by Tenant
pursuant to Sections 1(B) and/or (C) above be less than the amounts set
forth on EXHIBIT "B" attached hereto and made a part hereof for the
purposes of calculating the Termination Fee or Termination Fees to be
paid to Host pursuant to Sections 1(F)(i), (ii) and/or (iii) above.
(G) Notwithstanding anything contained in this Section 1 to the
contrary, Host understands and agrees that the termination by Tenant of
a Lease pursuant to the provisions of Section 41 of any of the Leases
shall not be deemed a termination without cause pursuant to Sections
1(A), (B), (C), (D) or (E) above.
(H) Notwithstanding anything contained in Section 1(F) above to the
contrary, Host understands and agrees that in the event Tenant has not
recovered all accrued Negative Base Rent at the time of termination
without cause of any of the Leases pursuant to Section 1(B) and/or (C)
above, the Termination Fee payable incident to such termination shall be
reduced by the amount of Negative Base Rent accrued but unrecovered by
Tenant for the Lease or Leases being so terminated.
3
<PAGE>
(I) Notwithstanding anything contained in this Section 1 to the
contrary, Tenant and Crossroads understand and agree that the provisions
of this Section 1 shall in no way release or be deemed to release Tenant
from any other obligations Tenant may have incident to the termination of
any of the Leases (whether such termination is with or without cause),
said obligations being more specifically set forth in each of the Leases.
Section 2. EVENTS OF DEFAULT BY TENANT UNDER THE LEASES. Tenant and
Crossroads understand and agree that if an Event of Default by Tenant occurs
under any of the Leases on or prior to the fifth (5th) anniversary of the
Commencement Date, Tenant is obligated to, among other things, pay to Host
the applicable Termination Fee or Termination Fees described in Section 1(F)
above, together with all Rent and other sums due by Tenant to Host pursuant
to such Lease or Leases through the date of such default termination or
terminations. Tenant and Crossroads further understand and agree that if an
Event of Default by Tenant occurs under any of the Leases after the fifth
(5th) anniversary of the Commencement Date, Tenant is obligated to, among
other things, pay the Host all Rent and other sums due by Tenant to Host
pursuant to such Lease or Leases through the date of such default termination
or terminations.
Section 3. LETTER OF CREDIT COVENANTS. In consideration of the agreement
by Host to enter into the Leases with Tenant and to secure the obligations of
Tenant set forth in Sections 1 and 2 above, Tenant and/or Crossroads covenant
and agree to at all times during the Term (as defined below), provide to Host
a letter of credit in an amount not less than (a) $264,000.00 for the initial
three (3) years after the Commencement Date, (b) $176,000.00 from and after
the third (3rd) anniversary of the Commencement Date until the fourth (4th)
anniversary of the Commencement Date, (c) $88,000.00 after the fourth (4th)
anniversary of the Commencement Date and from and through the fifth (5th)
anniversary of the Commencement Date, and (d) the sum of the Percentage Rent
paid by Tenant pursuant to all of the Leases then in effect for the previous
Fiscal Year after the fifth (5th) anniversary of the Commencement Date and at
all times thereafter during the Term (as defined below); provided, however,
in no event shall the amount of the letter of credit furnished to Host
pursuant to (a), (b) or (c) above be less than an amount equal to the sum of
the Percentage Rent paid by tenant pursuant to the Leases then in effect for
the previous Fiscal Year. Tenant and Crossroads understand and agree that
the letter of credit furnished pursuant to this Section 3 shall be issued by
a financial institution reasonably acceptable to Host and shall otherwise be
upon such other terms and conditions as are reasonably acceptable to Host.
Section 4. GUARANTY IN LIEU OF LETTER OF CREDIT.
(A) Notwithstanding anything contained in Section 3 above to the
contrary, at any time during the Term (as defined below), upon provision to
Host of at least ninety (90) days Notice, Crossroads may elect to guaranty
the obligations of Tenant set forth in Sections 1 and 2 above in substitution
for the obligation to furnish the letter of credit described in Section 3
above. In such event Crossroads covenants and agrees that during the Term
(as defined below) and as applicable with the date of such election,
Crossroads will not permit its Net Worth (as defined below) to be less than
(a) $660,000.00 for the initial three (3) years after the Commencement Date,
(b) $440,000.00
4
<PAGE>
from and after the third (3rd) anniversary of the Commencement Date until
the fourth (4th) anniversary of the Commencement Date and from and through
the fifth (5th) anniversary of the Commencement Date, and (d) in an amount
equal to the sum of the Percentage Rent paid by Tenant pursuant to all of
the Leases then in effect for the previous Fiscal Year from and after the
fifth (5th) anniversary of the Commencement Date and at all time thereafter
during the Term (as defined below).
(B) For purposes of this Section 4, Crossroads understands and agrees
that Net Worth shall mean the sum of the following for Crossroads: (a) the
amount of capital or stated capital (after deducting the cost of any shares
held in its treasury), plus (b) the amount of capital surplus and retained
earnings (or, in the case of a capital or retained earnings deficit, minus
the amount of such deficit), minus (c) the sum of the following (without
duplication of deductions with respect to items already deducted in arriving
at surplus and retained earnings): (1) unamortized debt discount and expense;
and (2) any write-up in the book value of assets resulting from a revaluation
thereof subsequent to the most recent Financials (as defined below) prior to
the date thereof, except any net write-up in value of foreign currency in
accordance with generally accepted accounting principles; provided, however,
that Crossroads covenants and agrees that it will maintain at least forty
percent (40%) of the foregoing Net Worth requirements in liquid assets.
(C) For purposes of this Section 4, Crossroads covenants and agrees to at
all times after its election to so guaranty the obligations of Tenant set
forth in Sections 1 and 2 above and during the Term (as defined below)
provide to Host for each Fiscal Year or other accounting period, statements
of earnings and retained earnings and of changes in financial position for
such period and for the period from the beginning of the respective Fiscal
Year to the end of such period and the related balance sheet as of the end
of such period, together with the notes thereto, all in reasonable detail
and setting forth in comparative form the corresponding figures for the
corresponding period in the preceding Fiscal Year, and prepared in accordance
with generally accepted accounting principles and audited by independent
certified public accounts acceptable to Host in its sole discretion
("Financials").
Section 5. FRANCHISE AGREEMENTS. Host agrees that it will pay any and
all fees or charges necessary to transfer to Tenant any of the Franchise
Agreements applicable to any of the Hotels subject to any of the Leases.
Section 6. TERM. This Agreement shall continue in full force and effect
so long as any of the Leases remain in effect (the "Term").
Section 7. MISCELLANEOUS.
(A) In the event Crossroads elects to guaranty the obligations of
Tenant set forth in Sections 1 and 2 above, Crossroads represents to Host,
as an inducement for Host to enter into the Leases, that Crossroads has
an interest in the financial success of Tenant.
5
<PAGE>
(B) In the event Crossroads elects to guaranty the obligations of
Tenant set forth in Sections 1 and 2 above, notice of acceptance of the
guaranty obligations of Crossroads by Host is hereby waived by Crossroads.
(C) In the event Crossroads elects to guaranty the obligations of
Tenant set forth in Sections 1 and 2 above, Crossroads understands and
agrees that the liability of Crossroads pursuant to this Agreement shall
in no way be affected by (i) the release or discharge of Tenant in any
creditor's receivership, bankruptcy or other proceedings, (ii) the
impairment, limitation or modification of the liability of Tenant or the
estate of Tenant in bankruptcy, or of any remedy for the enforcement of
Tenant's liability under any of the Leases resulting from the operation
of any present or future provision of the United States Bankruptcy Code or
other statute or from the decision of any court, (iii) the rejection or
disaffirmance of any of the Leases in any such proceedings, (iv) the
assignment or transfer of any of the Leases in a manner prohibited by any
of the Leases, (v) any disability or other defense of Tenant, or (vi) the
cessation for any cause whatsoever, other than Host's fault, of the
liability of Tenant pursuant to any of the Leases.
(D) In the event Crossroads elects to guaranty the obligations of
Tenant set forth in Sections 1 and 2 above, Crossroads understands and
agrees that until all the covenants and conditions in the Leases on
Tenant's part to be performed and observed are fully performed and
observed, Crossroads (i) shall have no right of subrogation against Tenant
by reason of any payments or acts of performance by Crossroads in
compliance with the obligations of Crossroads hereunder, (ii) waives any
right to enforce any remedy which Crossroads now or hereafter shall have
against Tenant by reason of any one or more payments or acts of
performance in compliance with the obligations of Crossroads hereunder,
and (iii) subordinates any lability or indebtedness of Tenant now or
hereafter held by Crossroads to the obligations of Tenant to Host under
the Leases.
(E) Any notice which may or is required to be given hereunder
shall be deemed given when received by personal delivery, federal express
or other overnight delivery service, or by registered or certified United
States mail, addressed to Host, Tenant and/or Crossroads at the addresses
set forth after their respective names below, or at such different
addresses as either party shall advise the other party in writing:
<TABLE>
<S> <C>
To Host: with copy to:
Host Funding, Inc. Duncan & Carper
c/o Hunt Properties 703 McKinney Avenue
8235 Douglas Avenue Suite 303
Suite 1300 Dallas, Texas 75202
Dallas, Texas 75225 Attn: James M. Duncan
Attn: Michael McNulty
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
To Tenant: with copy to:
Crossroads Hospitality Tenant
Company, L.L.C. Interstate Hotels Corporation
Foster Plaza Ten Foster Plaza Ten
680 Andersen Drive 680 Andersen Drive
Pittsburgh, Pennsylvania 15220 Pittsburgh, Pennsylvania 15220
Attn: Kevin P. Kilkeary Attn: General Counsel
To Crossroads: with copy to:
Crossroads Hospitality Company, L.L.C. Interstate Hotels Corporation
Foster Plaza Ten Foster Plaza Ten
680 Andersen Drive 680 Andersen Drive
Pittsburgh, Pennsylvania 15220 Pittsburgh, Pennsylvania 15220
Attn: Kevin P. Kilkeary Attn: General Counsel
</TABLE>
(F) This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
(G) This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their successors and assigns.
(H) This Agreement may not be modified or changed orally but may
be modified or changed only by a written agreement signed by the parties
hereto.
(I) No waiver of any breach of any covenant, condition or
agreement contained herein shall be construed to be a subsequent waiver
of that covenant, condition or agreement or of any subsequent breach
thereof or of this Agreement.
(J) If any provision of this Agreement or the application thereof
to any person or circumstances shall be invalid or unenforceable to any
extent, the remainder of this Agreement and the application of such
provisions to other persons or circumstances shall not be affected
thereby and shall be enforceable to the greatest extent permitted by law.
(K) To the extent that any conflict exists between this Agreement
and any of the Leases, this Agreement shall control the understandings
and agreements among the parties respecting the within subject matter.
(L) It is understood and agreed that should any party to this
Agreement commence legal proceedings against the other to enforce the
terms and provisions of this Agreement, the party losing in such legal
proceeding should pay the attorneys' fees and other expenses of the party
prevailing in such legal proceedings.
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<PAGE>
(M) It is understood and agreed that this Agreement is the entire
agreement of the parties hereto with regard to the subject matter
addressed herein and supersedes any prior written or oral agreements
between the parties hereto regarding same.
IN WITNESS WHEREOF, the parties have executed this Lease by their duly
authorized officers as of the date first above written.
HOST
HOST FUNDING, INC.,
a Maryland corporation
By: _______________________
Title: ____________________
TENANT
CROSSROADS HOSPITALITY TENANT
COMPANY, L.L.C.,
a Delaware limited liability company
By: _______________________
Title: ____________________
CROSSROADS
CROSSROADS HOSPITALITY
COMPANY, L.L.C.,
a Delaware limited liability company
By: _______________________
Title: ____________________
8
c:\c:\wpwin\1429.2\master.fnl
<PAGE>
EXHIBIT 10.3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADVISORY AGREEMENT
BETWEEN
HOST FUNDING, INC.
and
HOST FUNDING ADVISORS, INC.
, 1995
----------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ADVISORY AGREEMENT
THIS ADVISORY AGREEMENT (the "Agreement"), dated as of the ___ day of
____ , 1995, between Host Funding, Inc., a Maryland corporation (the "Company"),
and Host Funding Advisors, Inc., a Delaware corporation (the "Advisor"), recites
and provides as follows:
RECITALS
The purposes of the Company are, among other things, to invest debt and
equity in hotel properties (the "Properties"). The Company intends to qualify
as a real estate investment trust pursuant to Sections 856 through 860 of the
Code.
The Company desires to engage the Advisor to provide information, advice,
assistance and facilities to the Company and to have the Advisor undertake the
duties and responsibilities hereinafter set forth, all subject to the
supervision of the Company's Board of Directors (the "Board"), on the terms and
conditions set forth herein. In consideration therefor, the Company desires to
pay the Advisor fees as herein set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, the parties hereto agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms shall
have the meanings set forth below.
1.1 AFFILIATE shall mean (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 stock, shares or equity interests of
such person, or (iii) any officer, director, employee, partner or trustee of
such person or any person controlling, controlled by or under common control
with such person (excluding trustees and persons serving in similar capacities
who are not otherwise an Affiliate of such person). The term "person" means and
includes
<PAGE>
individuals, corporations, general and limited partnerships, stock companies or
associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts, or other entities and governments and
agencies and political subdivisions thereof. For the purposes of this
definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
through the ownership of voting securities, partnership interests or other
equity interests.
1.2 AVERAGE PRICE shall mean the average closing price for the Shares (if,
at the time of determination, the Shares are traded on a national securities
exchange) or the closing bid price as reported on Nasdaq (if, at the time of
determination, the Shares are traded in the over-the-counter market) for the
first ten trading days in April of the year following a year with respect to
which the Advisor is entitled to additional compensation pursuant to Section
11.3.
1.3 BOARD shall mean the Company's Board of Directors.
1.4 BYLAWS shall mean the Company's Bylaws, as the same may be amended
from time to time.
1.5 CHARTER shall mean the Company's charter filed with the Secretary of
State of the State of Maryland, as the same may be amended from time to time.
1.6 CODE shall mean the Internal Revenue Code of 1986, as amended, and as
hereafter amended from time to time.
1.7 FISCAL YEAR shall mean the calendar year and any portion thereof by
the Internal Revenue Service as a reporting period for the Company.
1.8 FUNDS FROM OPERATIONS shall mean the Company's net income (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures will be calculated to reflect Funds From
Operations on the same basis.
1.9 FUNDS FROM OPERATIONS PER SHARE shall mean, for any period, Funds From
Operations for such period divided by the weighted average number of shares of
the Company outstanding (as determined by GAAP) during such period.
1.10 GAAP means generally accepted accounting principles,
2
<PAGE>
consistently applied.
1.11 INDEPENDENT DIRECTORS shall mean a Director of the Corporation who is
not an officer or employee of the Corporation or an Affiliate of (i) any advisor
to the Corporation, (ii) any lessee of any of the Corporation's properties,
(iii) any subsidiary of the Corporation, or (iv) any partnership which is an
Affiliate of the Corporation.
1.12 ORGANIZATION AND OFFERING EXPENSES shall mean all expenses incurred in
connection with the formation of the Company, the registration and qualification
of the Shares under federal and state securities laws, the negotiation and
acquisition of Properties to be acquired by the Company, and the offering and
sale of the Shares, including selling commissions.
1.13 PROPERTIES OR PROPERTY shall mean the hotel properties in which the
Company may make or have investments from time to time, either directly or
indirectly through partnerships in which the Company has an equity interest.
1.14 REIT shall mean a real estate investment trust as defined in the Code.
1.15 SHAREHOLDERS shall mean the holders of record of the Company's Shares.
1.16 SHARES shall mean shares of the common stock of the Company, $.01 par
value per share.
2. DUTIES OF THE ADVISOR. Subject to the terms of the Charter and the
supervision and/or prior approval (if required by the Charter, Bylaws or this
Agreement) of the Board, the Advisor, at its own cost and expense, unless
otherwise set forth herein, on behalf of the Company, shall use its best efforts
to:
2.1 serve as the Company's investment advisor and consultant in connection
with policy and investment decisions to be made by the Board, furnish reports to
the Board, and provide research, economic and statistical data in connection
with Properties and other Company investments;
2.2 administer the day-to-day operations of the Company and perform or
supervise the various administrative functions reasonably necessary for the
management of the Company;
2.3 investigate and recommend to the Company and with the prior approval
of the Board, consultants, accountants, correspondents, lenders, technical
advisors, attorneys, brokers, underwriters, corporate fiduciaries, agents,
depositories, agents
3
<PAGE>
for collection, insurers, insurance agents, banks, builders, property owners,
mortgagors, and other mortgage and investment participants, any and all agents
for any of the foregoing, including Affiliates of the Advisor, and persons
acting in any other capacity deemed by the Board necessary or desirable for the
performance of any of the foregoing services; provided that any fees, costs and
expenses payable to third parties (including Affiliates of the Advisor) incurred
by the Advisor in connection with the foregoing shall be the sole responsibility
of the Company;
2.4 act as attorney-in-fact or agent in disbursing and collecting funds of
the Company, in paying the debts and fulfilling the obligations of the Company
and, with specific approval of the Board, in acquiring, disposing of and
refinancing Properties and other investments and handling, prosecuting and
settling any claims of the Company, including the foreclosure or other
enforcement of any mortgage or other lien securing investments, and exercise its
own discretion in doing so; provided that any fees and costs payable to third
parties (including Affiliates of the Advisor) incurred by the Advisor in
connection with the foregoing shall be the sole responsibility of the Company;
2.5 advise the Company in its negotiations with banks or other lenders
for loans to be made to the Company, and with investment banking firms and
broker-dealers for the public or private sales of the securities of the Company
or for loans for the Company, but in no event in such a way so that the Advisor
shall be acting as broker-dealer or underwriter, and provided, further, that any
fees, costs and expenses payable to third parties (including Affiliates of the
Advisor) in connection with the foregoing shall be the sole responsibility of
the Company;
2.6 advise the Company on investment and reinvestment of money of the
Company;
2.7 obtain appraisal reports (which may be prepared by the Advisor or its
Affiliates) on any Property in which the Company proposes to make an investment;
provided, however, that any fees, costs or expenses payable to third parties
(including Affiliates of the Advisor) in connection with the foregoing shall be
the sole responsibility of the Company;
2.8 at any time reasonably requested by the Board (but not more than
monthly) make reports of its performance of services to the Board;
2.9 communicate on behalf of the Company with the Shareholders of the
Company as required to satisfy the continuous reporting and other requirements
of any governmental bodies or agencies to Shareholders and third parties,
including the Securities and Exchange Commission and the National Association of
4
<PAGE>
Securities Dealers, Inc., and to maintain effective relations with Shareholders;
2.10 counsel the Company in connection with policy decisions to be made by
the Board;
2.11 provide the executive and administrative personnel, office space and
services required in rendering the foregoing services to the Company;
2.12 consult with the Board and the officers of the Company and furnish
them with advice and recommendations with respect to the acquisition,
disposition or financing of Properties or commitments therefor, or other
investments of, or investments to be considered by, the Company, and furnish
advice and recommendations with respect to other aspects of the business and
affairs of the Company, including maintaining its status as a REIT;
2.13 present to the Company investment opportunities that are within the
investment objectives and policies of the Company; and
2.14 perform such other services as may be required from time to time for
management and other activities relating to the assets of the Company as the
Advisor shall deem appropriate under the particular circumstances or as the
Company may reasonably request.
3. COMMITMENTS To meet the investment objectives of the Company, as
determined by the Board from time to time, the Advisor agrees at the direction
of the Board to issue on behalf and in the name of the Company commitments on
such terms as are established by the Board, including a majority of the
Company's Independent Directors, for the acquisition, disposition or financing
of Properties.
4. INFORMATION REGARDING THE COMPANY. In order for the Advisor to fulfill its
duties, the Board shall, to the extent it deems proper, authorize the Company to
provide the Advisor with full information concerning the Company, its
capitalization and investment policies and the intentions of the Board with
respect to future investments. The Company shall furnish the Advisor with a
copy of all audited statements, a signed copy of each report prepared by
independent accountants, and such other information with regard to its affairs
as the Advisor may from time to time reasonably request. The Advisor shall at
all reasonable times have access to the books and records of the Company. The
Advisor shall keep confidential any and all information obtained in connection
with the services rendered hereunder and shall not disclose any such information
to non-Affiliated third parties except with the prior consent of the Board or as
required by legal process or to
5
<PAGE>
discharge its duties hereunder.
5. INVESTMENTS. The Advisor may from time to time be granted, but is not
hereby granted, the power and authority to make and dispose of specific
investments and to make and terminate commitments for specific investments, on
behalf of, in the name of and at the sole risk of the Company, without further
or express authority from the Board; provided, however that the Board shall have
the power to revoke, suspend, modify or limit such power and authority at any
time or from time to time, but not retroactively. Unless otherwise notified by
the Board, a representative of the Advisor shall attend all regular and special
meetings of the Board and the Board shall notify the Advisor of such meetings.
6. BANK ACCOUNTS. The Advisor may establish and maintain one or more bank
accounts in the name of the Company and may collect and deposit into any such
account or accounts, and disburse from any such account or accounts, any money
on behalf of the Company, under such terms and conditions as the Board may
approve, provided that all such accounts shall be maintained in such fashion as
to make clear that the funds are the property of the Company and not of the
Advisor. The Advisor shall from time to time render appropriate accountings of
such collections and payments to the Board and to the auditors of the Company.
7. INVESTMENT UNDERTAKINGS. The Advisor shall use its best efforts to assure
that (i) the title to any Property is insured by appropriate policies of title
insurance; (ii) any Property forming part of the Company's investments is duly
insured, by appropriate insurance policies, against loss or damage by fire, with
extended coverage, and against such other insurable hazards and risks as is
customary and appropriate in the circumstances; (iii) the policies from time to
time specified by the Board with regard to the protection of the Company's
investments are carried out; (iv) proper Board approval is received for all of
the Company's investments; and (v) at the end of each month, the Company's
aggregate outstanding debt does not exceed 35% of the Company's investment in
Properties, at cost, and after giving effect to the Company's use of proceeds
from any debt. Any and all fees and costs incurred by the Advisor in performing
such functions whether payable to its Affiliates or independent persons, shall
be borne solely by the Company.
8. RECORDS. The Advisor shall maintain records of all its activities
hereunder and make such records available for inspection by the Board and by
counsel, auditors and authorized agents of the Company, at any time or from time
to time during normal business
6
<PAGE>
hours.
9. LIMITATIONS ON ACTIVITIES. Anything else in this Agreement to the contrary
notwithstanding:
9.1 The Advisor shall use its best efforts to refrain from taking any
action that in its sole judgment made in good faith and in the exercise of
reasonable care, would affect adversely the status of the Company as a REIT,
would subject the Company to regulation under the Investment Company Act of
1940, would violate any law, rule, regulation or statement of policy of any
governmental body or agency having jurisdiction over the Company or its
securities or otherwise is not permitted by the Charter or Bylaws, except if
such action shall be ordered by the Board, in which case the Advisor shall
notify promptly the Board of the Advisor's judgment of the potential impact of
such action and shall refrain from taking such action until it receives further
clarification or instructions from the Board. The Advisor shall not take any
action ordered by the Board not to be taken. Notwithstanding the foregoing, the
Advisor and its directors, officers, employees and shareholders shall not be
liable to the Company, or to the Board or the Shareholders for any act or
omission by the Advisor, its directors, officers, employees or shareholders,
except as provided in Section 15 of this Agreement.
9.2 Subject to the foregoing, in performing its duties and obligations
under this Agreement, the Advisor shall abide by and comply with the provisions
and policies set forth in the Charter and Bylaws.
10. RELATIONSHIP WITH COMPANY AND LESSEE. Directors, officers, shareholders or
employees of the Advisor may serve as members of the Board and as officers of
the Company, except that no officer, director, partner or employee of the
Advisor who also is a director or officer of the Company shall receive any
compensation from the Company for serving as a director or officer other than
for reasonable reimbursement for travel and related expenses incurred in
attending meetings of the Board. None of the officers or employees of the
Advisor (or the Company) shall be (i) officers or employees of Crossroads
Hospitality Tenant Company, LLC, a Delaware limited liability company, which
will be the Lessee of the Properties ("Lessee"); or (ii) officers or employees
of any person who leases the Properties, furnishes or renders services to the
tenants of the Properties, or manages or operates
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the Properties. If a person serves as both (i) a director and officer (or
employee) of the Advisor (or the Company), and (ii) a director of Interstate
Hotels Corporation, a Pennsylvania corporation, or an affiliate of or any person
who leases the Properties, furnishes or renders services to the tenants of the
Properties, or manages or operates the Properties, that person shall not receive
any compensation for serving as a director of the person who leases the
Properties, furnishes or renders services to the tenants of the Properties, or
manages or operates the Properties. If a person serves as both (i) a director
of the Advisor (or the Company), and (ii) a director and officer (or employee)
of an affiliate of or any other person who leases the Properties, furnishes or
renders services to the tenants of the Properties, or manages or operates the
Properties, that person shall not receive any compensation for serving as
director of the Advisor (or the Company).
11. FEE.
11.1. BASE FEE. The Company shall pay to the Advisor, for services
rendered under this Agreement, a base annual fee of $30,000 payable quarterly,
plus the Company shall fully reimburse the Advisor for any and all third party
professional expenses including but not limited to legal and accounting fees,
not paid directly by the Company, that the Advisor has incurred in accordance
with its obligations under this Agreement.
11.2. PERCENTAGE FEE. If and when the market value of the Company's real
property and/or loans secured by real property equals or exceeds $35,000,000,
then the Company shall pay to the Advisor, for services rendered under this
Agreement, an annual fee equal to 1.25% of the total market value of all real
property and/or loans secured by real property owned by the Company at the time
of payment, plus the Company shall fully reimburse the Advisor for any and all
third party professional expenses including but not limited to legal and
accounting fees, not paid directly by the Company, that the Advisor has incurred
in accordance with its obligations under this Agreement.
11.3. PAYMENT OF FEE. The Company shall pay the Advisor the fee under
Section 11.2 of this Agreement for any year on or before March 31 of the
subsequent year; provided, however, that the fee payable for the partial year
commencing on the date hereof and ending December 31, 1995 shall be due on or
before March 31, 1996. However, during the first three years of the Agreement,
if, for any such year, the dividends per share of the Class A Common Stock of
the Company are equal to an amount less than $22.75 per quarter, the Company
shall only be obligated to pay the Advisor fifty percent (50%) of the fee.
During the fourth year of the Agreement and all years thereafter, if the
dividends per share of the Class A Common Stock of the Company are equal to an
amount less than $22.75 per quarter, then the Company shall pay the Advisor
fifty percent (50%) of the fee in cash and fifty percent (50%) of the fee in
stock of the Company; otherwise, the Company shall pay the entire amount of the
fee to the Advisor in cash. In addition, in no event shall the Company pay
the Advisor a fee in cash if as a result of making such payment (or any part
thereof) the Company would have insufficient cash to make a distribution of
95% of its taxable income to its shareholders. If a payment to the Advisor
can not be made because of this limitation, the amount of the fee not paid to
the advisor shall be deferred to the first succeeding year in which the
Company can pay said amount to the Advisor free of the constraints of this
limitation.
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11.4. STOCK. As additional compensation to the Advisor hereunder,
on or before April 30 of each year beginning in 1996, the Company shall issue to
the Advisor a number of non-registered, restricted Shares equal to the quotient
derived from dividing (i) the product of multiplying (a) 10% of the amount, if
any, by which Funds From Operations per Share in the preceding fiscal year
exceeds Funds From Operations per Share for the fiscal year immediately
preceding such year by (b) the weighted average number of Shares outstanding (as
determined by GAAP) for the preceding fiscal year, (ii) by the Average Price;
provided, however, that no Shares shall be issued to the Advisor which cause the
Advisor, directly or indirectly (within the meaning of Section 856(d)(5) of the
Code), to own 9.9% or more of the then outstanding Shares or otherwise would
jeopardize the Company's status as a REIT. In lieu of distributing to the
Advisor Shares which would cause the Advisor to exceed the ownership limitation
set forth in the preceding sentence, the Company shall have the option to pay to
the Advisor the equivalent value of such Shares in cash. Funds From Operations
for any year shall be calculated utilizing the Company's audited financial
statements for the year. If this Agreement is terminated before the end of a
fiscal year other than pursuant to Section 19, the Advisor shall be entitled to
a pro rata amount of the additional compensation otherwise payable under this
Section 11.4 for such fiscal year, if any (based on the number of days of such
fiscal year before the termination and a 365 day year).
11.5. Notwithstanding anything in subsection 11.4 above, the Advisor shall
not be entitled to any Share issuance based upon the increase in Funds From
Operations per Share for any year unless Funds From Operations per Share for the
year exceeds $.91.
For example, assuming the weighted average number of Shares outstanding is
4,000,000 in each year in this example, if Funds From Operations per Share for
1994 were $.95 and Funds From Operations per Share for 1995 were $1.05, on or
before April 30, 1996, the Advisor would be entitled to receive the number of
Shares determined by multiplying 10% of the $.10 per share increase (or $.01)
times 4,000,000 Shares (or $40,000), divided by the Average Price. If Funds
From Operations per Share for 1996 were $1.00, the Advisor would not be entitled
to receive any Shares since, although 1996 Funds From Operations per Share would
have exceeded 1994 Funds From Operations per Share, it would not have exceeded
the Funds From Operations per Share for the immediately preceding fiscal year.
If 1996 Funds From Operations per Share were $1.00 and 1997 Funds From
Operations per Share were $1.20, on or before April 30, 1998, the Advisor would
be entitled to receive the number of Shares determined by multiplying 10% of the
$.20 per Share increase (or $.02) times 4,000,000 Shares (or $80,000), divided
by the Average Price.
11.6. The Advisor acknowledges and understands that any
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Shares issued to the Advisor by the Company under this Section 11 will not be
registered under the Securities Act of 1933, as amended, or any state securities
laws and cannot be sold or otherwise transferred except pursuant to an exemption
from registration under such laws or an effective registration statement
thereunder.
12. LOANS. If any loans are made to the Company by the Advisor or an
Affiliate of the Advisor, the maximum amount of interest that may be charged by
the Advisor or such Affiliate shall be no greater than the prime rate announced
by Citibank, N.A., New York, New York from time to time plus 1%, and the terms
of any such loans shall be no less favorable than the terms available to the
Company from unaffiliated parties for similar commercial loans. If Citibank, N.
A. for any reason fails to announce a prime rate, the maximum amount of interest
that may be charged on such loans shall be no greater than the prime rate
published by the Wall Street Journal from time to time plus 1%. For purposes
hereof, any reimbursement to which the Advisor is entitled from the Company, if
not paid within 30 days after such reimbursement is due, shall bear interest at
such rate from the date on which such reimbursement is due the Advisor until
paid in full.
13. EXPENSES.
13.1 In addition to reimbursements elsewhere provided for in this Agreement
(including, but not limited to, Sections 2 and 7) and subject to a restructuring
of the fee pursuant to Section 11.6, the Company shall pay directly or reimburse
the Advisor for the following expenses incurred by the Advisor on behalf of the
Company in connection with the services provided by Advisor to the Company
hereunder, in addition to the compensation provided for in this Agreement:
13.1.1 Organization and Offering Expenses incurred by the Advisor;
13.1.2 expenses incurred in connection with the initial investment
of the funds of the Company;
13.1.3 interest and other costs for borrowed money, including
discounts, points and other similar fees;
13.1.4 taxes and assessments on property and taxes as an expense of
doing business directly related to the Advisor's activities on behalf of the
Company hereunder;
13.1.5 fees and commissions, including finder's fees
10
<PAGE>
and brokerage commissions with respect to the acquisition and disposition of
assets of the Company, including, without limitation, costs of foreclosure,
maintenance, repair and improvement of property; provided, however, that neither
the Advisor nor any of its Affiliates may receive any such finder's fee or
brokerage commission;
13.1.6 costs associated with insurance required either in
connection with the business of the Company or by the Board;
13.1.7 reasonable expenses of managing and operating real property
owned by the Company, whether payable to an Affiliate of the Advisor or an
unrelated person;
13.1.8 fees and expenses of legal counsel for the Company;
13.1.9 fees and expenses of independent auditors, accountants or
other third party advisers, appraisers or consultants engaged by the Company;
13.1.10 all expenses in connection with payments to the Board and
meetings of the Board and Shareholders;
13.1.11 expenses associated with the issuance and distribution of
any Shares of the Company at any time, such as selling commissions and fees,
taxes, legal and accounting fees, listing and registration fees;
13.1.12 dividend and dividend distributions;
13.1.13 expenses of dissolving the Company, or revising, amending,
converting or modifying the Charter or Bylaws;
13.1.14 reasonable expenses of maintaining communications with
Shareholders, including the cost of preparation, printing and mailing annual
reports and other Shareholder reports, proxy statements and other reports
required by the Charter, Bylaws or applicable law;
13.1.15 expenses, costs and, damages for which reimbursement or
indemnification is expressly provided in the Company's Charter or Bylaws; and
13.1.16 expenses related to the investment or prospective investment
in Properties and other Company investments, and other fees relating to
acquiring Properties and making other investments; provided, that the Board must
approve the reimbursement of expenses incurred with respect to any Property
which are incurred after the Company (or the Advisor on behalf of the Company)
enters into a definitive purchase agreement with
11
<PAGE>
respect to such Property.
The Advisor shall prepare a statement documenting the expenses of the
Advisor and the Company during each quarter, and shall deliver such statement to
the Board within 45 days after the end of such quarter. Any expense paid or
payable to an Affiliate of the Advisor for which the Advisor is seeking payment
or reimbursement hereunder shall be reasonable. Expenses incurred by the
Advisor on behalf of the Company and reimbursable pursuant to this Section 13,
shall be reimbursed quarterly to the Advisor within 20 days following receipt by
the Company of the statement therefor from the Advisor.
13.2 Except as otherwise provided herein, the Advisor shall pay all of its
expenses incurred in connection with the performance of its obligations under
this Agreement, including, without limitation, the following expenses:
13.2.1 employment expenses of the Advisor, including, but not
limited to, salaries, wages, payroll taxes, costs of employee benefit plans,
and, except to the extent that such expenses are otherwise reimbursable pursuant
to this Agreement, temporary help expenses;
13.2.2 audit fees and expenses of the Advisor;
13.2.3 legal fees and other expenses of professional services of
the Advisor;
13.2.4 insurance of the Advisor; and
13.2.5 all other administrative and overhead expenses of the
Advisor.
14. OTHER SERVICES. Should the Board request that the Advisor or any officer
or employee thereof render services for the Company other than as set forth in
this Agreement, such services shall be separately compensated and not be deemed
to be services pursuant to,this Agreement.
15. ADVISORY RESPONSIBILITY. The Advisor assumes no responsibility under this
Agreement other than to use its best efforts to render the services called for
hereunder in good faith. The Advisor shall not be responsible for any action of
the Board in following or declining to follow any advice or recommendations of
the Advisor. The Advisor, its officers, directors and employees, shall not be
liable to the Company, the Company's Shareholders, or others, except by reason
of acts constituting bad faith, misconduct, illegality, gross negligence or
reckless disregard of duty. The
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Advisor shall reimburse, indemnify and hold harmless the Company, its officers,
directors and employees for and from any and all expenses, losses, damages,
liabilities, demands, charges and claims of any nature (including reasonable
attorneys' fees) (collectively, "Losses"), and respect of or arising from any
acts or omissions of the Advisor or any of its Affiliates constituting bad
faith, misconduct, illegality, gross negligence or reckless disregard of duty.
The Company shall reimburse, indemnify and hold harmless the Advisor, its
officers, directors and employees, for and from any and all Losses in respect of
or arising from any acts or omissions of the Advisor, its officers, directors
and employees, made in good faith in the performance of the Advisor's duties
under this Agreement and not constituting bad faith, misconduct, illegality,
gross negligence or reckless disregard of its duties.
16. RELATIONSHIP OF ADVISOR AND COMPANY. The Company and the Advisor are not
partners or joint venturers with each other, and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
17. OTHER ACTIVITIES.
17.1 Neither the Advisor nor any of its Affiliates shall engage in the
business of brokering the sale or purchase of Properties, except pursuant to the
Post-Formation Acquisition Agreement of which the Company is a party.
17.2 During the term of this Agreement, neither the Advisor nor any of its
Affiliates shall participate in the development of or own any interest in any
hotel or motel property other than those owned by the Company, and/or Affiliates
and those listed on EXHIBIT A hereto; provided, however, that the Advisor or its
Affiliates may own interests in hotel or motel properties to be developed or
constructed after the date hereof if the entity owning such property grants to
the Company a right of first refusal to acquire such property, which would allow
the Company to purchase the property for the same price and on the same terms
offered by any bona fide third party offeree.
17.3 During the term of this Agreement, neither the Advisor nor any of its
Affiliates shall manage or agree to manage any hotel or motel property that is
located within 5 miles of a hotel or motel in which the Company or its has
invested; provided that the Advisor and its Affiliates shall not be deemed to be
in violation of this provision if they manage or agree to manage a hotel or
motel within 5 miles of a hotel or motel in which the Company or its Affiliates
invests subsequent to the time of management or agreement to manage by the
Advisor or its Affiliates.
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17.4. Except as set forth in paragraphs 17.1 and 17.2 above, nothing
contained herein shall limit the right of the Advisor, any officers, directors
or employees of the Advisor whether or not a director, officer, or employee of
the Company, to engage in other business or to render services of any kind to
any other person, or entity.
18. TERM. Unless sooner terminated pursuant to Section 19 or 20, this
Agreement shall remain in force until the last day of December, 199 , and
thereafter it will be submitted to the Independent Directors annually for their
approval to extend the term for an additional one year term.
19. TERMINATION BY COMPANY. At the sole option of a majority of the Directors,
this Agreement may be terminated by written notice of termination from the
Company to the Advisor if any of the following events occur:
19.1 the Advisor shall violate or default in the performance of any
material provision of this Agreement and, after written notice of such
violation, shall not cure such default within 30 days or, if the default is of a
nature that it cannot be cured within 30 days, the Advisor shall not diligently
proceed to cure the default as soon as practicable and shall not actually cure
such default within 90 days; or
19.2 the Advisor shall be adjudged bankrupt or insolvent by a court of
competent jurisdiction, or an order shall be made by a court of competent
jurisdiction for the appointment of a receiver, liquidator, or trustee of the
Advisor, or of all or substantially all of its property by reason of the
foregoing, or approving any petition filed against the Advisor for
reorganization, and such adjudication or order shall remain in force or unstayed
for a period of 30 days; or
19.3 the Advisor shall institute proceedings for voluntary or shall file a
petition seeking reorganization under the federal bankruptcy laws, or for relief
under any law for relief of debtors, or shall consent to the appointment of a
receiver for itself or for all or substantially all of its property, or shall
make a general assignment for the benefit of its creditors, or shall admit in
writing its inability to pay its debts, generally, as they become due.
Any notice of termination under this or the immediately succeeding Section
shall be effective on the date specified in such notice, which may be the day on
which such notice is given or any date thereafter. The Advisor agrees that if
any of the events specified in subsection 19.2 and 19.3 of this Section shall
occur,
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it shall give written notice thereof to the Board within 15 days after the
occurrence of such event
20. TERMINATION BY EITHER PARTY. In addition to Section 19, this Agreement
maybe at any time, without cause or penalty, which on shall be effective not
less than 60 days following receipt of written notice, by a vote of a majority
of the Board, by the Shareholders as provided in the Bylaws, or by the Advisor.
In the event this Agreement is terminated by the Company pursuant to Section
19.2, 19.3, or 20, any and all compensation and reimbursements due to the
Advisor and any of its Affiliates the effective date of on shall be paid in full
by the Company on or before the effective date of the termination, except that
(i) in the event of a termination pursuant to Sections 19.2 or 19.3, the
compensation and reimbursements payable by the Company in accordance with this
Section 20, if any, shall be offset by any amounts owed by the Advisor to the
Company and (ii) computation and payment of fees accrued under Section 11.3 of
this Agreement may be paid on or before April 30 of the year following
termination.
21. ASSIGNMENT PROHIBITION. This Agreement may not be assigned by the Advisor
without the approval of a majority of the Board; provided, however, that such
approval shall not be required in the case of an assignment to a corporation,
association, trust or organization which may take over substantially all of the
assets and carry on substantially all of the affairs of the Advisor, provided
that at the time of such assignment, at least a majority of the outstanding
capital stock of such successor organization shall be owned substantially by the
current owners of a majority of the outstanding Common Stock of the Advisor and
that an officer of the Advisor shall deliver to the Board a statement in writing
indicating the ownership structure of the successor organization. Such an
assignment shall bind the assignees hereunder in the same manner as the Advisor
is bound hereunder. This Agreement shall not be assigned by the Company without
the consent of the Advisor, except in the case of an assignment by the Company
to a corporation or other organization which is a successor to the Company, in
which case such successor organization shall be bound hereunder and by the terms
of said assignment in the same manner as the Company is bound hereunder.
22. DUTIES UPON TERMINATION. After the effective date of termination of this
Agreement, the Advisor shall not be entitled to compensation for further
services hereunder. The Advisor shall forthwith upon such termination:
22.1 promptly pay over to the Company all money collected and held for the
account of the Company pursuant to this Agreement,
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<PAGE>
after deducting any accrued compensation and reimbursement for its expenses to
which it is then entitled;
22.2 promptly deliver to the Board a full accounting, including a statement
showing all payments collected by it and a statement of all money held by it,
covering the period following the date of the last accounting furnished to the
Board; and
22.3 promptly deliver to the Board all property and documents of the
Company then in the custody of the Advisor; and
22.4 use its best efforts to cooperate with the Company to ensure an
orderly transition of the services provided hereunder.
23. NOTICES. Any notice, report or other communication required or permitted
to be given hereunder shall be in writing unless some other method of giving
such notice, report or other communication is accepted by the party to whom it
is given, and shall be given by being delivered to the addresses set forth
herein:
To the Board and
to the Company: Host Funding, Inc.
c/o Michael S. McNulty
8235 Douglas Ave., Suite 1300
Dallas, TX 75225
To the Advisor: Ian Gardner-Smith
Host Funding Advisors, Inc.
7825 Fay Avenue, Suite 250
La Jolla, CA 92037
Either party may at any time give notice in writing to the other party of a
change in its address for the purposes of this Section.
24. MODIFICATION. This Agreement shall not be changed, modified or amended, in
whole or in part, except by an instrument in writing signed by both parties
hereto, or their respective successors or assigns.
25. SHAREHOLDER LIABILITY. No Shareholder of the Company shall be personally
liable for any of the obligations of the Company under this Agreement.
26. SEVERABILITY. The provisions of this Agreement are independent of and
severable from each other, and no provision shall be affected or rendered
invalid or unenforceable by virtue of the fact that for any reason any other or
others of them may be
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invalid or unenforceable in whole or in part.
27. BINDING. This Agreement shall bind any successors or assigns of the
parties hereto as herein provided.
28. CONSTRUCTION. The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of California.
29. ENTIRE AGREEMENT. This Agreement contains the entire agreement and
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements, understandings,
inducements and conditions, express or implied, oral or written, of any nature
whatsoever with respect to the subject matter hereof. The express terms hereof
control and supersede any course of performance or usage of the trade
inconsistent with any of the terms hereof.
30. INDULGENCES, NOT WAIVERS. Neither the failure nor any delay on the part
of a party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
Time is of the essence of this Agreement.
31. GENDER. Words used herein regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
32. TITLES NOT TO AFFECT INTERPRETATION. The titles of paragraphs and
subparagraphs contained in this Agreement are for convenience only, and they
neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.
33. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be
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<PAGE>
an original as against any party whose signature appears thereupon, and all of
which shall together constitute one and the same instrument. This Agreement
shall become binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of all of the parties reflected hereon as
the signatories.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers as of the day and year first written above.
HOST FUNDING, INC.,
a Maryland corporation
/s/ Michael S. McNulty
-------------------------------
By: Michael S. McNulty
Its: President
HOST FUNDING ADVISORS, INC.,
a Delaware corporation
/s/ Michael S. McNulty
-------------------------------
By: Michael S. McNulty
Its: President
19
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EXHIBIT A
Existing Hotel Ownership Interests
20
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EXHIBIT 10.5
<PAGE>
AN APPRAISAL OF THE SUPER 8 MOTEL IN
MINER, MISSOURI
for
HOST FUNDING, INC.
AS OF DECEMBER 1, 1994
Copyright 1994, Arthur Andersen LLP, 33 West Monroe Street, Chicago, Illinois
60603, U.S.A.
All rights reserved.
<PAGE>
[Letterhead]
December 27, 1994
Mr. John Phillips
President
Host Funding, Inc.
7825 Fay Avenue, Suite 250
LaJolla, California 92037
312-507-5993
Re: Super 8 Motel, Miner, Missouri
Dear Mr. Phillips:
In accordance with your request, we have performed a complete self-contained
narrative appraisal of the Super 8 Motel located in Miner, Missouri. It is a
limited service hotel with 63 rooms situated on 87,120 square feet of land.
The purpose of this appraisal is to estimate the market value of the fee simple
interest in the property on a going-concern basis, as of December 1, 1994. It
is our understanding that the report is to be used for securitization purposes.
A copy of this report may be distributed to Mr. Guy Hatfield of All American
Group LP, and may be included, or referred to, in a Securities and Exchange
Commission Filing. This report can only be used for the purposes stated and
only by our client and the listed third parties.
The accompanying report, of which this letter is a part, describes the building
improvements and methods of appraisal, and contains pertinent data considered in
reaching our value conclusions. The opinion of value is subject to the attached
certification and statement of general assumptions and limiting conditions.
Based on our analysis, the market value of the fee simple interest in the
subject property on a going-concern basis, as of December 1, 1994, was:
TWO MILLION NINE HUNDRED THIRTY THOUSAND DOLLARS
$2,930,000
Our appraisal of the property, including basic assumptions and limited
conditions, is detailed in the attached report.
Very truly yours,
<PAGE>
TABLE OF CONTENTS
LETTER OF TRANSMITTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY OF SALIENT FACTS AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . 3
CERTIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
STATEMENT OF GENERAL ASSUMPTIONS AND LIMITING CONDITIONS . . . . . . . . . . . 6
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Property Appraised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Property Rights Appraised. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Purpose and Function of the Appraisal. . . . . . . . . . . . . . . . . . . . 8
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Ownership History. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Date of Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Scope of the Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Marketing Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
DESCRIPTION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Site Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Improvement Description. . . . . . . . . . . . . . . . . . . . . . . . . . .11
Property Taxes and Assessments . . . . . . . . . . . . . . . . . . . . . . .13
Zoning and Other Use Restrictions. . . . . . . . . . . . . . . . . . . . . .13
Area Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Neighborhood Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
MARKET ANALYSIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Market Segments/Competitive Supply . . . . . . . . . . . . . . . . . . . . .18
Average Daily Rate and Occupancy . . . . . . . . . . . . . . . . . . . . . .19
HIGHEST AND BEST USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
VALUATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
COST APPROACH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Site Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Valuation of Improvements. . . . . . . . . . . . . . . . . . . . . . . . . .29
SALES COMPARISON APPROACH. . . . . . . . . . . . . . . . . . . . . . . . . . .32
Summary of the Sales Comparison Approach . . . . . . . . . . . . . . . . . .34
INCOME CAPITALIZATION APPROACH . . . . . . . . . . . . . . . . . . . . . . . .35
Market and Subject Operating Trends. . . . . . . . . . . . . . . . . . . . .36
Income and Forecast Assumptions. . . . . . . . . . . . . . . . . . . . . . .38
Expenses Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Direct Capitalization Method . . . . . . . . . . . . . . . . . . . . . . . .41
Discounted Cash Flow Method. . . . . . . . . . . . . . . . . . . . . . . . .43
Conclusion of the Income Capitalization Approach . . . . . . . . . . . . . .45
RECONCILIATION AND FINAL VALUE ESTIMATE. . . . . . . . . . . . . . . . . . . .46
ADDENDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
Property Name: Super 8 Motel
Location: 2609 East Malone
Miner, Missouri
Owner of Record: Guy Hatfield
Real Estate Tax Identification Code: 18 5.0 22.00 002 002 002.00
Date of Valuation: December 1, 1994
Purpose and Function of the Appraisal: Estimate the market value of
the fee simple interest on a going-
concern basis for securitization
purposes.
Interest Appraised: Fee simple on a going concern basis
Land Area: 87,120 square feet
Building Description: Two story, Class D, limited service
hotel with 63 rooms, wood frame hotel
with masonite exterior walls, painted
hardwood exterior trim, painted drywall
interior, asphalt shingled gable roof
Year Completed/Renovated: 1985
Amenities: Continental breakfast, guest fax
services, HBO and cable TV, free local
calls, VIP frequent stayer program
Highest and Best Use
AS VACANT: Improve with a commercial use
AS IMPROVED: Current Use
Year of Stabilization: FY 1996 (DECEMBER 1, 1995 THROUGH
NOVEMBER 30, 1996)
OCCUPANCY: 85%
AVERAGE DAILY RATE: $39.66
Indications of Value
COST APPROACH: $2,930,000
SALES COMPARISON APPROACH: $2,550,000
INCOME CAPITALIZATION APPROACH: $2,930,000
Direct Capitalization Method: $2,990,000
Discounted Cash Flow Method: $2,860,000
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 3
<PAGE>
Final Value Opinion: $2,930,000
Unit Value Conclusion
PER ROOM: $46,500 (rounded)
PER SQUARE FOOT: $135.00 (rounded)
Allocation of Value: Real Property: $1,252,000
Personal Property: 268,000
Business Value: 1,410,000
----------
Total: $2,930,000
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 4
<PAGE>
CERTIFICATION
We certify that, to the best of our knowledge and belief,
the statements of fact contained in this report are true and correct;
the reported analyses, opinions, and conclusions are limited only by the
accompanying limiting conditions and assumptions, and are our personal,
unbiased professional analyses, opinions, and conclusions;
we have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved;
our compensation is not contingent on an action or event resulting from the
analyses, opinions or conclusions in, or the use of, this report;
our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice;
as of the date of this report, William J. Carter has completed the
requirements of the continuing education program of the Appraisal
Institute;
a personal inspection of the property that is the subject of this report
was made by Bryan T. Clark on December 1, 1994;
William J. Carter and Kimberly L. Sass did not inspect the property that is
the subject of this report;
no one provided significant professional assistance to the persons signing
this report; and that
we certify that the use of this report is subject to the requirements of
the Appraisal Institute relating to review by its duly authorized
representatives.
----------------------------------------------
William J. Carter, MAI
Participating Principal - Real Estate Services
Review Appraiser
----------------------------------------------
Kimberly L. Sass
Manager - Real Estate Services
Review Appraiser
- -------------------------
Bryan T. Clark
Staff Appraiser
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 5
<PAGE>
STATEMENT OF GENERAL ASSUMPTIONS AND LIMITING
CONDITIONS
This appraisal report is subject to the following general assumptions and
limiting conditions:
1. No investigation has been made of, and no responsibility is assumed for,
the legal description or for legal matters including title or encumbrances.
Title to the property is assumed to be good and marketable unless otherwise
stated. The property is further assumed to be free and clear of liens,
easements, encroachments and other encumbrances unless otherwise stated,
and all improvements are assumed to lie within property boundaries.
2. Information furnished by others, upon which all or portions of this report
are based, is believed to be reliable, but has not been verified in all
cases. No warranty is given as to the accuracy of such information.
3. It is assumed that all required licenses, certificates of occupancy,
consents, or other legislative or administrative authority from any local,
state, or national government or private entity or organization have been,
or can readily be obtained, or renewed for any use on which the value
estimates provided in this report are based.
4. Full compliance with all applicable federal, state and local zoning, use,
occupancy, environmental, and similar laws and regulations is assumed,
unless otherwise stated.
5. No responsibility is taken for changes in market conditions and no
obligation is assumed to revise this report to reflect events or conditions
which occur subsequent to the appraisal date hereof.
6. Responsible ownership and competent property management are assumed.
7. The allocation, if any, in this report of the total valuation among
components of the property applies only to the program of utilization
stated in this report. The separate values for any components may not be
applicable for any other purpose and must not be used in conjunction with
any other appraisal.
8. Areas and dimensions of the property were obtained from sources believed to
be reliable. Maps or sketches, if included in this report, are only to
assist the reader in visualizing the property and no responsibility is
assumed for their accuracy. No independent surveys were conducted.
9. It is assumed that there are no hidden or unapparent conditions of the
property, subsoil, or structures that affect value. No responsibility is
assumed for such conditions or for arranging for engineering studies that
may be required to discover them.
10. No soil analysis or geological studies were ordered or made in conjunction
with this report, nor was an investigation made of any water, oil, gas,
coal, or other subsurface mineral and use rights or conditions.
11. Neither Arthur Andersen LLP nor any individuals signing or associated with
this report shall be required by reason of this report to give further
consultation, to provide testimony or appear in court or other legal
proceedings, unless specific arrangements therefor have been made.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 6
<PAGE>
12. This appraisal has been made in conformance with, and is subject to, the
requirements of the Code of Professional Ethics and Standards of
Professional Conduct of the Appraisal Institute and the Uniform Standards
of Professional Appraisal Practice.
13. This report has been made only for the purpose stated and shall not be used
for any other purpose. Neither this report nor any portions thereof
(including without limitation any conclusions as to value, the identity of
Arthur Andersen LLP or any individuals signing or associated with this
report, or the professional associations or organizations with which they
are affiliated) shall be disseminated to third parties by any means without
the prior written consent and approval of Arthur Andersen LLP.
14. We have not been engaged nor are qualified to detect the existence of
hazardous material which may or may not be present on or near the property.
The presence of potentially hazardous substances such as asbestos, urea-
formaldehyde foam insulation, industrial wastes, etc. may affect the value
of the property. The value estimate herein is predicated on the assumption
that there is no such material on, in, or near the property that would
cause a loss in value. No responsibility is assumed for any such
conditions or for any expertise or engineering knowledge required to
discover them. The client should retain an expert in this field if further
information is desired.
15. The date of value to which the conclusions and opinions expressed in this
report apply is set forth in the opinion letter at the front of this
report. Our value opinion is based on the purchasing power of the United
States' dollar as of this date.
16. The Americans with Disabilities Act (ADA) became effective January 26,
1992. We have not made a specific compliance survey and analysis of this
property to determine whether or not it is in conformity with the various
detailed requirements of the ADA. It is possible that a compliance survey
of the property, together with a detailed analysis of the requirements of
the ADA, could reveal that the property is not in compliance with one or
more of the requirements of the Act. If so, this fact could have a
negative effect upon the value of the property. Since we have no direct
evidence relating to this issue, we did not consider possible noncompliance
with the requirements of the ADA in estimating the value of the property.
17. Arthur Andersen & Co's maximum liability relating to services rendered for
this engagement (regardless of form of action, whether in contract,
negligence or otherwise), shall be limited to the fees paid to Arthur
Andersen LLP for its services under this agreement. In no event shall
Arthur Andersen LLP be liable for consequential, special, incidental or
punitive loss, damage or expense (including without limitation, lost
profits, opportunity costs, etc.) even if it has been advised of their
possible existence.
18. Client shall indemnify and hold Arthur Andersen LLP and its personnel from
and against any claims, liabilities, costs and expenses (including, without
limitation, attorney's fees and the time of Arthur Andersen LLP personnel
involved but excluding consequential, special incidental or punitive
damages) brought against, paid or incurred by Arthur Andersen LLP at any
time and in any way arising out of a breach by client of its obligations
under this agreement.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 7
<PAGE>
INTRODUCTION
PROPERTY APPRAISED
The Super 8 Motel is a limited service motel with 63 rooms located at 2609 East
Malone, Miner, Missouri. The improvements were completed in 1985 and consist of
approximately 21,696 square feet and occupy approximately 87,120 square feet of
land. A copy of the legal description is located in the Addenda.
PROPERTY RIGHTS APPRAISED
Since the property is appraised as a going-concern, we assume all property
rights which can be owned are included in our estimate of market value. The
property rights included are as follows:
1. RIGHTS IN REAL ESTATE
- LAND, SITE IMPROVEMENTS AND BUILDING IMPROVEMENTS;
2. RIGHTS IN TANGIBLE PERSONAL PROPERTY
- FURNITURE, FIXTURES AND EQUIPMENT;
3. RIGHTS TO INTANGIBLE PERSONAL PROPERTY (BUSINESS-RELATED ASSETS)
- MANAGEMENT CONTRACTS, FRANCHISE AGREEMENTS AND GOODWILL
Any separate indications that are developed as an allocation of total value on a
going-concern basis are not meant to reflect the intrinsic value of each
component if sold on a liquidation basis. Rather, they should be interpreted as
the approximate contributory value to overall property value as a going-concern.
PURPOSE AND FUNCTION OF THE APPRAISAL
This report estimates the market value of the fee simple interest in the
property on a going-concern basis, as of December 1, 1994. It is our
understanding that this information will be used for securitization purposes.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 8
<PAGE>
DEFINITIONS
Our appraisal conclusions are subject to the definition of value below and the
Statement of General Assumptions and Limiting Conditions that follows the
Certification. Market value, as used herein, is defined as:
THE MOST PROBABLE PRICE, AS OF A SPECIFIED DATE, IN CASH, OR IN TERMS
EQUIVALENT TO CASH, OR IN OTHER PRECISELY REVEALED TERMS, FOR WHICH
THE SPECIFIED PROPERTY RIGHTS SHOULD SELL AFTER REASONABLE EXPOSURE IN
A COMPETITIVE MARKET UNDER ALL CONDITIONS REQUISITE TO FAIR SALE, WITH
THE BUYER AND SELLER EACH ACTING PRUDENTLY, KNOWLEDGEABLY AND FOR
SELF-INTEREST, AND ASSUMING THAT NEITHER IS UNDER UNDUE DURESS.
Except as noted, this definitions and other definitions of appraisal terminology
in this report are taken from THE APPRAISAL OF REAL ESTATE, Tenth Edition,
Appraisal Institute.
Going-concern value, as used herein, is defined as:
THE VALUE CREATED BY A PROVEN PROPERTY OPERATION; CONSIDERED
AS A SEPARATE ENTITY TO BE VALUED WITH A SPECIFIC BUSINESS
ESTABLISHMENT.
This definition of appraisal terminology is taken from THE DICTIONARY OF REAL
ESTATE APPRAISAL, Third Edition, Appraisal Institute.
OWNERSHIP HISTORY
All American Group Limited Partnership is the name of the entity who currently
owns the Super 8 Motel in Miner, Missouri. Guy Hatfield is the majority owner
in the property and originally bought it in 1984. Many fractional interests
have been exchanged since the original purchase of the property, but Guy
Hatfield is still the majority owner.
DATE OF VALUE
The property was inspected by Bryan T. Clark on December 1, 1994 and the
effective date of our value opinion is December 1, 1994. The property was not
inspected by William J. Carter or Kimberly L. Sass.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 9
<PAGE>
SCOPE OF THE APPRAISAL
This is a complete, self-contained narrative appraisal which has been prepared
in accordance with the Uniform Standards of Professional Appraisal Practice and
the Code of Professional Ethics of the Appraisal Institute.
We have assumed that the operating information provided by our client accurately
reflects the historical operating performance of the subject.
In the course of our investigation, we consulted county and city offices for
information about zoning and growth trends, we contacted the county assessor's
office for tax and assessment data, examined the market area and inspected the
property to evaluate its condition, functional qualities, and market appeal. We
also surveyed competitive properties and consulted local real estate offices for
comparable sales, offerings, and operating expense information. When possible,
we inspected those sales and offerings considered to be within or similar to the
subject market and otherwise comparable. We attempted to confirm the chosen
comparable sales with the seller, buyer, broker, participating attorney or local
reliable appraiser. Finally, we collated and applied the resulting information
in the valuation process.
MARKETING TIME
Marketing time is the "REASONABLE AMOUNT OF TIME IT MIGHT TAKE TO SELL AN
INTEREST IN REAL PROPERTY AT ITS ESTIMATED MARKET VALUE DURING THE PERIOD
IMMEDIATELY AFTER THE EFFECTIVE DATE OF THE APPRAISAL." The hotel industry has
shown good improvement in the last year and a half with many buyers in the
market. Some of the most sought after properties are chain affiliated limited
service properties with good cash flows. Since the subject is a Super 8, has a
good cash flow history and is a highway motel, we believe a marketing time of 8
to 12 months is considered reasonable. This estimate is supported by Second
Quarter 1994 Korpacz and CB Commercial Investor Surveys.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 10
<PAGE>
DESCRIPTION AND ANALYSIS
SITE DESCRIPTION
Location: 2609 East Malone
Miner, Missouri
Shape: Irregular
Frontage: Along East Malone
Size: 87,120 square feet
Access/Visibility: Good/Excellent
Topography: Basically level
Apparent Soil and Subsoil Conditions: None observed
Flood Plain: Zone AH, 100 year flood zone
Utilities: All available
Easements: In addition to the typical utility
easements which are found on commercial
properties, the Super 8 Motel has a
street which runs along the eastern edge
of the property boundary which is owned
by the City of Miner, and is utilized
for ingress and egress to the factory
outlet mall which are located directly
behind the Super 8.
IMPROVEMENT DESCRIPTION
Date of Construction: 1985
Area & Room Mix
GROSS AREA: 21,696 square feet (estimated)
ROOM MIX: Queens 36
Double/Doubles 27
--
Total 63
Meeting Space: None
Elevators: None
Fire Protection: Smoke alarms, fire extinguishers and
emergency lighting
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<PAGE>
General Construction Features: Wood frame structure with exterior walls
consisting of masonite accented by
painted hardwood trim, gable roof with
asphalt shingles. Painted drywall is
used for the interior walls and the
ceilings. Commercial grade carpeting
with baseboard trim, and ceramic tile
floors are found in the hallways and the
main lobby.
Interior Features: Carpeting, ceramic tile, linoleum tile,
incandescent and fluorescent lighting in
the common areas, incandescent lighting
in the guest rooms.
Common Areas: Front desk, manager's office, lobby with
television and couches, small storage
areas for linens and supplies,
mechanical room with water boiler,
laundry room.
Site Improvements: Asphalt and concrete parking, concrete
sidewalks and curbs near the front
entrance, moderate landscaping around
the perimeter of the building, parking
bumpers, highway signage, and a
satellite dish.
Overall Condition: The rooms in the Super 8 Motel appeared
to be very clean and well maintained.
Within the last couple of years, several
of the rooms have been updated with new
drapes and bedspreads, new TV's, lamps,
recliners, furniture, and carpeting.
New carpeting was put in the common
hallways and stairwells. The exterior
was recently painted, there was a new
highway sign installed, and a recent
roof repair completed. Parking was
adequate for the number of rooms in the
motel, and appeared to be in good
condition. Overall, the property is in
very good condition as of the date of
inspection, and does not appear to be
nine years old due to the capital
expenditures which have been
continuously put into the motel.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 12
<PAGE>
GRAPH DESCRIPTION: MINOR REGIONAL MAP WITH AN ARROW POINTING TO THE
LOCATION OF THE MOTEL
[CRC MAP]
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 13
<PAGE>
GRAPH DESCRIPTION: MINOR REGIONAL MAP WITH AN ARROW POINTING TO THE
LOCATION OF THE MOTEL
[CRC MAP]
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 14
<PAGE>
PROPERTY TAXES AND ASSESSMENTS
The property is assessed by the Scott County Assessor every two years. The
assessed value is equal to 32 percent of the market value. Real estate tax
bills are sent out in November each year, and the taxes are due by December 31
of that year. The entire tax bill is paid in one installment for both personal
and real property. The following table summarizes the assessed value, tax rate
and actual property taxes for the last three years. The tax rates listed below
are applied per 100 dollars of assessed valuation, and are a combination of both
the county and city tax rates for both personal property and real property.
Between 1992 and 1994 the assessed values of the real estate have decreased,
while the tax rates have increased, resulting in a compounded annual growth in
total taxes of approximately 7 percent per year. This is expected to level off
and is projected to grow on average 4 percent per year over the projection
period.
<TABLE>
<CAPTION>
===================================================================================================================================
Real Property Personal Property Real Estate Personal Property
Tax Year Assessed Value Assessed Value Tax Rate Tax Rate R.E. Taxes P.P. Taxes Total Taxes
- -------- -------------- -------------- ----------------- ----------- ----------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 $234,360 $21,740 $3.40 $3.07 $7,968.22 $668.09 $8,636.31
1993 224,740 18,900 3.66 3.34 8,225.49 630.59 8,856.08
1994 207,580 18,900 4.40 4.18 9,133.52 790.45 9,923.97
===================================================================================================================================
</TABLE>
ZONING AND OTHER USE RESTRICTIONS
The property is zoned C-2, Highway Commercial District by the City of Miner
Zoning Department. This designation permits a variety of commercial uses
including motels, restaurants, automotive service facilities, grocery stores,
delicatessens, drive in theaters, gun clubs, race courses, and other commercial
uses. Based on our interpretation of the most recent zoning ordinance, the
building appears to be a legally conforming use.
AREA OVERVIEW
Miner/Sikeston Missouri is located in the southeast corner of the state of
Missouri. It is located approximately 146 miles south of St. Louis, 130 miles
north of Memphis, and is in close proximity with the neighboring states of
Arkansas, Kentucky, and Tennessee. Access to the city of Miner/Sikeston is
provided by Highway 61 and Interstate 55 from the north and south, and
Interstate 57 from the east or west. The city of Sikeston lies within Scott
County to the north, and New Madrid County to the south. This region of the
state is on the fringe of the central Ozarks, and has rolling hills throughout
the area. As of 1992, the area had a population of 39,300 for Scott County, and
20,928 for New Madrid County. The area is dominated by wholesale and retail
trade, manufacturing, and agriculture.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 15
<PAGE>
The southeast corner of the state accounts for less than 2 percent of the total
population, and is typically characterized as an environment which goes through
little change. Between 1980 and 1990, the population for both Scott and New
Madrid Counties changed by less than 2 percent. Historically this region of the
state has relied upon small industry and agriculture for its economic base.
Much of the work force is composed of skilled laborers and blue collar workers.
In addition to the small industry, agriculture accounts for approximately 5
percent of the total income generated. The average per capita income was
$13,854 dollars as of 1990, and the cost of living is very affordable.
Southeast Missouri has traditionally been an area of small industry and some
agriculture, combined with a fairly stable population base, and a very
affordable cost of living. However, the area is slowly transforming as it
realigns itself with the modern economy of the 1990s. The economic base is
shifting more towards the service industry, and becoming less reliant on
manufacturing as a source of earnings. In 1990 services accounted for 23
percent of the total earnings in Scott County, while manufacturing accounted for
only 12.5 percent of total earnings.
Along with the increasing number of jobs which are being created in the service
industry, the Miner/Sikeston area is positioning itself to have a larger tourism
industry. One of the advantages of Miner/Sikeston, is its proximity to Branson,
Missouri. Branson has exploded over the last few years, and is a vacation
destination for many people each year. It has been referred to as the
"Nashville of the midwest" and as it continues to grow and attract people from
all over the country, the surrounding areas continue to benefit from the tourism
dollars which it generates. Several towns including Cape Girardeau, Poplar
Bluff, and Miner/Sikeston have seen additional motel development, an increase in
the amount of retail space, new restaurant development, as well as improvements
to some of the roadways in order to better position itself to capture some of
the increase in the tourism industry. Many people traveling from the north,
east, and south, will pass through this part of the state on their way to
Branson.
In summary, the southeast Missouri region is an area of the country which has
historically been characterized as one of slow change and little growth. The
cost of living is among some of the most affordable in the state, and average
income levels reflect this. With a history of light manufacturing, small
industry, and some agriculture, the area is now repositioning itself by
broadening its economic base and creating more jobs in the service and trade
areas. With the centralized location, and the proximity of Branson, Missouri,
coupled with the fact that it lies between two urban areas (St. Louis and
Memphis), the region is taking advantage of the increase in the tourism
industry. It is developing new properties, and taking advantage of the
increasing number of people who travel through this part of the state.
According to projections which were published for the year 1997, the effective
buying index per household is expected to increase by over 30 percent between
1992 and 1997. In general, the southeast Missouri area should
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<PAGE>
experience slow but steady growth due to its centralized location, stable work
force and increasing diversification towards a service and tourism oriented
economy.
The information in the following table was obtained from the Miner/Sikeston
Chamber of Commerce unless otherwise noted.
<TABLE>
<CAPTION>
================================================================================================================================
Population
Historical Trends
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Actual Actual Annual Compounded Actual Annual Compound Annual Compound
1980 1990 Change 1980-1990 1990 Change 1990-1993 Change
---- ---- ---------------- ---- ---------------- ------
<S> <C> <C> <C> <C> <C> <C>
City of Miner 17,431 17,641 0.12% 17,641 N/A N/A
Scott County 39,647 39,376 (0.07)% 39,376 N/A N/A
=================================================================================================================================
</TABLE>
SOURCE: COMMUNITY PROFILE OF SCOTT COUNTY AND NEW MADRID COUNTY
EMPLOYMENT DISTRIBUTION
[Pie Chart]
OTHER 35%
WHOLESALE/RETAIL 25%
MANUFACTURING 21%
HEALTH SERVICES 9%
FIRE 4%
AGRICULTURE 4%
PUBLIC. ADMIN. 2%
SOURCE: 1994 COUNTY AND CITY DATA BOOK
==================================
8 Largest Private/Public Employers
==================================
Good Humor/Breyers
Fleming Co.
Triangle Wire & Cable, Inc.
Pullen Brothers Trucking Co.
Westlock National
Potashnick Trucking, Inc.
Tetra Pak
Hedrick Concrete Products
Lewis Brothers Bakery, Inc.
Missouri Delta Medical Center
Sikeston Public Schools
Vess Beverages
Sportswear, Inc.
Himmelberger-Harrison Mfg.
==================================
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 17
<PAGE>
===============================================================
Unemployment
===============================================================
Scott County Miner/Sikeston United States
------------ -------------- -------------
Annual Avg 1992 7.2% N/A 7.4%
Annual Avg 1993 7.5% N/A 6.8%
June 1994 5.7% N/A 6.2%
===============================================================
SOURCE: U.S. DEPARTMENT OF LABOR STATISTICS
NEIGHBORHOOD ANALYSIS
Miner, Missouri is most often associated with the adjacent town of Sikeston, and
the area is referred to as the Sikeston/Miner area. The immediate neighborhood
of the town is bordered on the south by Interstate 57, on the west by Route BB,
on the north by Route HH, and on the east by Interstate 55. The Super 8 Motel
is located on the eastern edge of town adjacent to Interstate 55 on Malone
Avenue. This road is the main east-west artery which runs through the middle of
downtown Miner and Sikeston. Malone Avenue and Main Street, which is the major
north-south artery, contain almost all of the commercial uses in the town. The
buildings along these commercial streets vary in age, quality of construction,
and use. Some of the uses which exist include service stations, fast food
restaurants, small mom and pop style motels, light industrial uses, banks, small
office buildings, and other retail uses. Some of the more significant
commercial uses include a Wal Mart Superstore located near the intersection of
Main Street and Interstate 57, and the new Sikeston Factory Outlet Mall which is
located adjacent to Interstate 55, approximately 200 yards behind the Super 8
Motel. In addition to these retail facilities, there is the nationally renowned
Lambert's Cafe which attracts thousands of people each year as they are
traveling through town.
The neighborhood more immediately surrounding the Super 8 Motel consists of
other motels, a couple of restaurants, and the factory outlet mall. A Ponderosa
Steakhouse, and a Hardee's are located just east of the Super 8 Motel.
Immediately behind the property is the newly constructed Hatfield Inn, and just
behind that is the Sikeston Factory Outlet Mall. Across the street on the north
side of Malone Avenue are three other motels; The Holiday Inn Express, The
Ramada Inn, and The Drury Inn which is currently under construction. The east
side of the property is bound by Interstate 55.
Access is very good. From either the north or the south, Interstate 55 provides
access to the Super 8 Motel which is located right along Malone Avenue as you
exit the Interstate. Traveling from the west, one can access Malone Avenue by
using Highway 61 (Main Street) which intersects Interstate 57 to the south.
Interstate 57 provides access from the east. In addition to the excellent
roadways which provide easy access, air travel is provided from the Cape
Girardeau airport which is 30 miles away, and The Union Pacific Railroad
provides freight service.
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<PAGE>
CONCLUSION
Southeast Missouri is the gateway to the south and is located at the fringe of
the Ozarks. The Miner/Sikeston area is a small midwestern community which has
exhibited slow change over the past decade. The economic base is driven by
governmental jobs, service industry, and more increasingly on the tourism
industry. The town is centrally located between Memphis and St. Louis, and
attracts many tourists who are traveling through the area, particularly on the
way to Branson, Missouri. With the recent arrival of the Sikeston Factory
Outlet Mall, and the new Wal Mart Superstore, the town has seen an increase in
the retail industry. The town has an adequate labor force and draws workers
from a four county area. Several employers provide jobs in light industry and
distribution. As we move further into the 1990s and continue to become a more
service dominated economy, Miner/Sikeston continues to shift its resources to
compete in the marketplace. As the midwest continues to become more popular
with tourists and people who are moving out of the congested coastal regions,
there should be increasing economic opportunities for towns such as
Miner/Sikeston. It is reasonable to expect steady slow growth in the
foreseeable future as the town continues to benefit from the changing economy.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 19
<PAGE>
COMPETITION SUMMARY
SUPER 8 MOTEL, MINER, MO.
<TABLE>
<CAPTION>
PROXIMITY # OF
PROPERTY TO SUBJECT ROOMS YOC AMENITIES
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUBJECT --
Super 8 Motel --- 63 1985 Lobby, continental breakfast,
I-55 at East Malone VIP program, AARP discounts,
cable TV, guest fax machine
COMPETITION
1 Hampton Inn 3 Miles 127 1966 Pool, health club, complimentary
1330 South Main Street breakfast, meeting rooms,
Sikeston, Mo. cable TV, restaurant
2 Holiday Inn Express across the street 67 1971 Pool, complimentary breakfast,
211 Old Santa Fe Trail meeting rooms, cable TV,
Miner, Mo. free local calls, guest fax
3 Ramada Inn across the street 152 1969 Pool, room service, restaurant,
I-55 at East Malone cable TV, meeting rooms,
Miner, Mo. guest fax, travel club
4 Econo Lodge half mile east 45 1969 Cable TV, free local calls,
Hwy 62 at I-55 travel club
Miner, Mo.
5 Best Western Coach House half mile east 65 1987 Restaurant, pool, TV,
East of I-55 at Malone game room, library, continental
Miner, Mo. breakfast, meeting rooms
6 Drury Inn across the street 80 Opening Swimming pool, cable TV,
East Malone at I-55 Mar.'95 guest fax, continental breakfast
Miner, Mo.
- -----------------------------------------------------------------------------------------------------------------------------
TOTALS/AVERAGES--COMPETITION 599/86
<CAPTION>
MARKET SEGMENTATION PUBLISHED RATES ESTIMATED (1994)
------------------------ --------------------- --------------------
COMMERCIAL LEISURE SINGLE DOUBLE OCCUPANCY ADR
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SUBJECT --
Super 8 Motel 70% 30% $38.88 $48.88 96% $36.36
I-55 at East Malone
COMPETITION
1 Hampton Inn 70% 30% $53.06 $49.87 50% $51.47
1330 South Main Street
Sikeston, Mo.
2 Holiday Inn Express 70% 30% $52.00 $47.00 72% $50.00
211 Old Santa Fe Trail
Miner, Mo.
3 Ramada Inn 70% 30% $48.00 $48.00 65% $48.00
I-55 at East Malone
Miner, Mo.
4 Econo Lodge 50% 50% $25.00 $30.00 50% $28.00
Hwy 62 at I-55
Miner, Mo.
5 Best Western Coach House 50% 50% $53.00 $77.00 40% $65.00
East of I-55 at Malone
Miner, Mo.
6 Drury Inn n/a n/a n/a n/a n/a n/a
East Malone at I-55
Miner, Mo.
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 20
<PAGE>
MARKET ANALYSIS
OVERVIEW
The motel market in Miner/Sikeston consists of several small "mom and pop"
motels which are generally less maintained and inexpensive, as well as a few
chain affiliated properties which are more comparable to the Super 8 Motel.
Currently, a new Drury Inn is being constructed across the street from the Super
8 Motel. According to an interview which was conducted with the development arm
of the Drury Corporation, the new motel will contain 80 rooms and is expected to
open in March of 1995. It will be a limited service type of motel and will be
the newest lodging facility in town.
MARKET SEGMENTS/COMPETITIVE SUPPLY
We have identified six motels in our competitive supply. Of these motels, five
of them are located within a half mile of the Super 8, and all of them are
positioned next to Interstate 55. These five motels consist of the Ramada Inn,
the Holiday Inn Express, the Econolodge, the Best Western Coach House, and soon
the newly constructed Drury Inn. In comparison to the Super 8 Motel, all of
these primary competitors, with the exception of the Econolodge, offer superior
facilities and amenities. The rates are higher at these properties due to this
fact. A couple of these competing properties, the Ramada Inn, and the Best
Western Coach House, offer restaurant service and are therefore more of a full
service type facility. The Econolodge is the exception, as it appears to be
inadequately maintained, and basically is a no frills type of property. Rates
at this property are at the low end of the range, and reflect the condition of
the property. In addition to the previously mentioned properties, The Hampton
Inn is another competing property, but it is located west of the Super 8 Motel
near the intersection of Highway 60 and Highway 61. It offers superior
amenities and has higher rates than the Super 8.
In addition to the properties which we surveyed in our competitive summary,
there are some other local mom and pop type of motels in the Miner/Sikeston
area. These properties are located more towards the interior of town along
Malone Avenue and Main Street. They do not have the same level of amenities as
the chain affiliated properties which are closer to the highways. By viewing
these properties and noting their physical condition, it was apparent that they
cater to a different market than the property being appraised. On the opposite
page is a table showing the results of our market survey of the primary
competitors.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 21
<PAGE>
COMPETITIVE SUPPLY SUMMARY FOR MINER/SIKESTON MISSOURI
Name of Property Number of Rooms Percentage of Supply
- --------------------------------------------------------------------------------
Super 8 Motel 63 11%
Hampton Inn 127 21%
Holiday Inn Express 67 11%
Ramada Inn 152 25%
Econo Lodge 45 8%
Best Western Coach House 65 11%
Drury Inn 80 13%
AVERAGE DAILY RATE AND OCCUPANCY
The industry surveys, such as the Host Report, are typically only published once
or twice a year, and therefore, cannot cover the most current state of the hotel
industry. This has not been an issue in past years since declines were
projected and realized. Since the national hotel industry has just recently
started to show signs of real recovery, based on the increased activity in sales
transactions and the reported increase in occupancy by many markets, we cannot
rely solely on these surveys in projecting future trends.
We interviewed managers at each of the competing properties and attempted to
gather information on occupancy levels and average daily rates at each of the
properties. None of the managers, with the exception of one, would give out
this type of information due to the confidential nature of it and the fact that
the market is becoming increasingly competitive. We were able, however, to
obtain information from one property manager on his projections for the
occupancy levels at each of the motels. This information was estimated by the
manager based upon surveys of parking lots at the other properties. Based upon
information which we obtained from the 1993 HOST Report survey, the average
occupancy level for limited service type of properties in this region of the
country is between 65 and 70 percent. Based upon the estimations of occupancy
levels provided to us, the Ramada Inn and the Holiday Inn Express are the only
two motels other than the subject property which have occupancy levels close to
this average. All of the other properties are performing well below these
averages. The Econolodge's poor occupancy level can be explained by the
physical condition of the property, and the Best Western Coach House has a
locational disadvantage as well as the distinction of being fairly expensive for
the area. Of the competitive set, the Ramada Inn, and the Holiday Inn Express
are the most similar to the Super 8 Motel in terms of location, amenities
offered, and the rate structure. Even so, they don't have occupancy levels
anywhere near those of the property being appraised. The rates at the Ramada
Inn and the Holiday Inn Express are between $10 to 12 dollars a night more for a
room due to the additional amenities.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 22
<PAGE>
The objective of doing a competitive market analysis, is to see how the property
being appraised fits into the marketplace, and gain a better understanding of
its targeted market. The Super 8 Motel has a niche in the motel market in
Miner/Sikeston. It has an excellent location right off of the exit from
Interstate 55, and right in front of the new Sikeston Outlet Mall. The strategy
which the Super 8 Motel employs, is to be the lowest priced well maintained
motel which feeds off of the highway traffic. It has rack rates starting at
$38.88 which is approximately $10 dollars cheaper than the other properties
located across the street. This aggressive rate structure, coupled with the
proactive efforts of the manager, have enabled this property to achieve
occupancy levels of between 90-100 percent on an annual basis over the last few
years. Below is a table highlighting the occupancy and ADR history at the Super
8 Motel.
SUPER 8 MOTEL, MINER, MO.
HISTORICAL OCCUPANCY AND ADR
Year Average Occupancy ADR
- ---- ----------------- ---
1991 90.21% $31.49
1992 92.72% $34.18
1993 93.89% $35.36
1994* 97.89% $36.49
* JANUARY THROUGH OCTOBER ONLY
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 23
<PAGE>
The subject has maintained a level progression of growth over the period of 1991
to 1994. The occupancy level has increased from 90.21 percent to a current
level of 97.89 percent in 1994. Part of this increase in occupancy level can be
explained by the improvement in the economy since the recession of the early
1990s, and some of the increase in occupancy levels can be attributed to the
increased marketing efforts of the manager. Overall the Sikeston/Miner area is
experiencing growth in the tourism industry, and this has helped increase the
demand for the lodging properties. However, with this growth, comes additional
competition in the form of the Drury Inn which is scheduled to open in March of
1995. This property will be located immediately across the street from the
Super 8 Motel. Currently the other properties which exist across the street
from the Super 8 Motel are substantially older, and have rates which are between
$10 to 12 dollars more per night. The Drury Inn, will be the newest property in
town with 80 rooms, and we were informed by people in the development department
that the targeted rack rate for the new property will probably be in the $40 to
$50 dollar per night range. This is not significantly higher than the average
rates which are currently being realized at the Super 8 Motel, yet they will be
for a brand new property with amenities such as an interior swimming pool, and a
very comparable location.
The Drury Corporation was originated in Cape Girardeau which is about 30 miles
from Miner/Sikeston, and they have a very established name in the southeast part
of the state. Their plan is to move into a market where there hasn't been a new
motel built for some time, and steal market share away from the other
properties. Given the close proximity of the new Drury Inn to the subject
property, and the lack of any significant difference in the rate structures, we
are predicting that the Super 8 Motel will lose some of its market share to the
new Drury Inn when they open in 1995. We are projecting a decrease in occupancy
from levels in the high 90 percent range, down to a stabilized level of 85
percent in fiscal year 1996. This reflects the additional supply of motel rooms
that are being added to the market, but still projects the Super 8 Motel to
maintain an occupancy level which is well above national averages.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 24
<PAGE>
Average daily rate (ADR) has also grown steadily over the period of 1991 to
1994. The rates at the Super 8 Motel are published in a national directory, and
can only be changed twice a year when the new directory comes out.
Historically, the rates have been increased by approximately $2.00 per year. It
is common for the published rates to increase with the level of inflation, all
other things held constant. The Super 8 Motel has been very well maintained and
continues to operate at rates very close to the published rates in its
directory. It gets most of its business from the commercial segment, and from
tourists. The manager at the Super 8 Motel also mentioned that they market
aggressively to the trucking industry to increase occupancy by this segment.
Some of the other incentives which the property offers to induce guests are AARP
discounts, VIP discounts for frequent stayers, and 10 percent off for corporate
rates. We have projected in our analysis that the ADR at the Super 8 Motel will
continue to increase slowly over time, and maintain a pace with the inflation
index. In our cash flow model, we projected a 3 percent annual increase in the
ADR over the projection period.
In summary, the Super 8 Motel currently enjoys a position in the market as the
"economy player" of the newer properties in town. However, in March of 1995 the
new Drury Inn will be opening across the street from the Super 8, and will offer
similar rates with superior amenities. We feel that this will have a negative
impact on the occupancy level of the Super 8 Motel, and will bring its
stabilized occupancy level to approximately 85 percent in fiscal year 1996 when
we are projecting the property to stabilize. The ADR is still projected to
increase slowly over time to keep pace with the inflation index. An increase of
3 percent a year over the projection period is considered reasonable when you
consider the historical operating performance of the Super 8, the inflation
rate, and the future additional supply coming on line in 1995 next year.
PROJECTED OCCUPANCY AND AVERAGE DAILY RATE
Year Beginning
December 1, 1995 ADR Growth Rate Average Daily Rate Occupancy
---------------- --------------- ------------------ ---------
FY 1996 3% $39.66 85%
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 25
<PAGE>
HIGHEST AND BEST USE
The uses to which a property can be put affect its value. This is recognized by
the concept of highest and best use, generally understood to mean:
THE REASONABLY PROBABLE AND LEGAL USE OF VACANT LAND OR AN IMPROVED
PROPERTY, WHICH IS PHYSICALLY POSSIBLE, APPROPRIATELY SUPPORTED,
FINANCIALLY FEASIBLE AND RESULTS IN THE HIGHEST VALUE.
The highest and best use of the land as if vacant and available for use may be
different from the highest and best use of the improved property. This is true
when the improvement is not an appropriate use, but makes a contribution to the
total property value in excess of the value of the site. Thus, in arriving at
our opinion of the highest and best use, we first analyzed the property as
though the land were vacant and then analyzed it as improved. In both
instances, the conclusion of highest and best use must be determined by
examining the physically possible, legally permissible, financially feasible and
maximally productive uses of the site.
AS VACANT
PHYSICALLY POSSIBLE - The physical aspects of the site such as size, shape, and
topography impose the first constraints on the possible use of the property.
The site is level, and although it is somewhat irregular in shape, its size
compensates for this factor, it has good visibility and all normal utilities are
available. The site has an easement of ingress and egress along the east
boundary that is approximately 10 feet wide and is used by the City of Miner for
access to the newly developed Sikeston Factory Outlet Mall, which is located
directly behind the Super 8 Motel. This should not impose a significant
constraint on the site's development due to its minimal size and location.
Other than its flood zone status, no physical characteristics were observed that
would impose constraints on the site's development. Since many of the
properties in the area are located in a similar flood zone, and development is
allowed, this physical feature was not considered to impose any unusual
constraints on development. Given the characteristics of the site and the
surrounding land uses, possible uses would include a wide range of commercial
uses.
LEGALLY PERMISSIBLE - Legal restrictions, as they apply, include the public
restrictions of zoning. The property is zoned C-2. Permitted uses include
motels, restaurants, automotive service facilities, grocery stores,
delicatessens, drive in theaters, gun clubs, race courses, and other commercial
uses.
FINANCIALLY FEASIBLE AND MAXIMALLY PRODUCTIVE - The Super 8 Motel is located
along East Malone at the intersection of Interstate 55 and Malone Avenue. The
site is highly visible and accessible from the Interstate, and would attract
significant amounts of traffic due to the proximity of the Sikeston Factory
Outlet Mall which is located directly behind the site. Other uses along Malone
Avenue and within close
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 26
<PAGE>
proximity to the location of the subject site include restaurants, other motels,
and service stations. Clearly these uses are all benefiting from their close
distance to the Interstate. With the increase in the tourism industry in the
Miner/Sikeston area, (which is due to its central location between Memphis and
St. Louis, the boom of Branson, Missouri and the newly developed Sikeston
Factory Outlet Mall) many more people are stopping in Miner/Sikeston, and the
demand for lodging and other commercial uses has increased. Therefore, we
believe that the highest and best use for the site as though vacant, would be
for development with a commercial use.
CONCLUSION - We believe the highest and best use of the site as though vacant,
as of December 1, 1994, would be to develop with a commercial use.
AS IMPROVED
PHYSICALLY POSSIBLE - The overall property is in excellent condition and is
well-suited to its current use.
LEGALLY PERMISSIBLE - The existing zoning of the property permits the existing
commercial use.
FINANCIALLY FEASIBLE AND MAXIMALLY PRODUCTIVE - We compared the estimated value
of the property as improved to its estimated net value as a vacant site. The
comparable sales we examined in considering land value (shown later) indicate
that the site as vacant is worth less than the property as improved. Even
though the current hotel market is adequately supplied and additional rooms are
expected to be added in the near term, it would not be economically feasible to
demolish the existing improvements. Given the layout, interior design and
apparent level of demand for the existing improvements, it is our opinion that
the only financially feasible and maximally productive use of the property is
its current use.
CONCLUSION - We have concluded that the highest and best use of the property, as
improved, as of December 1, 1994, is its current use.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 27
<PAGE>
VALUATION
Three approaches are generally used to estimate value: the cost, sales
comparison, and income capitalization approaches. Each approach assumes
valuation of the property at its highest and best use. These approaches are
more fully discussed on the following pages.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 28
<PAGE>
COST APPROACH
The cost approach is based upon the principle of substitution which states that
no rational buyer will pay more for a property than the amount for which he can
obtain a comparable site and construct improvements of equal desirability and
utility, assuming no undue delay.
This approach involves the application of several basic steps. First, the value
of the land as if vacant is estimated. Second, the current cost of replacing
the improvements is estimated. Third, an entrepreneurial profit sufficient to
attract a developer to undertake the risk associated with the project is
estimated. Fourth, accrued depreciation is estimated and deducted from the cost
new estimate (inclusive of profit) to arrive at a contributory value of the
improvements. In the fifth step, the land value is added to the contributory
value of the improvements to arrive at a value of the real estate. Finally, we
add amounts for personal property and for intangible business value.
SITE VALUATION
In estimating the value of the site as if vacant, the sales comparison approach
is used. In this approach, value is estimated by comparing the subject site to
similar properties that have been sold recently or are currently being offered
on the market for sale. We have consulted local brokers, appraisers and data
bases for recent sales of comparable properties within the subject area.
Principals and/or the broker handling the sale were then contacted to obtain
further information on the properties and transactions. The available market
data was investigated, analyzed and compared to the subject.
In estimating the value of the site, price per square foot was used since local
investors and brokers typically rely upon this method of analysis. The table on
the facing page summarizes pertinent details of the sales and the adjustments
made. Following is a brief description of the adjustments by relevant
characteristics. Details of each sale are located in the addenda.
The market sales used ranged in date from October 1991 to December 1992, in size
from 43,820 to 402,494 square feet and have unadjusted sales prices from $1.66
to $5.13 per square foot. To the best of our knowledge all of the sales were
located in similar flood plain zones and therefore no adjustment was necessary.
PROPERTY RIGHTS CONVEYED - All sales were reportedly fee simple transfers.
FINANCING TERMS - All sales were reportedly cash transactions or financed at
terms equivalent to cash.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 29
<PAGE>
LAND VALUE ADJUSTMENT GRID
SUPER 8 MOTEL, MINER, MO.
DECEMBER 1, 1994
<TABLE>
<CAPTION>
SUBJECT SALE NO. 1 SALE NO. 2 SALE NO. 3
<S> <C> <C> <C> <C>
Location I-55 at East Malone 1701 East Malone South Main Street East Malone & Main
City, State Miner, Mo. Miner, Mo. Miner, Mo. Miner, Mo.
Size (sq ft) 87,120 95,832 402,494 43,820
Sale Price ---- $175,000 $666,710 $225,000
Sales Price per sq ft ---- $1.83 $1.66 $5.13
Adjustments
Property Rights Conveyed Fee Simple Fee Simple = Fee Simple = Fee Simple =
Adjusted Unit Sales Price ---- $1.83 $1.66 $5.13
Financing Terms Market Cash = Cash = Cash =
Adjusted Unit Sales Price ---- $1.83 $1.66 $5.13
Conditions of Sale Normal Normal = Normal = Normal =
Adjusted Unit Sales Price ---- $1.83 $1.66 $5.13
Market Conditions Dec-92 + Sep-92 + Oct-91 +
Adjusted Unit Sales Price ---- $2.01 $1.82 $5.65
Location/Physical Adjustments
Location I-55 at East Malone 1701 East Malone + South Main Street + East Malone & Main -
Size (sq ft) 87,120 95,832 = 402,494 + 43,820 -
Access/Frontage Excellent/Good Average/Good + Average/Good + Average/Good -
Zoning/Use C-2 C-2 = C-2 = C-2 =
Topography/Shape Level/Irregular Level/Rectangular = Level/Rectangular = Level/Rectangular =
Total Location/
Physical Adjustments + + -
Adjusted Price/Sq. Ft. $2.60 $2.60 $2.80
Minimum Adjusted Price: $2.60
Maximum Adjusted Price: $2.80
Mean Adjusted Price: $2.67
Concluded Price/Sq.Ft.: $2.65
Concluded Land Value: $230,868
Rounded: $231,000
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 30
<PAGE>
CONDITIONS OF SALE - None of the sales were found to include any abnormal
conditions affecting the final sale price.
MARKET CONDITIONS - As discussed in the area analysis section of this report,
the Miner/Sikeston area has improved over the past few years. A lot of this can
be explained by the increasing popularity of Branson, Missouri as a vacation
destination, and the draw to the Miner/Sikeston area which has been generated by
the newly developed Sikeston Factory Outlet Mall. In addition to these factors,
the economy as a whole has improved over the last year and a half since the
recession of the early 1990s. All of the land sales which were analyzed in our
analysis occurred in 1991 and 1992, and therefore warranted an upward
adjustment, to reflect the improved conditions in the market.
LOCATION - Sales 1 and 2 are both located along main commercial corridors which
go through downtown Miner/Sikeston. However, they don't have the excellent
highway visibility like the subject site. The Super 8 Motel is located right
off of the exit ramp from Interstate 55 and has excellent access. Therefore, an
upward adjustment was made to sales 1 and 2 to reflect their inferior location.
Sale 3 on the other hand is located at the main intersection in downtown. It is
right at the corner of Main Street and Malone Avenue, and is the convergence
point of traffic traveling from any direction going through downtown
Miner/Sikeston. Due to this corner location and the excellent traffic flow
which travels by this site, a downward adjustment was made to the sales price of
this land to reflect its superior location.
SIZE - The larger the size of a property, the smaller the per unit price, and
vice versa, assuming all other variables are constant. Sale 2 was significantly
larger than the subject site, and therefore required an upward adjustment for
this category. Conversely, sale 3 was smaller than the subject site, and
required a downward adjustment for size.
ACCESS/FRONTAGE - We considered the significance and degree of road frontage,
exposure, traffic and general activity in estimating the appropriate adjustment.
Sales 1 and 2 do not have as good of access from Interstate 55 as the subject,
and therefore warranted an upward adjustment for their inferior access. Sale 3
on the other hand, is located at the intersection of the two main commercial
arteries (Malone and Main Street) and has frontage along both streets. This
corner benefits from traffic coming from all directions as it passes through
downtown. Due to these factors, a downward adjustment was made to Sale 3 to
reflect its superior frontage.
ZONING/USE -All of the land sales which were analyzed in our report were zoned
for commercial uses like the property being appraised. No adjustments were
necessary for this category.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 31
<PAGE>
SHAPE/TOPOGRAPHY - All sales were basically level and similar in shape. No
adjustments were necessary.
The adjusted sales prices range from $2.60 to $2.80 per square foot, with an
average adjusted price of $2.67 per square foot. Based on our analysis, it is
our opinion that the market value of the site as if vacant, as of December 1,
1994, is $2.65 per square foot, or as follows:
87,120 square feet x $2.65/square foot = $230,868
Rounded: $231,000
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 32
<PAGE>
COST APPROACH SUMMARY
SUPER 8 MOTEL, MINER, MO.
DECEMBER 1, 1994
<TABLE>
<S> <C> <C>
Estimated Replacement Cost of the Improvements $1,175,995
Less: Physical Deterioration 20% (235,199)
----------
Estimated Replacement Cost less Physical Deterioration $940,796
Less: Functional Obsolescence 0% 0
External Obsolescence 0% 0
----------
Total Depreciated Replacement Cost of Improvements $940,796
Plus: Depreciated Value of Site Improvements $84,000
Land Value 231,000
----------
Total Depreciated Value of Real Estate $1,255,796
Plus: Personal Property 268,000
----------
Value Estimate via the Cost Approach $1,523,796
(NOT INCLUDING INTANGIBLE BUSINESS VALUE) Rounded $1,520,000
To this we must add an allowance for Intangible Business Value. This is
estimated based on the difference between the income and cost approaches as
follows:
Income Capitalization Approach Conclusion $2,930,000
Less: Cost Approach Conclusion $1,520,000
----------
Intangible Business Value $1,410,000
Total Value Estimate via the Cost Approach $2,930,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following figures from the HVS Hotel Development Cost Survey are provided as
a check to the reasonableness of the indicated intangible business value
<TABLE>
<CAPTION>
Low High Avg
--- ---- ---
<S> <C> <C> <C>
Intangible Business Value/Room --
(Economy/Standard) $2,864 $8,004 $5,434
# of Rooms 63 63 63
-------- -------- --------
Total Intangible Business Value Range $180,407 $504,242 $342,325
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 33
<PAGE>
VALUATION OF IMPROVEMENTS
The most accurate method of estimating replacement cost is to obtain bids from
contractors. In lieu of actually obtaining bids, we have estimated the
replacement cost new using MARSHALL VALUATION SERVICE manual published by
Marshall and Swift. A summary of the cost approach conclusions is located on
the facing page. Following is a brief explanation of each component.
ESTIMATE OF BUILDING REPLACEMENT COST
The Marshall Valuation Service calculator method, indicated a base construction
cost of $49.75 per square foot of gross area for a Class D average quality
construction motel. After refining for HVAC, elevators, and floor area-
perimeter, and then applying current cost and local area multipliers, a base
price of $44.90 per square foot was obtained. We added additional costs for
canopies and the exterior wall mounted flood lights which totaled $25,050.
We then added an additional amount for soft costs not included in this figure.
These costs include professional fees, property taxes and carrying costs during
construction. The soft costs amounted to 7.00 percent of the total replacement
cost new of the improvement or $69,940.
ENTREPRENEURIAL PROFIT
Entrepreneurial profit is a necessary factor of production, without which a
project would not be created. The appropriate level of entrepreneurial profit
depends on the riskiness of the subject investment in relation to alternative
investments of similar risks available in the market. It is our opinion that
the appropriate level of entrepreneurial profit would be in the 5 percent to 15
percent range. We have selected 10 percent as an appropriate level for the
subject or $106,909. This results in the following calculation:
Adjusted Base Cost x Area $974,097
+ Additional costs 25,050
+ Soft Costs 69,940
----------
Total Development Costs $1,069,087
Entrepreneurial Profit 106,909
----------
Estimated RCN $1,175,996
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 34
<PAGE>
DEPRECIATION
PHYSICAL DETERIORATION - Physical deterioration encompasses wear and tear which
is evident during the field inspection, and typical wear associated with a
building of this quality and use. We utilized the effective age-economic life
method which estimates depreciation by dividing the effective age by its
economic life. The actual age of the building is 9 years. Considering the
current condition of the improvements, the effective age of the improvements is
7 years. Based on a useful life of 40 years, we arrived at an estimate of
physical deterioration of 20 percent.
FUNCTIONAL OBSOLESCENCE - Functional obsolescence reflects impairment of
operational capacity or efficiency, or simply the inability of a facility to
perform adequately the function for which it is employed. In our opinion the
property does not suffer from functional obsolescence under the replacement cost
method.
EXTERNAL OBSOLESCENCE - External obsolescence is defined at the diminished
utility of a structure due to negative influences from outside the site. The
potential net income the property generates based on stabilized revenues and
expenses supports the current development costs of a property similar to the
subject less physical depreciation. Based on this analysis, the property does
not suffer from external obsolescence.
SITE IMPROVEMENTS
Site improvements consist primarily of asphalt and concrete paving, concrete
sidewalks and curbs, signage, moderate landscaping, a satellite dish, parking
bumpers, and highway signage. The replacement cost of these items is estimated
at $126,000. The depreciated cost is $84,000.
PERSONAL PROPERTY
The cost estimate for furniture, fixtures and equipment was based on an industry
standard for this type of property at $7,100 per room or $447,300. The
depreciated cost of the personal property totals $268,000.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 35
<PAGE>
INTANGIBLE BUSINESS VALUE
The property requires that certain expenditures be made to ensure the proper
operation and management of the hotel as a "going concern". For a new hotel,
these items include pre-opening marketing and operating costs and the initial
franchise fee. In addition to these costs is a component for goodwill which is
a value created through a proven business operation above and beyond the initial
costs. The intangible business value estimate was based on the difference
between the income and cost approaches. This cost estimate was then checked
against industry standards indicated by HVS, which do not include goodwill, for
reasonableness. Details of this analysis are located on the cost approach
summary at the beginning of the "Valuation of the Improvements" section.
The Super 8 Motel in Miner, Missouri has occupancy levels which are
significantly above any industry standards for this type of property. In
addition, the management of the property has done an outstanding job in
promoting the property throughout the community. A couple of years ago, they
were awarded the most outstanding managers in the entire Super 8 franchise, and
they have consistently received excellent reviews during the franchise
inspections. Due to these factors, the motel has been able to generate above
normal levels of business income relative to the initial cost of construction
for the property. Therefore, it is reasonable to assume that there would be a
significant increment of intangible business value attributable to goodwill.
Details of this analysis are located on the Cost Approach Summary in the
beginning of this section.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 36
<PAGE>
IMPROVED SALES ADJUSTMENT GRID
SUPER 8 MOTEL, MINER, MO
DECEMBER 1, 1994
<TABLE>
<CAPTION>
SUBJECT SALE NO. 1 SALE NO. 2 SALE NO. 3
<S> <C> <C> <C> <C>
Property Name Super 8 Motel Comfort Inn Thrifty Inn Motel 6 (Knights Inn)
Location I-55 at East Malone 2889 Austin Peay Hwy Macon Rd. at I-40 1860 Intertech Drive
City, State Miner, Mo. Memphis, TN Memphis, TN Fenton, MO (St. Louis)
Sale Price ---- 2,330,000 1,925,000 2,200,000
Sale Price/Room ---- $33,286 $18,160 $19,820
Adjustments
Property Rights Conveyed Fee Simple = Fee Simple = Fee Simple =
Adjusted Unit Sales Price $33,286 $18,160 $19,820
Financing Terms Market = Market = Market =
Adjusted Unit Sales Price $33,286 $18,160 $19,820
Conditions of Sale Normal = Normal = Normal =
Adjusted Unit Sales Price $33,286 $18,160 $19,820
Market Conditions Mar-92 + Jan-92 + Sep-90 +
Adjusted Unit Sales Price $39,943 $21,792 $27,748
Location/Physical Adjustments
Location Highway Highway + Highway + Highway +
Number of Rooms 63 70 = 106 + 111 +
Age/Condition 1985/Good 1988/Good - 1989/Good - 1985/Average =
Quality of Construction Average Average = Below Average + Average =
Amenities Limited Limited = Limited = Limited -
Occupancy 85% 69% + 81% = 60% +
Total Location/Physical Adjustments + + +
Adjusted Price/Room $41,900 $40,300 $40,200
Minimum Adjusted Price: $40,200
Maximum Adjusted Price: $41,900
Mean Adjusted Price: $40,800
Concluded Price/Room $40,500
Concluded Value: $2,551,500
Rounded: $2,550,000
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 37
<PAGE>
SALES COMPARISON APPROACH
The sales comparison approach is based upon the principle of substitution, which
assumes that a prudent buyer will not pay more for a property than it would cost
to purchase an equally desirable property, assuming no costly delay in making
that substitution. The reliability of this approach is dependent upon there
being an adequate volume of comparable sale data. In addition, the comparable
sales must be "arm's length" and there must be no unusual conditions affecting
the price paid. We conducted a search through real estate brokers, appraisers,
and county records in order to determine what transactions had occurred over the
past few years.
We collected data on 3 sales that were considered similar to the property. The
unit of comparison used is price per room, chosen because it is standard for
this type of property and generally gives reliable results. Prior to adjustment
for differences due to market conditions, age/condition, etc., the sales ranged
in price from $18,160 to $33,286 per room.
The table on the facing page summarizes the sales and the adjustments made.
Following is a brief description of the adjustments by relevant characteristics.
Details of each sale are located in the Addenda. We attempted to verify the
terms of each sale with the buyer, seller, broker or local reliable appraisers.
We assumed normal conditions unless we were informed otherwise in terms of
financing terms and conditions of sale.
PROPERTY RIGHTS CONVEYED - All sales were reportedly fee simple transfers,
therefore no adjustments were necessary for this category.
FINANCING TERMS - To the best of our knowledge, none of the sales involved
atypical financing and were bought on terms which were considered cash
equivalent. Therefore none of the sales required an adjustment for financing.
CONDITIONS OF SALE - To the best of our knowledge, there were no conditions
associated with any of the sales which would be considered unusual or involving
undue influences, so no adjustment was made for this category.
MARKET CONDITIONS - As discussed in the area section of the report, the
Miner/Sikeston area has shown signs of an improving economy, and an increase in
the tourism industry due to the newly developed Sikeston Factory Outlet Mall,
and the increasing popularity of Branson, Missouri. In addition, the overall
motel industry has improved over the last year and a half as the economy
continues to improve from the
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 38
<PAGE>
recession of the early 1990s. All three of the sales which were analyzed
occurred between 1990 and 1992 and therefore warranted an upward adjustment, to
reflect the improved conditions in the market.
LOCATION - The Super 8 Motel in Miner, Missouri is a highway motel with
immediate access off Interstate 55. Additionally, it is located within 200
yards of the Sikeston Factory Outlet Mall, which draws thousands of people each
year as they are traveling through the area. It also has two restaurants
immediately adjacent to it, and is down the road from Lambert's Cafe which is
nationally renowned. The 3 other motel sales which we analyzed in our report
did not have the superior locational features as did the Super 8 Motel in Miner.
We made an upward adjustment to each of the sales to reflect their inferior
location compared to the property being appraised.
NUMBER OF ROOMS - Typically motel properties with more rooms sell for less per
unit, and properties with fewer rooms sell for more per unit, all else being
equal. Sales 2 and 3 both had more rooms than the Super 8 Motel, so an upward
adjustment was made for the number of rooms category.
AGE/CONDITION - Sales 1 and 2 were both newer than the Super 8 Motel in Miner,
Missouri, and therefore required a slight downward adjustment for this category.
QUALITY OF CONSTRUCTION - The construction quality of sale 2 was considered
inferior and therefore required a positive adjustment to reflect its inferior
construction quality.
AMENITIES - All three of the sales were limited service motels which offered
similar amenities to the Super 8 Motel in Miner, Missouri. Sale 3 however had
an outdoor pool and required a slight downward adjustment for this factor.
OCCUPANCY - We were able to obtain occupancy information on the comparable
motels at the time they were sold. Sale 1 and 3 both had occupancy levels which
were lower than the Super 8 Motel in Miner, Missouri. An upward adjustment was
made to each of these two sales to account for their inferior occupancy.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 39
<PAGE>
SUMMARY OF THE SALES COMPARISON APPROACH
After adjustments, the sales ranged in value from $40,200 to $41,900 per room
with an average of $40,800 per room. Based on our analysis, it is our opinion
that the market value of the subject property based on the sales comparison
approach, as of December 1, 1994 is as follows:
63 rooms x $40,500 per room = $2,551,500
Rounded: $2,550,000
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 40
<PAGE>
INCOME CAPITALIZATION APPROACH
The Income Capitalization Approach is based on the premise that value is created
by the expectation of future benefits. We estimated the present value of those
benefits to derive an indication of the amount that a prudent, informed
purchaser-investor would pay for the right to receive them as of the valuation
date.
This approach requires an estimation of the net operating income of a property.
The estimated net operating income is then converted to a value indication by
use of the Direct Capitalization Method and/or the Discounted Cash Flow Method.
The direct capitalization method estimates the value of the subject property by
dividing the net income for a typical year by an overall capitalization rate
that is based on an analysis of the relationship between income and sales prices
achieved from recent sales of properties similar to the subject and investor
surveys. The direct capitalization method is most reliable when the income and
expenses maintain a basic level of stability.
The discounted cash flow method estimates the value of the property by
discounting the projected income stream over the holding period and the
estimated reversionary value of the property at the end of the period, to a
present value as of the date of valuation.
ESTIMATE OF PROJECTED REVENUE AND EXPENSES FOR HOLDING PERIOD - The first step
involves projecting the income and expenses for the subject property over a
projected holding period plus an additional year for purposes of estimating a
reversion value. In our analysis, we project the property's income for a period
of 10 years. The income for each of these years is estimated by projecting the
actual occupancy and average daily room rate that will be achieved given
foreseeable market conditions and normal management policies necessary to
establish the market position of the property. Variances in occupancy and room
rate are frequently caused by factors such as: the marketing time necessary to
establish the presence of the subject property through advertising and repeat
business; discounted room rates lower than room rates otherwise supportable to
assist the initial marketing effort; temporary imbalance in local supply and
demand characteristics that may lead to occupancies that are either higher or
lower than those expected on a stabilized basis; and/or the entrance of new,
competitive hotels, or the removal of older economically obsolete properties
from the competitive supply. Expenses in some years of the projection period
can vary from those in the typical year due to such factors as: higher initial
administrative and general expenses because of the establishment of new
ownership, new operating policies and training of new staff; higher marketing
costs than normal to assist the initial marketing effort or meeting the effect
of new competition; and variable property operating and maintenance expenses
dependent on the age of the improvements.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 41
<PAGE>
VALUATION OF THE ESTIMATED INCOME - The projected income stream reflects
foreseeable market conditions that may cause the projected income stream to be
greater than or less than a stabilized income stream. In addition to changes in
market conditions that may impact the occupancy rate, the discounted cash flow
method also considers the impact of inflation and appreciation on the expected
room rates and operating expenses. The reversion value is estimated by
capitalizing the last year of income by an appropriate overall rate to reflect
an assumed sale of the property to another buyer at that time. The resulting
cash flows and reversion value are discounted to an indication of value as of
the date of valuation at a discount rate that reflects the durability, timing
and riskiness of the cash flow stream in light of alternative investments
currently available to investors.
CONCLUSION - The final step in this approach is to reconcile the conclusions of
value reached by the direct capitalization and discounted cash flow methods.
MARKET AND SUBJECT OPERATING TRENDS
Our estimates of future operating results are primarily based on historical
trends of the subject property and statistical data from THE HOST REPORT
published by Arthur Andersen and Smith Travel Research, a publication providing
operating results of full service hotels, limited service hotels and all suite
hotels. The survey breaks these categories down further by various groupings.
We have considered the following categories for comparison of ratios to total
revenues from the limited service section of the Host Report.
- Chain Affiliated
- West North Central
- Under 75 rooms
- Highway
- 1981-1986
We have compared the 1994 budget to THE HOST REPORT data as well as the
property's actual operating history from 1991 to 1993. THE HOST REPORT data and
a schedule of the property's operating history are located on the following
page.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 42
<PAGE>
OPERATING RESULTS -- HISTORICAL AND FORECASTED
SUPER 8 MOTEL, MINER, MO.
<TABLE>
<CAPTION>
Actual % Of Actual % of % % of %
YEAR 1992 Rev. 1993 Rev. Change *1994 Rev. Change
- ---- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 92.9% 94.7% 1.9% 97.2% 2.6%
Average Daily Rate $34.22 $35.40 3.5% $36.42 2.9%
# Rooms Occupied 21,372 21,786 1.9% 22,356 2.6%
# Rooms Available 22,995 22,995 0.0% 22,995 0.0%
------------------------------------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
------------------------------------------------------------------------------------------------------
Rooms 731,293 97.3% 771,277 96.0% 5.5% 814,123 95.9% 5.6%
Telephone 9,401 1.3% 21,076 2.6% 124.2% 23,519 2.8% 11.6%
Other Operating Revenues 11,067 1.5% 10,973 1.4% -0.8% 11,583 1.4% 5.6%
------------------------------------------------------------------------------------------------------
TOTAL REVENUE 751,761 100.0% 803,326 100.0% 6.9% 849,225 100.0% 5.7%
------------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
------------------------------------------------------------------------------------------------------
Rooms 146,095 20.0% 154,536 20.0% 5.8% 166,522 20.5% 7.8%
Telephone 10,056 107.0% 11,158 52.9% 11.0% 11,377 48.4% 2.0%
------------------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 156,151 20.8% 165,694 20.6% 6.1% 177,899 20.9% 7.4%
------------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
------------------------------------------------------------------------------------------------------
Rooms 585,198 80.0% 616,741 80.0% 5.4% 647,601 79.5% 5.0%
Telephone -655 -7.0% 9,918 47.1% 1614.2% 12,142 51.6% 22.4%
Other Operating Revenues 11,067 100.0% 10,973 100.0% -0.8% 11,583 100.0% 5.6%
------------------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 595,610 79.2% 637,632 79.4% 7.1% 671,326 79.1% 5.3%
------------------------------------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
------------------------------------------------------------------------------------------------------
Admin & General 131,414 17.5% 152,984 19.0% 16.4% 127,464 15.0% -16.7%
Management Fees 22,153 2.9% 40,210 5.0% 81.5% 42,014 4.9% 4.5%
Marketing 23,486 3.1% 24,325 3.0% 3.6% 23,257 2.7% -4.4%
Property Operations/Maint. 30,505 4.1% 31,405 3.9% 3.0% 31,660 3.7% 0.8%
Energy 33,772 4.5% 32,827 4.1% -2.8% 33,958 4.0% 3.4%
------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 241,330 32.1% 281,751 35.1% 16.7% 258,353 30.4% -8.3%
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
HOUSE PROFIT 354,280 47.1% 355,881 44.3% 0.5% 412,973 48.6% 16.0%
------------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
------------------------------------------------------------------------------------------------------
Property Taxes 8,637 1.1% 8,857 1.1% 2.5% 9,924 1.2% 12.0%
Insurance 9,444 1.3% 7,473 0.9% -20.9% 15,042 1.8% 101.3%
Leases 21,736 2.9% 15,487 1.9% -28.7% 13,595 1.6% -12.2%
------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 39,817 5.3% 31,817 4.0% -20.09% 38,561 4.5% 21.2%
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
NET OPERATING INCOME 314,463 41.8% 324,064 40.3% 3.1% 374,412 44.1% 15.5%
------------------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
------------------------------------------------------------------------------------------------------
Reserves for Replacement 21,941 2.9% 24,125 3.0% 10.0% 25,209 3.0% 4.5%
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
NET CASH FLOW 292,522 38.9% 299,939 37.3% 2.5% 349,203 41.1% 16.4%
------------------------------------------------------------------------------------------------------
<FN>
* 1994 income and expense amounts were calculated based upon 10 month actual
Y-T-D information provided to us by the client, and then adding in the budgeted
amounts per the 1994 budget for the months of Nov. and Dec.
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 43
<PAGE>
1993 HOST REPORT -- OPERATING RATIOS
(RATIO TO REVENUES)
SUPER 8 MOTEL, MINER, MO.
LIMITED SERVICE
<TABLE>
<CAPTION>
Under
Chain West North Central 75 Rooms Highway 1981-1986
----- ------------------ -------- ------- ---------
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------
Occupancy 69.9% 66.8% 65.4% 66.7% 69.7%
Average Daily Rate $50.12 $47.26 $43.38 $45.16 $49.82
-----------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
-----------------------------------------------------------------------------
Rooms 94.7% 95.2% 96.3% 94.7% 94.4%
Telephone 2.0% 2.1% 2.2% 1.8% 1.6%
Minor Operated Depts. 1.1% 1.3% 0.6% 0.9% 1.0%
Rentals and Other 2.2% 1.4% 0.9% 2.6% 3.0%
---- ---- ---- ---- ----
TOTAL REVENUE 100.0% 100.0% 100.0% 100.0% 100.0%
-----------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
-----------------------------------------------------------------------------
Rooms 28.6% 29.5% 26.6% 29.6% 29.4%
Telephone 70.4% 74.9% 126.5% 84.2% 65.1%
Other Departmental Exp. 0.7% 0.8% 0.2% 0.5% 0.8%
---- ---- ---- ---- ----
TOTAL DEPT. EXPENSES 29.2% 30.5% 28.6% 30.1% 29.6%
-----------------------------------------------------------------------------
DEPARTMENTAL PROFIT
-----------------------------------------------------------------------------
Rooms 71.4% 70.5% 73.5% 70.4% 70.6%
Telephone 29.6% 25.1% -26.5% 15.9% 34.9%
Other Departmental Profit 2.6% 1.9% 1.3% 3.0% 3.2%
---- ---- ---- ---- ----
GROSS OPER INCOME 70.8% 69.5% 71.4% 69.9% 70.4%
-----------------------------------------------------------------------------
LESS GENERAL OPER EXPENSES
-----------------------------------------------------------------------------
Admin & General 10.0% 10.2% 10.0% 10.1% 9.5%
Marketing 4.7% 5.8% 3.1% 4.0% 4.7%
Franchise Fees 2.3% 2.5% 3.6% 2.0% 1.8%
Energy 5.5% 5.9% 7.2% 6.0% 5.0%
Property Operations/Maint. 4.8% 5.1% 6.0% 5.0% 4.4%
---- ---- ---- ---- ----
TOTAL OPER EXPENSES 27.3% 29.5% 29.9% 27.1% 25.4%
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
HOUSE PROFIT 43.4% 40.0% 41.6% 42.7% 44.9%
-----------------------------------------------------------------------------
LESS OTHER EXPENSES
-----------------------------------------------------------------------------
Management Fee 3.8% 3.0% 3.6% 3.8% 4.4%
Property Taxes 4.3% 5.5% 3.5% 3.9% 4.2%
Insurance 1.3% 1.4% 1.5% 1.4% 1.3%
Leases 0.3% 0.5% 0.6% 0.2% 0.2%
-----------------------------------------------------------------------------
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 44
<PAGE>
INCOME AND FORECAST ASSUMPTIONS
OCCUPANCY AND STABILIZATION - The Miner Super 8 Motel has historically performed
at occupancy levels in the 90 percent range. Many years it had occupancy levels
above 95 percent. This type of occupancy level is obviously well above any
industry standard, but was supported to us according to monthly financial
statements provided by the client. However, in March of 1995, a newly
constructed Drury Inn is opening across the street from the subject, and will
have 80 rooms. It will be a little bit more expensive than the Super 8, but it
will not have a price variation large enough to prevent it from taking away some
of the business from the Super 8. In order to accurately project this, we have
estimated that the current occupancy levels will decrease somewhat in the second
half of 1995 to reflect the lost business to the new competition. This results
in a blended occupancy of 91 percent for fiscal year 1995. We are projecting a
stabilized occupancy of 85 percent starting in fiscal year 1996.
ROOMS DEPARTMENT - We have estimated room revenue using the occupancies and
average daily room rates concluded on page 22 in the market study section of
this report.
TELEPHONE REVENUE - This department is entirely driven by occupancy and guest
dollars. Historically telephone revenue amounted to 1.3 to 2.8 percent of total
revenue. During 1993 the Super 8 Motel began a policy of charging a flat $0.50
per day for opening up the phone lines whether or not any calls were actually
made. This is the main reason behind the increase in the telephone revenue.
Based on past percentages and our discussions with the management we believe the
budgeted 2.8 percent is within a reasonable range given the new policy of
charging a flat fee each day for opening the phone lines. We have projected a
stabilized percentage of 2.8 percent in our analysis to represent the amount of
revenue generated by telephones.
OTHER OPERATING REVENUES - This category is a line item which includes income
generated from vending machine sales, pay per view movies, and medicine sales
from a vending machine. Historically these revenues have accounted for 1.4 -
1.5 percent of total revenues generated. In our stabilized cash flow
projection, we have allocated 1.4 percent of total income for this category.
EXPENSES ANALYSIS
In our forecast, the departmental expenses are expressed as a percentage of the
corresponding revenue item which the expense is associated with. The remaining
expenses are expressed as a percent of total revenue. Property management fees,
and real estate taxes are expressed as fixed expenses which are projected to
grow at a projected rate over the holding period analysis. These two expenses
are fixed and not related to
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 45
<PAGE>
the amount of revenue which the property generates. In each case, we examined
the historical ratios and compared them to those reported in the HOST REPORT.
The following only highlights those expenses that required further discussion.
The remaining, departmental expenses, general operating expenses and other
expenses were considered reasonable and did not warrant further discussion.
ADMINISTRATIVE AND GENERAL - This expense has historically been 15.0 to 19.0
percent which is above average for this type of property. However, included in
the administrative and general expense category are expense items for royalty
fees which are based upon approximately 4 percent of room sales. When you take
this into consideration, the administrative and general expense category falls
within industry ranges. In 1993 the expenses were higher than normal, and this
was primarily due to larger than usual legal fees. In our stabilized year cash
flow projection, we have projected 15 percent of total revenue to make up the
administrative and general expenses for this property. This includes the
royalty fee associated with the franchise, and is supported by the historical
performance of the property.
MANAGEMENT FEE - The management fees at the Super 8 Motel have fluctuated
between approximately 3 to 5 percent over the past few years. However,
management expenses are closely monitored by owners and are frequently revised
in an effort to control costs. It is becoming more common to base part of the
management fee on total revenues, and then add an additional amount as an
incentive amount which is based upon the bottom line profitability of the
property. According to conversations with our client, the management fees for
the property are going to be altered to a structure where the property will be
charged a 3 percent management fee with a 10 percent incentive on cash flow.
This equates to an approximate 3.3 percent management fee. The Host Report
indicates a range in management fee, based on our identified categories, of 3.0
to 4.4 percent. Based on the information provided by our client, assuming this
new structure of management fees, and the fact that this new percentage is
within industry averages according to the Host Report, we have applied a
management fee of 3.3 percent through our projection period.
PROPERTY TAXES - Included in the property tax expense is real estate and
personal property taxes. The property taxes are considered a fixed expense and
are not related to the revenue which is generated at the property. Historically
the taxes have grown between 2.5 to 4 percent a year. It is typical to expect
the property taxes to grow over time with the rate of inflation. In some years
they could decrease due to declining market conditions or tax appeals, and in
some years they can increase due to additional expenditures at the property or
increases in the assessed value. Over the long term, however, we have projected
a 4 percent annual increase in the overall property taxes which is also in line
with the average annual increase expected in the future.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 46
<PAGE>
INSURANCE - The insurance policy for the Super 8 Motel is part of a blanket
policy that covers the four other Super 8 properties which are owned by All
American Group Limited Partnership. This expense consists of workmen's
compensation and property insurance. The insurance agent allocates a portion of
the total expense to each property. The insurance policy is constantly monitored
for expense levels, and the owners solicit bids every year from various
insurance providers. Historically, this expense has amounted to between 0.9 -
and 1.8 percent of the total revenues, although this expense is a fixed amount
and is not strictly tied to revenue levels. For the Super 8 Motel in Miner, the
insurance expense line item includes flood insurance, as the property is in a
100 year flood plain. We have budgeted the insurance expense in our cash flow
based upon historical levels. We applied a constant 4 percent annual growth to
reflect the expected average annual increase in the cost of insurance.
RESERVES FOR REPLACEMENT - It is typical for properties to include a reserve in
their budget, for items which are expected to wear out and need repair or
replacement, prior to the end of the remaining economic life of the building.
After talking with the property manager on site, we were informed of items which
would be repaired or replaced within the near future. While many of the costs
for improvements have been incurred many are still in the process of being
completed or have yet to begin. With the Super 8 Motel, the amount and timing
of the capital expenditures for these type of items are dependent upon the
franchise inspection which is performed periodically. Many recent improvements
have been made to the Miner Super 8, including a new roof, re-painting the
exterior, new TV's, carpeting the interior, new drapes, etc. However, the
property management informed us that one of the main objectives of the owners,
was to consistently maintain the property at a level which generates excellent
reviews from the franchise inspections. In order to do this, it is expected
that these periodic capital expenditures will be made on the property. We were
not provided with any actual capital expenditure reports for the property, but
in our opinion 3 percent of total revenues for a reserve for replacements should
be sufficient to pay for continual capital projects. This is supported by
industry standards.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 47
<PAGE>
INCOME CAPITALIZATION APPROACH CONCLUSION
DIRECT CAPITALIZATION METHOD
SUPER 8 MOTEL, MINER, MO.
DECEMBER 1, 1994
<TABLE>
<S> <S>
Stabilized income
Fiscal year ending
November 30, 1996: $357,235
Overall Capitalization Rate: 11.50%
Capitalized Income: $3,106,395
Discounted @ 4% to FY95 $2,986,919
Rounded to: $2,990,000
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 48
<PAGE>
DIRECT CAPITALIZATION METHOD
The projected stabilized cash flow is on the following page. In order to
estimate the value of the property by the Direct Capitalization Method, the
estimated stabilized cash flow must be capitalized with an overall
capitalization rate. This rate provides a rate of return of and on the
investment through the relationship of net operating income to a hotel's sale
price. The comparable sales used in this analysis indicated a capitalization
rate range of 9.9 to 17.6 percent. While this provides us with a range of
capitalization rates, these sales were all at least two years old, and don't
necessarily reflect the current relationships between income and value which
investors are using in their capitalization rates as of the date of the
appraisal. In addition, the accuracy of these capitalization rates is
questionable because the income information could not be completely confirmed.
We have also consulted Korpacz investor survey which indicated an average of
12.44 percent for an overall capitalization rate, and CB Commercial which
indicated an average overall capitalization rate of 11.3 percent.
While the desirability of hotel investment was low in past years, the economy is
improving, and the tourism and lodging industry in Miner/Sikeston show signs of
improvement. The values overall are increasing in the limited service motel
market, and investors are reporting lower capitalization rates as properties
become more expensive relative to the income they generate. Based upon the
above factors, we have chosen an overall rate of 11.5 percent. This is at the
lower end of the surveyed range, but reflects the fact that the values are going
up for these types of properties due to increased demand by investors. As the
competition increases for fewer and fewer of these types of properties, the
required return on and of the investment (the capitalization rate) will go down.
The conclusion of this method is on the facing page. This conclusion takes into
account stabilization occurring in 1996, so our value has been discounted 1 year
to reflect a fiscal year 1995 date of valuation.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 49
<PAGE>
PROJECTED STABILIZED OPERATING RESULTS
FISCAL YEAR 1996
(DECEMBER 1, 1995 THROUGH NOVEMBER 30, 1996)
SUPER 8 MOTEL, MINER, MO.
<TABLE>
<CAPTION>
% % Change
Stabilized of Total Actual
YEAR FY 1996 Revenue CY 1994
- ---- ---------------------------------------------
<S> <C> <C> <C>
Occupancy 85.0% -12.6%
Average Daily Rate $39.66 8.9%
Occupied Rooms 19,546 -12.6%
Room-nights Available 22,995 0.0%
---------------------------------------------
DEPARTMENTAL REVENUE:
---------------------------------------------
Rooms 775,184 95.8% -4.8%
Telephone 21,848 2.7% -7.1%
Other Operating Revenue 12,138 1.5% 4.8%
---------------------------------------------
TOTAL REVENUE 809,170 100.0% -4.7%
---------------------------------------------
DEPARTMENTAL EXPENSES
---------------------------------------------
Rooms 155,037 20.0% -6.9%
Telephone 10,924 50.0% -4.0%
---------------------------------------------
TOTAL DEPT. EXPENSES 165,961 20.5% -6.7%
---------------------------------------------
DEPARTMENTAL PROFIT
---------------------------------------------
Rooms 620,148 80.0% -4.2%
Telephone 10,924 50.0% -10.0%
Other Operating Revenue 12,138 100.0% 4.8%
---------------------------------------------
GROSS OPER INCOME 643,209 79.5% -4.2%
---------------------------------------------
LESS GENERAL OPER EXPENSES
---------------------------------------------
Admin & General 121,375 15.0% -4.8%
Management Fees 26,703 3.3% -36.4%
Marketing 24,275 3.0% 4.4%
Property Operations/Maint. 30,748 3.8% -2.9%
Energy 32,367 4.0% -4.7%
---------------------------------------------
TOTAL OPER EXPENSES 235,468 29.1% -8.9%
---------------------------------------------
---------------------------------------------
HOUSE PROFIT 407,741 50.4% -1.3%
---------------------------------------------
LESS OTHER EXPENSES
---------------------------------------------
Property Taxes 9,961 1.2% 8.2%
Insurance 16,269 2.0% 8.2%
Leases 0 0.0% -100.0%
---------------------------------------------
TOTAL OTHER EXPENSES 26,230 3.2% -31.3%
---------------------------------------------
---------------------------------------------
NET OPERATING INCOME 381,511 47.1% 1.8%
---------------------------------------------
LESS CAPITAL EXPENSES
---------------------------------------------
Reserves for Replacement 24,275 3.0% -3.7%
---------------------------------------------
---------------------------------------------
NET CASH FLOW 357,235 44.1% 2.2%
---------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 50
<PAGE>
Projected Cash Flow
Super 8 Motel, Miner, Mo.
<TABLE>
<CAPTION>
Projected Projected Projected Projected Projected Projected
YE YE YE YE YE YE
YEAR 12/30/95 % 12/30/96 % 12/30/97 % 12/30/98 % 12/30/99 % 12/30/00 %
- ---- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 91.0% 85.0% 85.0% 85.0% 85.0% 85.0%
Average Daily Rate $38.50 $39.66 $40.84 $42.07 $43.33 $44.63
# Rooms Occupied 20,925 19,546 19,546 19,546 19,546 19,546
Room-Nights Available 22,995 22,995 22,995 22,995 22,995 22,995
-------------------------------------------------------------------------------------------------------------
ADR Growth Rate 3.00% 3.00% 3.00% 3.00% 3.00%
--------------------------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
-------------------------------------------------------------------------------------------------------------
Rooms 805,630 95.8% 775,087 95.8% 798,339 95.8% 822,289 95.8% 846,958 95.8% 872,367 95.8%
Telephone 22,706 2.7% 22,645 2.7% 22,500 2.7% 23,175 2.7% 23,870 2.7% 24,587 2.7%
Other Operating
Revenues 12,614 1.5% 12,136 1.5% 12,500 1.5% 12,875 1.5% 13,261 1.5% 13,659 1.5%
------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 840,950 100.0% 809,068 100.0% 833,340 100.0% 858,340 100.0% 884,090 100.0% 910,613 100.0%
------------------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
------------------------------------------------------------------------------------------------------------
Rooms 161,126 20.0% 155,017 20.0% 159,668 20.0% 164,458 20.0% 169,392 20.0% 174,473 20.0%
Telephone 10,596 45.0% 10,194 45.0% 10,500 45.0% 10,815 45.0% 11,140 45.0% 11,474 45.0%
------------------------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 171,722 20.4% 165,212 20.4% 170,168 20.4% 175,273 20.4% 180,531 20.4% 185,947 20.4%
------------------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
------------------------------------------------------------------------------------------------------------
Rooms 644,504 80.0% 620,069 80.0% 638,671 80.0% 657,832 80.0% 677,567 80.0% 697,894 80.0%
Telephone 12,951 55.0% 12,460 55.0% 12,833 55.0% 13,218 55.0% 13,615 55.0% 14,023 55.0%
Other Operating
Revenues 11,773 100.0% 11,327 100.0% 11,667 100.0% 12,017 100.0% 12,377 100.0% 12,749 100.0%
------------------------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 669,228 79.6% 643,856 79.6% 663,172 79.6% 683,067 79.6% 703,559 79.6% 724,666 79.6%
------------------------------------------------------------------------------------------------------------
LESS GENERAL
OPERATING EXPENSES
------------------------------------------------------------------------------------------------------------
Admin & General 126,142 15.0% 121,360 15.0% 125,001 15.0% 128,751 15.0% 132,613 15.0% 136,592 15.0%
Management Fees 27,751 3.3% 26,699 3.3% 27,500 3.3% 28,325 3.3% 29,175 3.3% 30,050 3.3%
Marketing 25,228 3.0% 24,272 3.0% 25,000 3.0% 25,750 3.0% 26,523 3.0% 27,318 3.0%
Property
Operations/Maint. 31,956 3.8% 30,745 3.8% 31,667 3.8% 32,617 3.8% 33,595 3.8% 34,603 3.8%
Energy 33,638 4.0% 32,363 4.0% 33,334 4.0% 34,334 4.0% 35,364 4.0% 36,425 4.0%
------------------------------------------------------------------------------------------------------------
TOTAL OPERATING
EXPENSES 244,716 29.1% 235,439 29.1% 242,502 29.1% 249,777 29.1% 257,270 29.1% 264,988 29.1%
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
HOUSE PROFIT 424,511 50.5% 408,417 50.5% 420,670 50.5% 433,290 50.5% 446,289 50.5% 459,677 50.5%
------------------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
------------------------------------------------------------------------------------------------------------
Property Taxes 10,320 1.2% 10,733 1.3% 11,162 1.3% 11,609 1.4% 12,073 1.4% 12,556 1.4%
Insurance 15,643 1.9% 16,269 2.0% 16,919 2.0% 17,596 2.1% 18,300 2.1% 19,032 2.1%
Leases 13,595 1.6% 4,532 0.6% 0 0.0% 0 0.0% 0 0.0% 0 0.0%
------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE 39,558 4.7% 31,534 3.9% 28,082 3.4% 29,205 3.4% 30,373 3.4% 31,588 3.5%
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
NET OPERTING INCOME 384,953 45.8% 376,884 46.6% 392,588 47.1% 404,085 47.1% 415,916 47.0% 428,089 47.0%
------------------------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
------------------------------------------------------------------------------------------------------------
Reserves for
Replacement 25,228 3.0% 24,272 3.0% 25,000 3.0% 25,750 3.0% 26,523 3.0% 27,318 3.0%
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
NET CASH FLOW 359,725 42.8% 352,612 43.6% 367,588 44.1% 378,335 44.1% 389,393 44.0% 400,771 44.0%
------------------------------------------------------------------------------------------------------------
<CAPTION>
Projected Projected Projected Projected Projected
YE YE YE YE YE
YEAR 12/30/01 % 12/30/02 % 12/30/03 % 12/30/04 % 12/30/05 %
- ---- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 85.0% 85.0% 85.0% 85.0% 85.0%
Average Daily Rate $45.97 $47.35 $48.77 $50.23 $51.74
# Rooms Occupied 19,546 19,546 19,546 19,546 19,546
Room-Nights Available 22,995 22,995 22,995 22,995 22,995
-----------------------------------------------------------------------------------------------------------
ADR Growth Rate 3.00% 3.00% 3.00% 3.00% 3.00%
-----------------------------------------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
-----------------------------------------------------------------------------------------------------------
Rooms 898,538 95.8% 925,494 95.8% 953,259 95.8% 981,857 95.8% 1,011,312 95.8%
Telephone 11,818 45.0% 12,172 45.0% 12,538 45.0% 12,914 45.0% 13,301 45.0%
Other Operating
Revenues
-----------------------------------------------------------------------------------------------------------
TOTAL REVENUE 937,931 100.0% 966,069 100.0% 995,051 100.0% 1,024,903 100.0% 1,055,650 100.0%
-----------------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
-----------------------------------------------------------------------------------------------------------
Rooms 179,708 20.0% 185,099 20.0% 190,652 20.0% 196,371 20.0% 202,262 20.0%
Telephone 11,818 45.0% 12,172 45.0% 12,538 45.0% 12,914 45.0% 13,301 45.0%
-----------------------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 171,722 20.4% 197,271 20.4% 203,189 20.4% 209,285 20.4% 215,564 20.4%
-----------------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
-----------------------------------------------------------------------------------------------------------
Rooms 718,830 80.0% 740,395 80.0% 762,607 80.0% 785,485 80.0% 809,050 80.0%
Telephone 14,444 55.0% 14,877 55.0% 15,324 55.0% 15,783 55.0% 16,257 55.0%
Other Operating
Revenues 13,131 100.0% 13,525 100.0% 13,931 100.0% 14,349 100.0% 14,779 100.0%
-----------------------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 746,406 79.6% 768,798 79.6% 791,862 79.6% 815,617 79.6% 840,086 79.6%
-----------------------------------------------------------------------------------------------------------
LESS GENERAL
OPERATING EXPENSES
-----------------------------------------------------------------------------------------------------------
Admin & General 140,690 15.0% 144,910 15.0% 149,258 15.0% 153,735 15.0% 158,347 15.0%
Management Fees 30,952 3.3% 31,880 3.3% 32,837 3.3% 33,822 3.3% 34,836 3.3%
Marketing 28,138 3.0% 28,982 3.0% 29,852 3.0% 30,747 3.0% 31,669 3.0%
Property
Operations/Maint. 35,641 3.8% 36,711 3.8% 37,812 3.8% 38,946 3.8% 40,115 3.8%
Energy 37,517 4.0% 38,643 4.0% 39,802 4.0% 40,996 4.0% 42,226 4.0%
-----------------------------------------------------------------------------------------------------------
TOTAL OPERATING
EXPENSES 272,938 29.1% 281,126 29.1% 289,560 29.1% 298,247 29.1% 307,194 29.1%
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
HOUSE PROFIT 473,468 50.5% 487,672 50.5% 502,302 50.5% 517,371 50.5% 532,892 50.5%
-----------------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
-----------------------------------------------------------------------------------------------------------
Property Taxes 13,058 1.4% 13,580 1.4% 14,124 1.4% 14,689 1.4% 15,276 1.4%
Insurance 19,793 2.1% 20,585 2.1% 21,409 2.2% 22,265 2.2% 23,155 2.2%
Leases 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0%
-----------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE 32,851 3.5% 34,166 3.5% 35,532 3.6% 36,953 3.6% 38,432 3.6%
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
NET OPERTING INCOME 440,616 47.0% 453,506 46.9% 466,770 46.9% 480,417 46.9% 494,460 46.8%
-----------------------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
-----------------------------------------------------------------------------------------------------------
Reserves for
Replacement 28,138 3.0% 28,982 3.0% 29,852 3.0% 30,747 3.0% 31,669 3.0%
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
NET CASH FLOW 412,478 44.0% 424,524 43.9% 436,918 43.9% 449,670 43.9% 462,791 43.8%
-----------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 51
<PAGE>
DISCOUNTED CASH FLOW METHOD
The projected cash flow for the property is presented on the facing page. In
order to complete the valuation of the property using the Discounted Cash Flow
Approach, we present our analysis of an appropriate discount rate and
capitalization rate, calculate the reversion value of the property at the end of
the holding period, and present the conclusions of value.
REVERSION CAPITALIZATION RATE - Terminal capitalization rates are typically
higher than "going-in" capitalization rates due to the risk associated with the
passage of time and uncertainty into the future. The following table summarizes
terminal capitalization rate ranges for limited service hotels as indicated by
two investor surveys.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Summary Of Terminal Capitalization Rate Ranges
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Publication Publication Date Low High Average
----------- ---------------- --- ---- -------
<S> <C> <C> <C> <C>
CB Commercial Investor Survey 2nd Qtr 1994 10.00% 14.00% 12.00%
Korpacz Investor Survey 2nd Qtr 1994 10.00% 16.00% 12.54%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
After considering the future risks of operations in a property similar to the
subject, such as the property's age and condition, we have concluded with a
terminal capitalization rate of 12 percent. This rate will be used to
capitalize the 11th year income estimate into a reversionary value for the
subject property.
DISCOUNT RATE - Discount rates vary according to investor requirements, investor
motivations, property characteristics, and market conditions. For this reason
we reviewed various interest rates as follows:
T-Notes - 10 year 8.20%
Corporate Bonds - High Quality 8.72%
Corporate Bonds - Medium Quality 9.12%
Conventional Fixed Rate Mortgage 9.32%
Prime Rate 8.50%
Source: Wall Street Journal - December 1, 1994
While interest rates overall have decreased in the past few years, they are on
the rise again as the Federal Reserve has raised interest rates several times in
1994. Interest rates generally move together, and therefore the required rate
of return on investments increases with the returns available on alternative
assets. The returns required on real estate investments are no exception to
this, and the discount rates required by investors for hotels has gone up with
the rise in other interest rates. Several national organizations periodically
survey real estate investors for discount rate information on limited service
hotels.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 52
<PAGE>
INCOME CAPITALIZATION APPROACH CONCLUSION
DISCOUNTED CASH FLOW METHOD
SUPER 8 MOTEL, MINER, MO.
DECEMBER 1, 1994
Discount Rate: 15.00%
Terminal Capitalization Rate: 12.00%
Sales cost: 3.00%
<TABLE>
------------------------------------------------------------------------------------
Fiscal Year (December 1 through November 30) 1995 1996 1997 1998 1999 2000
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income $359,709 $352,654 $367,640 $378,396 $349,464 $400,653
+ Reversion
Total $359,709 $352,654 $367,640 $378,396 $349,464 $400,653
x Discount Factor 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323
------ ------ ------ ------ ------ ------
PV of Cash Flow & Reversion $312,790 $266,657 $241,719 $216,349 $193,632 $173,300
-------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------------------
Fiscal Year (December 1 through November 30) 2001 2002 2003 2004 2005
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income $412,572 $424,630 $437,037 $449,803 $462,938
+ Reversion 3,742,079
---------
Total $412,572 $424,630 $437,037 $4,191,882
x Discount Factor 0.3759 0.3269 0.2843 0.2472
------ ------ ------ ------
PV of Cash Flow & Reversion $155,101 $138,842 $124,233 $1,036,169
------------------------------------------------------------------------------------
Total Present Value: $2,858,775
Rounded to: $2,860,000
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 53
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Summary Of Discount Rate Surveys
<TABLE>
<CAPTION>
Discount Rates
- --------------------------------------------------------------------------------
Publication Publication Date Low High Average
- ----------- ---------------- --- ---- -------
<S> <C> <C> <C> <C>
CB Commercial Investor Survey 2nd Qtr 1994 8.00% 17.00% 12.90%
Korpacz Investor Survey 2nd Qtr 1994 11.00% 20.00% 15.58%
PKF Investor Survey 4th Qtr 1993 12.00% 20.00% 16.50%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The subject's ADR and occupancy have steadily increased each year since 1991.
However, with the addition of a new competitor (The Drury Inn) coming on line in
March of 1995, the future occupancy levels and average daily rates for this
property carry some risk with them. For these reasons, and the fact that
required discount rates have increased recently with other interest rates, we
have chosen a discount rate of 15 percent to use in our analysis.
REVERSION VALUE - The reversion value at the end of the 10th full year of the
holding period is based on the 11th year cash flow capitalized using a terminal
capitalization rate of 12 percent. We have deducted an amount equal to 3
percent of the total reversion value to represent the costs of sale upon the
reversion.
The discounted cash flow calculation is presented on the facing page. As shown,
the fee simple value indicated by the discounted cash flow method is $2,860,000.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 54
<PAGE>
CONCLUSION OF THE INCOME CAPITALIZATION APPROACH
With anticipated changes in market conditions, buyers and sellers of this type
of property consider the discounted cash flow technique, in addition to the
direct capitalization method of valuation. In this case, the occupancy and
average daily rate are projected to stabilize in fiscal year 1996, after the new
Drury Inn has been on line, and the market has adjusted to the new supply of
rooms. Most of the expenses associated with the Super 8 Motel have shown signs
of consistency in relationship to revenue levels. Those expense items which
varied considerably were accounted for and forecast in our projected cash flow.
The cash flow takes into account expectations of changes in expense levels,
income streams, appreciation and capital expenditures. The direct
capitalization method supports the value indication derived by using a
discounted cash flow technique. We estimated the final value via the income
capitalization approach by placing emphasis on both income capitalization
methods. We estimate the value by the income capitalization approach, as of
December 1, 1994, at $2,930,000.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 55
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
The results of the three approaches to value are as follows:
Cost Approach $2,930,000
Sales Comparison Approach $2,550,000
Income Capitalization Approach $2,930,000
DIRECT CAPITALIZATION $2,990,000
DISCOUNTED CASH FLOW $2,860,000
The three approaches to value are utilized whenever possible in order to provide
a check whereby all factors are considered in each approach. Inherent in each
approach is an interpretation of market conditions as they affect the subject
property. If only one approach is used, a factor may be overlooked or
misinterpreted. The quality and the quantity of the data in each approach has
been considered, along with the relevancy of each to the subject.
The cost approach relies on the proposition that the market value of the
property is no more than the cost of producing a substitute with the same
utility as the subject. Our estimate under the cost approach assumed fee simple
interest. The approach is reasonably accurate in establishing replacement cost,
but less so in establishing physical deterioration and functional and external
obsolescence, especially for older buildings. The cost approach conclusion
weighs heavily on the income approach conclusion since the intangible business
value is based on the difference between the cost approach not including this
component and the income capitalization approach. The resulting intangible
business value was compared to the HVS Industry Standard Survey. The cost
approach was used as a check to the reasonableness of the income capitalization
approach.
The sales comparison approach reflects the behavior of buyers and sellers
transferring property. Buyers and sellers of hotels compare properties that
have sold and those that are offered for sale in the marketplace so they pay no
more than the least amount that a prudent seller would accept. This approach
relies heavily on the availability of sale data and the willingness of buyers
and/or sellers to reveal details of the transactions. Data on limited service
hotel sales which had occurred recently and were within the geographic region of
the Miner Super 8 were difficult to find. In addition, buyers and/or sellers
were not willing to divulge all of the pertinent facts relating to the sales we
did find. The sales we analyzed were a couple of years old, and needed
adjustments to bring them up to the date of the appraisal. Therefore, little to
no consideration was given to this approach.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 56
<PAGE>
The income capitalization approach is generally regarded as the most reliable
technique for estimating the value of an income producing property. This
approach primarily emphasizes the economic productivity of the asset. It is
based on the premise that value is created by the expectation of future
benefits. We estimated the present value of those benefits to derive an
indication of the amount that a prudent, informed purchaser-investor would pay
for the right to receive them as of the valuation date. In addition, we
estimated the stabilized years income and capitalized it into an indication of
value based upon a capitalization rate supported by industry surveys of
investors in this type of property. In this case we have considered both the
direct capitalization method, and the discounted cash flow method to valuation,
as both methods provided a close range of value estimates.
Based on the three approaches to value, with primary consideration given to the
income capitalization approach, we estimate that the market value of the real
property, as of December 1, 1994, was:
TWO MILLION NINE HUNDRED THIRTY THOUSAND DOLLARS
$2,930,000
The allocation for real property, personal property and business value is as
follows:
Real Property: $1,252,000
Personal Property: 268,000
Business Value: 1,410,000
----------
Total: $2,930,000
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 57
<PAGE>
ADDENDA
_Definitions
_Legal Description
_Land Sales
_Site Plan
_Improved Sales
_Property Photographs
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 58
<PAGE>
DEFINITIONS
(Except as noted, all definitions are as cited in THE APPRAISAL OF REAL ESTATE,
Tenth Edition, Chicago: Appraisal Institute, 1992.)
HIGHEST AND BEST USE: The reasonably probable and legal use of
vacant land or an improved property, which
is physically possible, appropriately
supported, financially feasible, and
results in the highest value.
MARKET VALUE: The most probable price, as of a specified
date, in cash, or in terms equivalent to
cash, or in other precisely revealed terms,
for which the specified property rights
should sell after reasonable exposure in a
competitive market under all conditions
requisite to fair sale, with the buyer and
seller each acting prudently,
knowledgeably, and for self-interest, and
assuming that neither is under undue
duress.
USE VALUE: The value a specific property has for a
specific use. Use value focuses on the
value the real estate contributes to the
enterprise of which it is a part, without
regard to the property's highest and best
use or the monetary amount that might be
realized upon its sale.
GOING-CONCERN VALUE: The value of a proven property operation.
It includes the incremental value
associated with the business concern, which
is distinct from the value of the real
estate only.
REPLACEMENT COST NEW: The estimated cost to construct, at current
prices as of the effective appraisal date,
a building with utility equivalent to the
building being appraised, using modern
materials and current standards, design,
and layout.
REPRODUCTION COST NEW: The estimated cost to construct, at current
prices as of the effective appraisal date,
an exact duplicate or replica of the
building being appraised, using the same
materials, construction standards, design,
layout, and quality of workmanship, and
embodying all the deficiencies,
superadequacies, and obsolescence of the
subject building.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 59
<PAGE>
ACCRUED DEPRECIATION: The difference between the reproduction or
replacement cost of the improvements on the
effective date of the appraisal and the
market value of the improvements on the
same date.
PHYSICAL DETERIORATION: A reduction in utility resulting from an
impairment of physical condition.
FUNCTIONAL OBSOLESCENCE: An impairment of the functional capacity of
a property or building according to market
tastes and standards.
EXTERNAL OBSOLESCENCE: The diminished utility of a structure due
to negative influences emanating from
outside the building.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 60
<PAGE>
LEGAL DESCRIPTION
The following is the legal description of the property:
PARCEL NO. 1: A tract or parcel of land lying and being in the Southwest
Quarter of the Southwest Quarter of Section 15, and the Northwest Quarter of the
Northwest Quarter of Section 22, Township 26 North, Range 14 East, in Miner,
Scott County, Missouri, and being more fully described by metes and bounds as
follows: Commencing at the common corner of Sections 15, 16, 21, and 22, of
Township 26 North, Range 14 East; thence South 88 degrees 56 minutes East on and
along the North line of Section 22 a distance of 613.74 feet to the point of
beginning; thence North 82 degrees 22 minutes East a distance of 62 feet to a
point; thence South 25 degrees 31 minutes 30 seconds East a distance of 128 feet
to a point; thence South 27 degrees 16 minutes 30 seconds East a distance of
78.53 feet to a point; thence South 33 degrees 37 minutes East a distance of
277.94 feet to a point; thence South 82 degrees 22 minutes West a distance of
399.35 feet to a point set in the East right-of-way line of Matthews Lane;
thence North 7 degrees 38 minutes West on and along the East right-of-way line
of Matthews Lane a distance of 145.5 feet to a point; thence North 82 degrees 22
minutes East a distance of 150 feet to a point; thence North 7 degrees 38
minutes West a distance of 300 feet to the point of beginning. Subject to all
rights-of-way and easements affecting the same.
PARCEL NO. 2: Together with an easement and right-of-way for ingress/egress
and parking over, under, and across the following described real estate, to-wit:
A tract or parcel of land lying in and being a part of the Southwest Quarter of
the Southwest Quarter of Section 15, and the Northwest Quarter of the Northwest
Quarter of Section 22, all in Township 26 North, Range 14 East, Scott County,
Missouri, and being more fully described by metes and bounds as follows:
Commencing at the common corner of Sections 15, 16, 21, and 22, Township 26
North, Range 14 East; thence South 88 degrees 56 minutes East on and along the
section line between Sections 15 and 22 a distance of 462.00 feet to the point
of beginning; thence North 7 degrees 38 minutes West a distance of 26.00 feet to
a point set in the South right-of-way line of U.S. Highway 62; thence on and
along the South right-of-way line of U.S. Highway 62 and West right-of-way line
of Interstate 55 with the following courses and distances: North 71 degrees 57
minutes 51 seconds East, 188.00 feet; South 66 degrees 45 minutes 31 seconds
East, 116.00 feet; South 18 degrees 4 minutes 34 seconds East, 131.71 feet;
south 27 degrees 22 minutes 46 seconds East, 73.30 feet and South 33 degrees 37
minutes East, 301.56 feet to a point; thence North 33 degrees 37 minutes West a
distance of 277.94 feet to a point, thence North 27 degrees 16 minutes 30
seconds West a distance of 78.53 feet to a point; thence North 25 degrees 31
minutes 30 seconds West a distance of 128.00 feet to a point; thence South 82
degrees 22 minutes West a distance of 212 feet to a point set in the East right-
of-way line of Matthews Lane; thence North 7 degrees 38 minutes West on and
along said east right-of-way line of Matthews Lane a distance of 22.95 feet to
the point of beginning.
[LOGO} Miner Legal Desciption
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 61
<PAGE>
LAND SALE 1
IDENTIFICATION
Address: 1701 East Malone
City, County, State: Miner, Scott, Missouri
TRANSACTION DATA
Grantor: Ziegenhorn Insurance Agency
Grantee: Paul J. Dorman, Jr.
Deed: Book 453, Page 133
Date of Sale: December, 1992
Sale Price: $175,000
Price / Square Foot: $1.83
Financing: Cash to Seller
PHYSICAL DATA
Land Area: 95,832 square feet
Utilities: All available
Zoning: Commercial
CONFIRMATION: Bill Dockins - Local Appraiser
REMARKS: The sale was located at the intersection of
Missouri and East Malone. It was
previously improved with a motel which was
demolished. Currently it is improved with
a Wendy's hamburger restaurant.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 62
<PAGE>
LAND SALE 2
IDENTIFICATION
Address: South Main Street
City, County, State: Miner, Scott, Missouri
TRANSACTION DATA
Grantor: Scott Matthews
Grantee: Dennis J. Eskie
Deed: Book 469, Page 63
Date of Sale: September, 1992
Sale Price: $666,710
Price / Square Foot: $1.66
Financing: Cash to Seller
PHYSICAL DATA
Land Area: 402,494 square feet
Utilities: All available
Zoning: Commercial
CONFIRMATION: Bill Dockins - Local Appraiser
REMARKS: The sale was located along the east side of
South Main Street. It is now improved with
a K-Mart Store.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 63
<PAGE>
LAND SALE 3
IDENTIFICATION
Address: Intersection of Main Street and East Malone
City, County, State: Miner, Scott, Missouri
TRANSACTION DATA
Grantor: Arthur B. Ziegenhorn
Grantee: Martin & Bayley, Inc.
Deed: Book 441, Page 633
Date of Sale: October, 1991
Sale Price: $225,000
Price / Square Foot: $5.13
Financing: Cash to Seller
PHYSICAL DATA
Land Area: 43,820 square feet
Utilities: All available
Zoning: Commercial
CONFIRMATION: Bill Dockins - Local Appraiser
REMARKS: The sale was located at the intersection of
Main Street and Malone Avenue. It is
currently improved with a Huck's
Convenience Store
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 64
<PAGE>
[GRAPH: Miner floor plan, showing the first floor]
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 65
<PAGE>
IMPROVED SALE 1--COMFORT INN
Property Address: 2889 Austin Peay
Memphis, TN
TRANSACTION DATA
Date of Sale: March 1992
Grantor: Sunburst Bank
Grantee: Rick Patel
Property Rights Transferred: Fee Simple
Sale Price: $2,440,000
Cash Equivalent Sales Price: $2,330,000
Sales Price/Room: $32,286
Personal Property Included
in Sales Price: Yes
Financing/Terms of Sale: Seller provided a loan in the amount of
$1,850,000 at 9% amortized over 15 years
PHYSICAL FEATURES:
Year Completed: 1988
Number of Units: 70
Property Description: Masonry construction, average condition
consisting of singles, doubles, and suites
CONFIRMATION Confirmed with the seller
REMARKS At the time of the sale the property was 69
percent occupied, and sold at an OAR of
9.9%
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 66
<PAGE>
IMPROVED SALE 2--THRIFTY INN
Property Address: Macon Road at I-40
Memphis, TN
TRANSACTION DATA
Date of Sale: January 1992
Grantor: St. Louis Investment Properties, Inc.
Grantee: Hotel Enterprises Limited Partnership, #1
Property Rights Transferred: Fee Simple
Sale Price: $2,025,000
Cash Equivalent Sales Price: $1,925,000
Sales Price/Room: $18,160
Personal Property Included
in Sales Price: Yes
Financing/Terms of Sale: Seller holds a non-recourse loan of
$1,725,000 at 9% on a 25 year amortization
schedule with a 5 year call
PHYSICAL FEATURES:
Year Completed: 1989
Number of Units: 106
Property Description: Frame and pre-fabricated consisting of
singles, doubles, and studio types
CONFIRMATION Seller
REMARKS Hotel had an 81% occupancy at time of sale.
The reported capitalization rate was 17.6
percent.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 67
<PAGE>
IMPROVED SALE 3--MOTEL 6
Property Address: 1860 Intertech Drive
Fenton, MO
TRANSACTION DATA
Date of Sale: September 1990
Grantor: Mellon Bank
Grantee: Motel 6 Operating L.P.
Property Rights Transferred: Fee Simple
Sale Price: $2,200,000
Cash Equivalent Sales Price: $2,200,000
Sales Price/Room: $19,820
Personal Property Included
in Sales Price: Yes
Financing/Terms of Sale: At market
PHYSICAL FEATURES:
Year Completed: 1985
Number of Units: 111
Property Description: 1 story with brick and concrete exterior,
painted drywall interior
CONFIRMATION Buyer
REMARKS Amenities include an outdoor pool. The
reported OAR was 16.5%
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 68
<PAGE>
PROPERTY PHOTOGRAPHS
4 x 6 table photo box
Column Width 6.2
Row Height 25 lines THE MAIN ENTRANCE
4 x 6 table photo box
Column Width 6.2
Row Height 25 lines TYPICAL GUEST ROOM
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 69
<PAGE>
EXHIBIT 10.6
<PAGE>
AN APPRAISAL OF THE SUPER 8 MOTEL IN
POPLAR BLUFF, MISSOURI
FOR
HOST FUNDING, INC.
AS OF DECEMBER 1, 1994
Copyright 1994, Arthur Andersen LLP, 33 West Monroe Street, Chicago, Illinois
60603, U.S.A.
All rights reserved.
<PAGE>
[ARTHUR ANDERSEN LETTERHEAD]
December 27, 1994
Mr. John Phillips
President -----------------------------
Host Funding, Inc. Arthur Andersen LLP
7825 Fay Avenue, Suite 250
LaJolla, California 92037 -----------------------------
33 West Monroe Steet
Chicago IL 60603-5385
312-507-5993
Re: The Super 8 Motel, Poplar Bluff, Missouri
Dear Mr. Phillips:
In accordance with your request, we have performed a complete self-contained
narrative appraisal of the Super 8 Motel located in Poplar Bluff, Missouri. It
is a limited service hotel with 63 rooms situated on 74,445 square feet of land.
The purpose of this appraisal is to estimate the market value of the fee simple
interest in the property on a going-concern basis, as of December 1, 1994. It
is our understanding that the report is to be used for securitization purposes.
A copy of this report may be distributed to Mr. Guy Hatfield of All American
Group LP, and may be included, or referred to, in a Securities and Exchange
Commission Filing. This report can only be used for the purposes stated and
only by our client and the listed third parties.
The accompanying report, of which this letter is a part, describes the building
improvements and methods of appraisal, and contains pertinent data considered in
reaching our value conclusions. The opinion of value is subject to the attached
certification and statement of general assumptions and limiting conditions.
Based on our analysis, the market value of the fee simple interest in the
subject property on a going-concern basis, as of December 1, 1994, was:
TWO MILLION ONE HUNDRED SIXTY THOUSAND DOLLARS
$2,160,000
Our appraisal of the property, including basic assumptions and limited
conditions, is detailed in the attached report.
Very truly yours,
<PAGE>
TABLE OF CONTENTS
LETTER OF TRANSMITTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY OF SALIENT FACTS AND CONCLUSIONS . . . . . . . . . . . . . . . . . . 3
CERTIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
STATEMENT OF GENERAL ASSUMPTIONS AND LIMITING CONDITIONS . . . . . . . . . . 6
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Property Appraised . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Property Rights Appraised. . . . . . . . . . . . . . . . . . . . . . . . . 8
Purpose and Function of the Appraisal. . . . . . . . . . . . . . . . . . . 8
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Ownership History. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Date of Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Scope of the Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . .10
Marketing Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
DESCRIPTION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . .11
Site Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Improvement Description. . . . . . . . . . . . . . . . . . . . . . . . . .11
Property Taxes and Assessments . . . . . . . . . . . . . . . . . . . . . .13
Zoning and Other Use Restrictions. . . . . . . . . . . . . . . . . . . . .13
Area Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Neighborhood Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . .16
MARKET ANALYSIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Market Segments/Competitive Supply . . . . . . . . . . . . . . . . . . . .18
Average Daily Rate and Occupancy . . . . . . . . . . . . . . . . . . . . .19
HIGHEST AND BEST USE . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
VALUATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
COST APPROACH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Site Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Valuation of Improvements. . . . . . . . . . . . . . . . . . . . . . . . .28
SALES COMPARISON APPROACH. . . . . . . . . . . . . . . . . . . . . . . . . .31
Summary of the Sales Comparison Approach . . . . . . . . . . . . . . . . .33
INCOME CAPITALIZATION APPROACH . . . . . . . . . . . . . . . . . . . . . . .34
Market and Subject Operating Trends. . . . . . . . . . . . . . . . . . . .35
Income and Forecast Assumptions. . . . . . . . . . . . . . . . . . . . . .37
Expenses Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Direct Capitalization Method . . . . . . . . . . . . . . . . . . . . . . .40
Discounted Cash Flow Method. . . . . . . . . . . . . . . . . . . . . . . .42
Conclusion of the Income Capitalization Approach . . . . . . . . . . . . .44
RECONCILIATION AND FINAL VALUE ESTIMATE. . . . . . . . . . . . . . . . . . .45
ADDENDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
Property Name: The Super 8 Motel
Location: 2831 North Westwood
Poplar Bluff, Missouri
Owner of Record: Guy Hatfield
Real Estate Tax Identification Code: 08-09-29.0-004-002-002.030
Date of Valuation: December 1, 1994
Purpose and Function of the Appraisal: Estimate the market value
of the fee simple interest on a
going-concern basis for
securitization purposes
Interest Appraised: Fee simple on a going concern
basis
Land Area: 74,445 square feet
Building Description: Two story, Class D, limited
service hotel with 63 rooms,
wood frame hotel with masonite
exterior walls, painted hardwood
exterior trim, painted drywall
interior, asphalt shingled gable
roof
Year Completed/Renovated: 1985
Amenities: Continental breakfast, guest fax
services, HBO and cable TV, free
local calls, VIP frequent stayer
program
Highest and Best Use
AS VACANT: Improve with a commercial use
AS IMPROVED: Current Use
Year of Stabilization: FY 1995 (DECEMBER 1, 1994
THROUGH NOVEMBER 30, 1995)
OCCUPANCY: 71%
AVERAGE DAILY RATE: $37.00
Indications of Value
COST APPROACH: $2,160,000
SALES COMPARISON APPROACH: $2,270,000
INCOME CAPITALIZATION APPROACH: $2,160,000
Direct Capitalization Method: $2,160,000
Discounted Cash Flow Method: $2,160,000
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 3
<PAGE>
Final Value Opinion: $2,160,000
Unit Value Conclusion
PER ROOM: $34,300 (rounded)
PER SQUARE FOOT: $99.00 (rounded)
Allocation of Value: Real Property: $1,182,000
Personal Property: 268,000
Business Value: 710,000
----------
Total: $2,160,000
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 4
<PAGE>
CERTIFICATION
We certify that, to the best of our knowledge and belief,
the statements of fact contained in this report are true and correct;
the reported analyses, opinions, and conclusions are limited only by the
accompanying limiting conditions and assumptions, and are our personal,
unbiased professional analyses, opinions, and conclusions;
we have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved;
our compensation is not contingent on an action or event resulting from the
analyses, opinions or conclusions in, or the use of, this report;
our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice;
as of the date of this report, William J. Carter, MAI has completed the
requirements of the continuing education program of the Appraisal
Institute;
a personal inspection of the property that is the subject of this report
was made by Bryan T. Clark on December 1, 1994;
William J. Carter, MAI and Kimberly L. Sass did not inspect the property
that is the subject of this report;
no one provided significant professional assistance to the persons signing
this report; and that
we certify that the use of this report is subject to the requirements of
the Appraisal Institute relating to review by its duly authorized
representatives.
----------------------------------------------
William J. Carter, MAI
Participating Principal - Real Estate Services
Review Appraiser
----------------------------------------------
Kimberly L. Sass
Manager - Real Estate Services
Review Appraiser
- ----------------------------------------------
Bryan T. Clark
Staff Appraiser
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 5
<PAGE>
STATEMENT OF GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal report is subject to the following general assumptions and
limiting conditions:
1. No investigation has been made of, and no responsibility is assumed for,
the legal description or for legal matters including title or encumbrances.
Title to the property is assumed to be good and marketable unless otherwise
stated. The property is further assumed to be free and clear of liens,
easements, encroachments and other encumbrances unless otherwise stated,
and all improvements are assumed to lie within property boundaries.
2. Information furnished by others, upon which all or portions of this report
are based, is believed to be reliable, but has not been verified in all
cases. No warranty is given as to the accuracy of such information.
3. It is assumed that all required licenses, certificates of occupancy,
consents, or other legislative or administrative authority from any local,
state, or national government or private entity or organization have been,
or can readily be obtained, or renewed for any use on which the value
estimates provided in this report are based.
4. Full compliance with all applicable federal, state and local zoning, use,
occupancy, environmental, and similar laws and regulations is assumed,
unless otherwise stated.
5. No responsibility is taken for changes in market conditions and no
obligation is assumed to revise this report to reflect events or conditions
which occur subsequent to the appraisal date hereof.
6. Responsible ownership and competent property management are assumed.
7. The allocation, if any, in this report of the total valuation among
components of the property applies only to the program of utilization
stated in this report. The separate values for any components may not be
applicable for any other purpose and must not be used in conjunction with
any other appraisal.
8. Areas and dimensions of the property were obtained from sources believed to
be reliable. Maps or sketches, if included in this report, are only to
assist the reader in visualizing the property and no responsibility is
assumed for their accuracy. No independent surveys were conducted.
9. It is assumed that there are no hidden or unapparent conditions of the
property, subsoil, or structures that affect value. No responsibility is
assumed for such conditions or for arranging for engineering studies that
may be required to discover them.
10. No soil analysis or geological studies were ordered or made in conjunction
with this report, nor was an investigation made of any water, oil, gas,
coal, or other subsurface mineral and use rights or conditions.
11. Neither Arthur Andersen LLP nor any individuals signing or associated with
this report shall be required by reason of this report to give further
consultation, to provide testimony or appear in court or other legal
proceedings, unless specific arrangements therefor have been made.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 6
<PAGE>
12. This appraisal has been made in conformance with, and is subject to, the
requirements of the Code of Professional Ethics and Standards of
Professional Conduct of the Appraisal Institute and the Uniform Standards
of Professional Appraisal Practice.
13. This report has been made only for the purpose stated and shall not be used
for any other purpose. Neither this report nor any portions thereof
(including without limitation any conclusions as to value, the identity of
Arthur Andersen LLP or any individuals signing or associated with this
report, or the professional associations or organizations with which they
are affiliated) shall be disseminated to third parties by any means without
the prior written consent and approval of Arthur Andersen LLP
14. We have not been engaged nor are qualified to detect the existence of
hazardous material which may or may not be present on or near the property.
The presence of potentially hazardous substances such as asbestos, urea-
formaldehyde foam insulation, industrial wastes, etc. may affect the value
of the property. The value estimate herein is predicated on the assumption
that there is no such material on, in, or near the property that would
cause a loss in value. No responsibility is assumed for any such
conditions or for any expertise or engineering knowledge required to
discover them. The client should retain an expert in this field if further
information is desired.
15. The date of value to which the conclusions and opinions expressed in this
report apply is set forth in the opinion letter at the front of this
report. Our value opinion is based on the purchasing power of the United
States' dollar as of this date.
16. The Americans with Disabilities Act (ADA) became effective January 26,
1992. We have not made a specific compliance survey and analysis of this
property to determine whether or not it is in conformity with the various
detailed requirements of the ADA. It is possible that a compliance survey
of the property, together with a detailed analysis of the requirements of
the ADA, could reveal that the property is not in compliance with one or
more of the requirements of the Act. If so, this fact could have a
negative effect upon the value of the property. Since we have no direct
evidence relating to this issue, we did not consider possible noncompliance
with the requirements of the ADA in estimating the value of the property.
17. Arthur Andersen LLP maximum liability relating to services rendered for
this engagement (regardless of form of action, whether in contract,
negligence or otherwise), shall be limited to the fees paid to Arthur
Andersen LLP for its services under this agreement. In no event shall
Arthur Andersen LLP be liable for consequential, special, incidental or
punitive loss, damage or expense (including without limitation, lost
profits, opportunity costs, etc.) even if it has been advised of their
possible existence.
18. Client shall indemnify and hold Arthur Andersen LLP and its personnel from
and against any claims, liabilities, costs and expenses (including, without
limitation, attorney's fees and the time of Arthur Andersen LLP personnel
involved but excluding consequential, special incidental or punitive
damages) brought against, paid or incurred by Arthur Andersen LLP at any
time and in any way arising out of a breach by client of its obligations
under this agreement.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 7
<PAGE>
INTRODUCTION
PROPERTY APPRAISED
The Super 8 Motel is a limited service motel with 63 rooms located at 2831 North
Westwood, Poplar Bluff, Missouri. The improvements were completed in 1985 and
consist of approximately 21,890 square feet and occupy approximately 74,445
square feet of land. A copy of the legal description is located in the Addenda.
PROPERTY RIGHTS APPRAISED
Since the property is appraised as a going-concern, we assume all property
rights which can be owned are included in our estimate of market value. The
property rights included are as follows:
1. RIGHTS IN REAL ESTATE
- LAND, SITE IMPROVEMENTS AND BUILDING IMPROVEMENTS;
2. RIGHTS IN TANGIBLE PERSONAL PROPERTY
- FURNITURE, FIXTURES AND EQUIPMENT;
3. RIGHTS TO INTANGIBLE PERSONAL PROPERTY (BUSINESS-RELATED ASSETS)
- MANAGEMENT CONTRACTS, FRANCHISE AGREEMENTS AND GOODWILL
Any separate indications that are developed as an allocation of total value on a
going-concern basis are not meant to reflect the intrinsic value of each
component if sold on a liquidation basis. Rather, they should be interpreted as
the approximate contributory value to overall property value as a going-concern.
PURPOSE AND FUNCTION OF THE APPRAISAL
This report estimates the market value of the fee simple interest in the
property on a going-concern basis, as of December 1, 1994. It is our
understanding that this information will be used for securitization purposes.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 8
<PAGE>
DEFINITIONS
Our appraisal conclusions are subject to the definition of value below and the
Statement of General Assumptions and Limiting Conditions that follows the
Certification. Market value, as used herein, is defined as:
THE MOST PROBABLE PRICE, AS OF A SPECIFIED DATE, IN CASH, OR IN TERMS
EQUIVALENT TO CASH, OR IN OTHER PRECISELY REVEALED TERMS, FOR WHICH
THE SPECIFIED PROPERTY RIGHTS SHOULD SELL AFTER REASONABLE EXPOSURE IN
A COMPETITIVE MARKET UNDER ALL CONDITIONS REQUISITE TO FAIR SALE, WITH
THE BUYER AND SELLER EACH ACTING PRUDENTLY, KNOWLEDGEABLY AND FOR
SELF-INTEREST, AND ASSUMING THAT NEITHER IS UNDER UNDUE DURESS.
Except as noted, this definitions and other definitions of appraisal terminology
in this report are taken from
THE APPRAISAL OF REAL ESTATE, Tenth Edition, Appraisal Institute.
Going-concern value, as used herein, is defined as:
THE VALUE CREATED BY A PROVEN PROPERTY OPERATION; CONSIDERED
AS A SEPARATE ENTITY TO BE VALUED WITH A SPECIFIC BUSINESS
ESTABLISHMENT.
This definition of appraisal terminology is taken from THE DICTIONARY OF REAL
ESTATE APPRAISAL, Third Edition, Appraisal Institute.
OWNERSHIP HISTORY
All American Group Limited Partnership is the name of the entity who currently
owns the Super 8 Motel in Poplar Bluff, Missouri. Guy Hatfield is the majority
owner in the partnership. Many fractional interests have been exchanged since
the original purchase of the property, but Guy Hatfield is still the majority
owner.
DATE OF VALUE
The property was inspected by Bryan T. Clark on December 1, 1994 and the
effective date of our value opinion is December 1, 1994. The property was not
inspected by William J. Carter or Kimberly L. Sass.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 9
<PAGE>
SCOPE OF THE APPRAISAL
This is a complete, self-contained, narrative appraisal which has been prepared
in accordance with the Uniform Standards of Professional Appraisal Practice and
the Code of Professional Ethics of the Appraisal Institute.
We have assumed that the operating information provided by our client accurately
reflects the historical operating performance of the subject.
In the course of our investigation, we consulted county and city offices for
information about zoning and growth trends, we contacted the county assessor's
office for tax and assessment data, examined the market area and inspected the
property to evaluate its condition, functional qualities, and market appeal. We
also surveyed competitive properties and consulted local real estate offices for
comparable sales, offerings, and operating expense information. When possible,
we inspected those sales and offerings considered to be within or similar to the
subject market and otherwise comparable. We attempted to confirm the chosen
comparable sales with the seller, buyer, broker, participating attorney or local
reliable appraiser. Finally, we collated and applied the resulting information
in the valuation process.
MARKETING TIME
Marketing time is the "REASONABLE AMOUNT OF TIME IT MIGHT TAKE TO SELL AN
INTEREST IN REAL PROPERTY AT ITS ESTIMATED MARKET VALUE DURING THE PERIOD
IMMEDIATELY AFTER THE EFFECTIVE DATE OF THE APPRAISAL." The hotel industry has
shown good improvement in the last year and a half with many buyers in the
market. Some of the most sought after properties are chain affiliated limited
service properties with good cash flows. Since the subject is a Super 8, has a
good cash flow history and is a highway motel, we believe a marketing time of 8
to 12 months is considered reasonable. This estimate is supported by Second
Quarter 1994 Korpacz and CB Commercial Investor Surveys.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 10
<PAGE>
DESCRIPTION AND ANALYSIS
SITE DESCRIPTION
Location: 2831 North Westwood
Poplar Bluff, Missouri
Shape: Irregular
Frontage: Along Highway 67
Size: 74,445 square feet
Access/Visibility: Poor/Average
Topography: Basically level
Apparent Soil and Subsoil Conditions: None observed
Flood Plain: According to the FEMA map community
panel # 290047 0003 B, the property
does not lie within a flood plain
Utilities: All available
Easements: No adverse easements were noted at
the time of inspection
IMPROVEMENT DESCRIPTION
Date of Construction: 1985
Area & Room Mix
GROSS AREA: 21,890 square feet (estimated)
ROOM MIX: Queens 36
Double/Doubles 27
---
Total 63
Meeting Space: None
Elevators: None
Fire Protection: Smoke alarms, fire extinguishers
and emergency lighting
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 11
<PAGE>
General Construction Features: Wood frame structure with exterior walls
consisting of masonite accented by
painted hardwood trim, gable roof with
asphalt shingles. Painted drywall is
used for the interior walls and the
ceilings. Commercial grade carpeting
with baseboard trim, and ceramic tile
floors are found in the hallways and the
main lobby.
Interior Features: Carpeting, ceramic tile, linoleum tile,
incandescent and fluorescent lighting in
the common areas, incandescent lighting
in the guest rooms.
Common Areas: Front desk, manager's office, lobby with
television and couches, small storage
areas for linens and supplies,
mechanical room with water boiler,
laundry room.
Site Improvements: Asphalt and concrete parking, concrete
sidewalks and curbs near the front
entrance, moderate landscaping around
the perimeter of the building, parking
bumpers, highway signage, and a
satellite dish.
Overall Condition: The rooms appeared to be very clean and
well maintained. Within the last couple
of years, several of the rooms have been
updated with new drapes and bedspreads,
new TV's, lamps, recliners, furniture,
and carpeting. New carpeting was put in
the common hallways and stairwells.
Outside a new parking lot sign, and a
recent parking lot resurfacing job was
completed. Overall, the property is in
very good condition as of the date of
inspection, and does not appear to be
nine years old due to the substantial
capital expenditures which have been
made on the property.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 12
<PAGE>
[GRAPH]
Graph Description: Poplar Bluff Regional Map with an arrow pointing to the
Loacation of the Motel
[CRC MAP]
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 13
<PAGE>
PROPERTY TAXES AND ASSESSMENTS
The property is assessed by the Butler County Assessor every two years. The
assessed value is equal to 32 percent of the market value. Real estate tax
bills are sent out in November each year, and the taxes are due by December 31
of that year. The entire tax bill is paid in one installment for both personal
and real property. The following table summarizes the assessed value, tax rate
and actual property taxes for the last three years. The tax rates listed below
are applied per 100 dollars of assessed valuation, and are a combination of both
the county and city tax rates for both personal property and real property.
Between 1992 and 1994 the assessed value of the property has decreased while the
tax rates have increased, resulting in a compound annual growth in total taxes
of approximately 13 percent a year. This is projected to level off after the
tax rate increase in 1994, and is projected to grow on average 4 percent per
year over our projection period.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Real Property Personal Property Real Estate Personal Property
Tax Year Assessed Value Assessed Value Tax Rate Tax Rate R.E. Taxes P.P. Taxes Total Taxes
- -------- -------------- ----------------- ----------- ----------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 $252,720 $6,300 $3.58 $3.36 $9047.38 $211.68 $9,259.06
1993 235,430 6,300 3.77 3.55 8,875.71 223.65 9,099.36
1994 235,430 18,900 4.63 4.41 10,900.41 833.49 11,733.90
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ZONING AND OTHER USE RESTRICTIONS
The property is zoned C-2, General Commercial District by the City of Poplar
Bluff Zoning Department. This designation permits a variety of commercial uses
including motels, restaurants, automotive service facilities, grocery stores,
bowling alleys, billiard parlors, drive in theaters, gun clubs, race courses,
and other commercial uses. Based on our interpretation of the most recent
zoning ordinance, the building appears to be a legally conforming use.
AREA OVERVIEW
Poplar Bluff, Missouri is located in the southeast corner of the state of
Missouri. It is located approximately 153 miles south of St. Louis, and is
approximately the same distance from Memphis. It is in close proximity with the
neighboring states of Arkansas, Kentucky, and Tennessee. Access to the city of
Poplar Bluff is provided by Highway 60 from the east and west, Highway 67 from
the north and south, and Highway 53 from the southeast. The city of Poplar
Bluff is located in Butler County. This region of the state is on the fringe of
the central Ozarks, and has rolling hills throughout the area. As of 1992, the
area had a population of 39,100 for Butler County. The area is dominated by
manufacturing, wholesale and retail trade, and health services.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 14
<PAGE>
The southeast corner of the state accounts for less than 2 percent of the total
population in Missouri, and is typically characterized as an environment which
goes through little change. Between 1980 and 1990, the population for Butler
County changed by only 1.5 percent a year. Historically this region of the
state has relied upon light manufacturing and small industry for its economic
base. Much of the work force is composed of blue collar and service industry
workers. Manufacturing accounts for approximately 15 percent of the jobs, and
generates nearly 13 percent of the earnings. In addition to the small industry,
agriculture accounts for approximately 6 percent of the total income generated.
The average per capita income was $12,795 dollars as of 1990, and the cost of
living in the area is very affordable.
Southeast Missouri has traditionally been an area of light manufacturing and
small industry, combined with a fairly stable population base, and a very
affordable cost of living. However, the area is slowly transforming as it
realigns itself with the modern economy of the 1990s. The economic base is
shifting more towards the service industry, and becoming less reliant on
manufacturing as a source of earnings. In 1990 services accounted for 25
percent of the total earnings in Butler County, while manufacturing accounted
for only 13 percent of total earnings.
Along with the increasing number of jobs which are being created in the service
industry, the Poplar Bluff area is positioning itself to have a larger tourism
industry. One of the advantages that the area has to offer, is its proximity to
Branson, Missouri. Branson has exploded over the last few years, and is a
vacation destination for many people each year. It has been referred to as the
"Nashville of the midwest" and as it continues to grow and attract people from
all over the country, the surrounding areas continue to benefit from the tourism
dollars which it generates. Several towns including Cape Girardeau, Poplar
Bluff, and Miner/Sikeston have seen additional motels being built, an increase
in the amount of retail space, new restaurants being developed, as well as
improvements to some of the roadways so that it is in a better position to
capture some of the increase in the tourism industry. Many people traveling
from the north, east, and south, will pass through this part of the state on
their way to Branson.
In summary, the southeast Missouri region is an area of the country which has
historically been characterized as one of slow change and little growth. The
cost of living is among some of the most affordable in the state, and the
average income levels reflect this. With a history of light manufacturing,
small industry, and some agriculture, the area is now repositioning itself for
the future economy by broadening its economic base and creating more jobs in the
service and trade areas. With the centralized location, and the proximity of
Branson, Missouri, coupled with the fact that it lies within driving distance to
two urban areas (St. Louis and Memphis), the region is taking advantage of the
increase in the tourism industry. It is developing newer properties, and taking
advantage of the increasing number of people who travel through this part of the
state. According to projections which were published for the year 1997, the
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 15
<PAGE>
effective buying index per household is expected to increase by over 37 percent
between 1992 and 1997. In general, southeast Missouri should experience slow
but steady growth due to its centralized location, stable work force and
increasing diversification towards a service and tourism oriented economy.
The information in the following table was obtained from the Poplar Bluff
Chamber of Commerce unless otherwise noted.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Population
Historical Trends
- ------------------------------------------------------------------------------------------------------------------
Actual Actual Annual Compounded Actual Annual Compound Annual Compound
1980 1990 Change 1980-1990 1990 Change 1990-1993 Change
---- ---- ----------------- ------ ---------------- ------
<S> <C> <C> <C> <C> <C> <C>
Poplar Bluff 17,139 16,889 (1.5)% 16,889 N/A N/A
Butler County 33,529 38,618 (0.07)% 38,618 N/A N/A
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
SOURCE: COMMUNITY PROFILE OF POPLAR BLUFF AND BUTLER COUNTY
EMPLOYMENT DISTRIBUTION
[GRAPH]
SOURCE: 1994 COUNTY AND CITY DATA BOOK
----------------------------------
6 Largest Private/Public Employers
----------------------------------
Briggs & Stratton Corp. - 875
Butler County Publishing - 100
Gates Rubber Company - 340
Moark Mold Division - 200
Rowe Furniture Corp. - 500
Smiley Container Corp. - 350
-----------------------------------
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 16
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
UNEMPLOYMENT
- -------------------------------------------------------------------------------
Butler County Miner/Sikeston United States
------------- -------------- -------------
<S> <C> <C> <C>
Annual Avg 1992 7.1% n/a 7.4%
Annual Avg 1993 8.1% n/a 6.8%
September 1994 4.7% n/a 6.2%
- -------------------------------------------------------------------------------
SOURCE: U.S. DEPARTMENT OF LABOR STATISTICS
</TABLE>
NEIGHBORHOOD ANALYSIS
Poplar Bluff is located in the southeast corner of the State of Missouri, and is
situated on the edge of the central Ozarks. The boundaries for most of the town
are delineated by the new Highway 60 bypass on the north, Highway 67 to the
west, Highway 53 to the south, and by the Black River on the east. The new
Highway 60 bypass is the main east to west road which provides access to the
northern end of Poplar Bluff. Access from the southeast is provided from
Highway 53. The main commercial artery that extends through town is Highway 67,
which is a four lane north to south road which intersects Business Highway 60 to
provide direct access to downtown Poplar Bluff.
Highway 67 contains the newer development, and is the most desirable location
for commercial properties. Several mixed uses can be found along the highway
including service stations, fast food restaurants, strip centers, office
buildings, governmental buildings, and lodging facilities. The ages of the
buildings varied from older properties which appeared to be neglected, to newer
facilities which were constructed with modern materials and design. One of the
most significant developments along Highway 67 is the new Wal Mart Superstore
which is located at the south end of the highway, north of Highway 53. This
development is very sizable and has attracted many other commercial uses to be
constructed nearby. The traffic flow near this store is extremely high, as
people travel from around the area to come shopping.
The neighborhood more immediately surrounding the Super 8 Motel consists of
other motels, a couple of fast food restaurants, service stations, and some
governmental offices located west of the Super 8 Motel. Immediately south of
the subject property is a McDonald's Restaurant which shares a driveway with the
motel, and to the north of the property is a small accounting office. Highway
67 forms the eastern boundary of the Super 8 Motel, and the site has frontage
right along the road.
Access to the Super 8 Motel is fair, but could be much better if the property
had a curb cut directly in front of the building, rather than sharing a driveway
with McDonald's and then having a small service drive which branches off once
you exit the highway. The access can be cumbersome and confusing for people
traveling north or south on Highway 67. In addition to the highways which
provide access from several different directions, Poplar Bluff is served by a
commercial airport. It also has freight service provided by Yellow Freight
Systems, Inman Freight, ABF Freight, and the Union Pacific Railroad.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 17
<PAGE>
CONCLUSION
Southeast Missouri is the gateway to the south and is located at the fringe of
the Ozarks. The Poplar Bluff area is a small midwestern community which has
exhibited slow change over the past decade. The economic base is driven by
manufacturing, small industry, wholesale and retail trade, agriculture,
government, services, and more increasingly on tourism. The town is centrally
located between Memphis and St. Louis, and attracts many tourists who are
traveling through the area, particularly on the way to Branson, Missouri. With
the recent development of the Wal Mart Superstore there has been an increase in
the retail supply. The town has an adequate labor force and draws workers from
a four county area. Several employers provide jobs in light industry and
distribution. As we move further into the 1990s and continue to become a more
service dominated economy, Poplar Bluff continues to shift its resources to
compete in the marketplace. As the midwest continues to become more popular
with tourists and people who are moving out of the congested coastal regions,
there should be increasing economic opportunities for towns such as Poplar
Bluff. It is reasonable to expect steady slow growth in the foreseeable future
as the town continues to benefit from the changing economy.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 18
<PAGE>
COMPETITION SUMMARY
SUPER 8 MOTEL, POPLAR BLUFF, MO.
<TABLE>
<CAPTION>
PROXIMITY # OF
PROPERTY TO SUBJECT ROOMS YOC AMENITIES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUBJECT --
Super 8 Motel -- 63 1985 Lobby, continental breakfast,
2831 North Westwood VIP program, AARP discounts,
cable TV, guest fax machine
COMPETITION
1 Drury Inn 2 miles south 78 1986 Quick start complimentary
US 60 & US 67 North breakfast, cable TV, pool,
Poplar Bluff, Mo. guest fax, travel club
2 Holiday Inn 2 miles south 143 1961 Pool, restaurant, meeting rooms,
2115 North Westwood cable TV, free local calls,
Poplar Bluff, Mo. guest fax machine services
3 Pear Tree Inn by Drury 2 miles south 77 1974 Pool, complimentary breakfast,
US 60 & US 67 North guest fax, travel club, cable TV
Poplar Bluff, Mo.
<CAPTION>
MARKET SEGMENTATION PUBLISHED RATES ESTIMATED (1994)
-------------------------- ----------------- -----------------------
PROPERTY COMMERCIAL LEISURE SINGLE DOUBLE OCCUPANCY ADR
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Super 8 Motel 75% 25% $35.88 $45.88 71% $35.61
2831 North Westwood
COMPETITION
1 Drury Inn 70% 30% $53.00 $48.00 n/a n/a
US 60 & US 67 North
Poplar Bluff, Mo.
2 Holiday Inn 70% 30% $53.00 $55.00 80% $54.00
2115 North Westwood
Poplar Bluff, Mo.
3 Pear Tree Inn by Drury 70% 30% $37.95 $43.95 n/a n/a
US 60 & US 67 North
Poplar Bluff, Mo.
</TABLE>
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ARTHUR ANDERSEN LLP - REALE STATE SERVICES GROUP 19
<PAGE>
MARKET ANALYSIS
OVERVIEW
The motel market in Poplar Bluff consists of several small mom and pop motels
which are generally less maintained and inexpensive, as well as a few chain
affiliated properties which are more comparable to the Super 8 Motel.
Currently, the Thrifty Inn which is located south of the Super 8 Motel along
Highway 67 is undergoing renovations, and will be reopened as a Pear Tree Inn by
Drury. According to an interview which was conducted with the current manager
of the Thrifty Inn, they are redoing the lobby, and changing the interior design
of the property to make it more attractive in the marketplace.
MARKET SEGMENTS/COMPETITIVE SUPPLY
We have identified three motels in our competitive supply. All of these
competing properties are located within a few miles south of the Super 8 Motel
along Highway 67. They all have access directly from the highway, and have
adequate signage for motorists traveling north or south. The three properties
which we considered primary competition were the Drury Inn, The Holiday Inn, and
the Thrifty Inn (which is being reopened as a Pear Tree Inn by Drury.)
Of the three competitive properties, The Drury Inn is the newest one. It was
built in 1986, and offers superior amenities to the Super 8 Motel including, a
superior breakfast, swimming pool, newer rooms, and a superior location. The
rates at the Drury Inn are somewhat higher than those at the Super 8, due to the
fact that it is a newer property.
The Holiday Inn was built in 1961 and is much older than the property being
appraised. It has 143 rooms, but is in inferior physical condition. It appears
to have substantial amounts of deferred maintenance, and does not have as nice
of rooms as the Super 8. However, it is a full service hotel which has the
capacity to handle up to 200 people for meetings and conferences, as well as a
full service restaurant, swimming pool, lounge, and bar. The rates for The
Holiday Inn are higher than the Super 8 Motel due to the fact that it is the
only real full service hotel in town, and can offer additional facilities to the
guests.
We surveyed the Thrifty Inn as the final primary competitor in our analysis. It
was built in 1974 and is older than the property being appraised. Plans are
underway however, to convert the old Thrifty Inn to a new Pear Tree Inn by
Drury. According to conversations with the property management, they are trying
to upgrade the image of the property, and will be doing a complete renovation of
the lobby. In addition, they will offer a more complete complimentary
breakfast, and still have the added amenity of an outdoor pool. The rates at
this property are comparable to the Super 8 Motel.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 20
<PAGE>
In addition to the three properties which we surveyed in our competitive
summary, there are other local mom and pop type of motels which exist in Poplar
Bluff. These properties are located more towards downtown Poplar Bluff along
Business Highway 60. They do not have the same level of amenities as the chain
affiliated properties which are located along Highway 67 closer to the Super 8.
By viewing these properties and noting their physical condition, it was apparent
that they cater to a different market than the property being appraised.
AVERAGE DAILY RATE AND OCCUPANCY
The Host Report is published by Smith Travel Research, and is an industry survey
which gathers income and expense information, as well as occupancy and average
daily rate information on thousands of hotels from around the country. They
survey all different types of properties and then assimilate the information by
property type, geographic information, and other factors. The industry surveys,
such as the Host Report, are published once a year with a midyear update. We
analyzed several different categories in the Host Report and compared them with
the properties in our competitive set to estimate the operating performance of
the motels.
We interviewed managers at each of the competing properties and attempted to
gather information on occupancy levels and average daily rates at each of the
properties. None of the managers, with the exception of one, would give out
this type of information due to the confidential nature of it and the fact that
the market is becoming increasingly competitive. Based upon information which
we obtained from the 1993 HOST Report survey, the average occupancy level for
limited service type of properties in this region of the country is between 65-
70 percent.
The objective of doing a competitive market analysis, is to see how the property
being appraised fits into the marketplace, and gain a better understanding of
its targeted market. The Super 8 Motel operates as a limited service motel in a
highway hotel market. It has excellent frontage along Highway 67, and is in a
good location next to a McDonald's. The rates at the Super 8 Motel are at the
lower end of the range in the market, and it caters to cost conscious customers
who want a nice room with basic amenities for a good value. It has maintained
an occupancy level which has been within and above industry averages published
by the Host Report. By competing with the competition on price, and still
offering a quality room to customers, the property has maintained its share of
the market. Based on our research, we were informed that there were not any
plans to immediately add any hotel rooms to the supply. However, overall demand
in the area is increasing due to the people traveling through town to go to
Branson, Missouri. Below is a table highlighting the occupancy and ADR history
at the Super 8 Motel.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 21
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------
The Super 8 Motel, Miner, Mo.
Historical Occupancy and ADR
------------------------------------------
Average
Year Occupancy ADR
---- --------- ---
<S> <C> <C>
1991 64.10% $31.39
1992 69.10% $33.06
1993 71.42% $33.86
1994* 74.08% $35.39
------------------------------------------
<FN>
* JANUARY THROUGH OCTOBER ONLY
</TABLE>
The subject has maintained a level progression of growth over the period of 1991
to 1994. The occupancy level has increased from 64.10 percent to a current
level of 74.08 percent in 1994. Part of this increase in occupancy level can be
explained by the improvement in the economy since the recession of the early
1990s, and some of the increase in occupancy levels can be attributed to the
increased marketing efforts of the manager. Overall the Poplar Bluff area is
experiencing growth in the tourism industry, and this has helped increase the
demand for the lodging properties. However, with this growth, comes increased
competition. The Thrifty Inn is scheduled to undergo a renovation and reopen as
a new Pear Tree Inn by Drury. This property will be located approximately 2
miles south of the Super 8 Motel and will offer more upscale amenities with a
superior breakfast. The rates at the Pear Tree Inn will be raised slightly when
it reopens, but they will still be comparable to the rates at the Super 8 Motel.
Since the Pear Tree Inn rate structure is not expected to change significantly
from the current levels, we feel that it will only have a marginal effect upon
the occupancy levels of the Super 8 Motel. With the increased marketing efforts
of the Super 8, and the good quality service which it offers for a reasonable
price, in our opinion a stabilized occupancy of 71 percent over our projection
period is considered reasonable.
Average daily rate (ADR) has also grown steadily over the period of 1991 to
1994. The rates at the Super 8 Motel are published in a national directory, and
can only be changed twice a year when the new directory comes out.
Historically, the rates have been increased by approximately $2.00 per year. It
is common for the rates to increase with the level of inflation. the Super 8
Motel has been excellently maintained and continues to operate at rates very
close to the published rates in its directory. It gets most of its business
from the commercial and leisure segments. The manager at the Super 8 Motel also
mentioned that they market aggressively to the tricking industry to increase
occupancy by this segment. Some of the other incentives which the property
offers to induce people are AARP discounts, VIP discounts for frequent stayers,
and 10 percent off for corporate rates. We have projected in our analysis that
the ADR at the Super 8 Motel will continue to increase slowly over time, and
maintain a pace with the inflation index. In our cash flow model, we projected
a 4 percent annual increase in the ADR over the projection period.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 22
<PAGE>
Below is a table summarizing our projections for occupancy and ADR at the
Super 8.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Projected Occupancy and Average Daily Rate
Year Beginning ADR Growth Average
December 1, 1994 Rate Daily Rate Occupancy
---------------- ----------- ---------- ---------
<S> <C> <C> <C>
FY 1995 4% $37.00 71%
-------------------------------------------------------------------------
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 23
<PAGE>
HIGHEST AND BEST USE
The uses to which a property can be put affect its value. This is recognized by
the concept of highest and best use, generally understood to mean:
THE REASONABLY PROBABLE AND LEGAL USE OF VACANT LAND OR AN IMPROVED
PROPERTY, WHICH IS PHYSICALLY POSSIBLE, APPROPRIATELY SUPPORTED,
FINANCIALLY FEASIBLE AND RESULTS IN THE HIGHEST VALUE.
The highest and best use of the land as if vacant and available for use may be
different from the highest and best use of the improved property. This is true
when the improvement is not an appropriate use, but makes a contribution to the
total property value in excess of the value of the site. Thus, in arriving at
our opinion of the highest and best use, we first analyzed the property as
though the land were vacant and then analyzed it as improved. In both
instances, the conclusion of highest and best use must be determined by
examining the physically possible, legally permissible, financially feasible and
maximally productive uses of the site.
AS VACANT
PHYSICALLY POSSIBLE - The physical aspects of the site such as size, shape, and
topography impose the first constraints on the possible use of the property.
The site is level, and although it is somewhat irregular in shape, its size
compensates for this factor, it has good visibility and all normal utilities are
available. The site has no apparent easements which adversely effect the
utility of the site. While access is not as direct as it could be it is
considered adequate and no other physical characteristics were observed that
would impose constraints on the site's development., given the characteristics
of the site and the surrounding land uses, possible uses would include a wide
range of commercial uses including a motel.
LEGALLY PERMISSIBLE - Legal restrictions, as they apply, include the public
restrictions of zoning. The property is zoned C-2. Permitted uses include
motels, restaurants, automotive service facilities, grocery stores, bowling
alleys, billiard parlors, drive in theaters, gun clubs, race courses, and other
commercial uses.
FINANCIALLY FEASIBLE AND MAXIMALLY PRODUCTIVE - The Super 8 Motel is located
along North Highway 67 approximately 1 mile south of the Highway 60 bypass. The
site which it sits upon is located adjacent to a McDonald's restaurant, and has
visibility from Highway 67 from both northbound and southbound traffic. The
site has direct access from the Highway, and shares an entrance with the
McDonald's Restaurant. Highway 67 is the main commercial strip in Poplar Bluff,
and contains commercial uses all along the road from the Highway 60 bypass to
the north, down to Highway 53 at the south. The uses include restaurants, strip
shopping centers, offices, service stations, motels, and other commercial uses.
There is a limited
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 24
<PAGE>
amount of vacant land located along Highway 67, so the site would be well suited
for a commercial development. Clearly, by observing the other uses around the
site, it is apparent that several of the other sites benefit from the heavy
traffic flow which passes through town on Highway 67. Much of this traffic
includes tours going to Branson, Missouri, as well as commercial travelers. The
tourism industry in Poplar Bluff is becoming larger, and several new
developments can be seen along the Highway, such as the Wal Mart Superstore
which is located approximately 3 miles south of the site. Due to the improved
economy, and the fact that more people are traveling through the area on their
way to Branson, Missouri, the demand for commercial sites along Highway 67 is
increasing. Due to the above mentioned factors, we believe that the highest and
best use for the site as though vacant, would be for development with a
commercial use.
CONCLUSION - We believe the highest and best use of the site as though vacant,
as of December 1, 1994, would be to develop with a commercial use.
AS IMPROVED
PHYSICALLY POSSIBLE - The overall property is in excellent condition and is
well-suited to its current use.
LEGALLY PERMISSIBLE - The existing zoning of the property permits the existing
commercial use.
FINANCIALLY FEASIBLE AND MAXIMALLY PRODUCTIVE - We compared the estimated value
of the property as improved to its estimated net value as a vacant site. The
comparable sales we examined in considering land value (shown later) indicate
that the site as vacant is worth less than the property as improved. Even
though the current hotel market is adequately supplied and there are few vacant
sites available along Highway 67, it would not be economically feasible to
demolish the existing improvements. Given the layout, interior design and
apparent level of demand for the existing improvements, it is our opinion that
the only financially feasible and maximally productive use of the property as
improved is its current use.
CONCLUSION - We have concluded that the highest and best use of the property, as
improved, as of December 1, 1994, is its current use.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 25
<PAGE>
VALUATION
Three approaches are generally used to estimate value: the cost, sales
comparison and income capitalization approaches. Each approach assumes
valuation of the property at its highest and best use. These approaches are
more fully discussed on the following pages.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 26
<PAGE>
LAND VALUE ADJUSTMENT GRID
SUPER 8 MOTEL, POPLAR BLUFF, MO.
DECEMBER 1, 1994
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SUBJECT SALE NO. 1 SALE NO. 2
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Location 2831 North Westwood 108 South Westwood US 67 & Oak Grove
City, State Poplar Bluff, Mo. Poplar Bluff, Mo. Poplar Bluff, Mo.
Size (sq ft) 74,445 26,825 152,460
Sale Price ---- $90,000 $200,000
Sales Price per sq ft ---- $3.36 $1.31
- ----------------------------------------------------------------------------------------------------------------------------
Adjustments
- ----------------------------------------------------------------------------------------------------------------------------
Property Rights Conveyed Fee Simple Fee Simple = Fee Simple =
Adjusted Unit Sales Price ---- $3.36 $1.31
Financing Terms Market Cash = Cash =
Adjusted Unit Sales Price ---- $3.36 $1.31
Conditions of Sale Normal Normal = Normal =
Adjusted Unit Sales Price ---- $3.36 $1.31
Market Conditions Sep-93 + Oct-94 =
Adjusted Unit Sales Price ---- $3.69 $1.31
- ----------------------------------------------------------------------------------------------------------------------------
Location/Physical Adjustments
- ----------------------------------------------------------------------------------------------------------------------------
Location 2831 North Westwood 108 South Westwood - US 67 & Oak Grove +
Size (sq ft) 74,445 26,825 - 152,460 +
Access/Frontage Fair/Good Excellent/Good - Excellent/Good -
Zoning/Use C-2 C-2 = C-2 =
Topography/Shape Level/Irregular Level/Rectangular = Level/Rectagular =
- ----------------------------------------------------------------------------------------------------------------------------
Total Location/Physical Adjustments - +
------------------------------------------------------------
Adjusted Price/Sq. Ft. $2.00 $1.80
<CAPTION>
SALE NO. 3 CURRENT LISTING
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Location North US 67 US 67 & Oak Grove
City, State Poplar Bluff, Mo. Poplar Bluff, Mo.
Size (sq ft) 65,340 54,450
Sale Price $210,000 $56,000
Sales Price per sq ft $3.21 $1.03
Adjustments
- ----------------------------------------------------------------------------------------------------------------------------
Property Rights Conveyed Fee Simple = Fee Simple =
Adjusted Unit Sales Price $3.21 $1.03
Financing Terms Cash = Cash =
Adjusted Unit Sales Price $3.21 $1.03
Conditions of Sale Normal = Normal =
Adjusted Unit Sales Price $3.21 $1.03
- ----------------------------------------------------------------------------------------------------------------------------
Market Conditions Sep-94 = Current Listing =
Adjusted Unit Sales Price $3.21 $1.03
Location/Physical Adjustments
Location North US 67 - US 67 & Oak Grove +
Size (sq ft) 65,340 = 54,450 =
Access/Frontage Excellent/Good - Average/None +
Zoning/Use C-2 = C-2 =
Topography/Shape Level/Rectagular = Level/Rectagular =
Total Location/Physical Adjustments - +
- -----------------------------------------------------------------------------------------------
Adjusted Price/Sq. Ft. $2.10 $1.90
- -----------------------------------------------------------------------------------------------
Minimum Adjusted Price: $1.80
Maximum Adjusted Price: $2.10
Mean Adjusted Price: $1.95
Concluded Price/Sq.Ft.: $2.00
Concluded Land Value: $148,890
Rounded: $149,000
</TABLE>
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 27
<PAGE>
COST APPROACH
The cost approach is based upon the principle of substitution which states that
no rational buyer will pay more for a property than the amount for which he can
obtain a comparable site and construct improvements of equal desirability and
utility, assuming no undue delay.
This approach involves the application of several basic steps. First, the value
of the land as if vacant is estimated. Second, the current cost of replacing
the improvements is estimated. Third, an entrepreneurial profit sufficient to
attract a developer to undertake the risk associated with the project is
estimated. Fourth, accrued depreciation is estimated and deducted from the cost
new estimate (inclusive of profit) to arrive at a contributory value of the
improvements. In the fifth step, the land value is added to the contributory
value of the improvements to arrive at a value of the real estate. Finally, we
add amounts for personal property and for intangible business value.
SITE VALUATION
In estimating the value of the site as if vacant, the sales comparison approach
is used. In this approach, value is estimated by comparing the subject site to
similar properties that have been sold recently or are currently being offered
on the market for sale. We have consulted local brokers, appraisers and data
bases for recent sales of comparable properties within the subject area.
Principals and/or the broker handling the sale were then contacted to obtain
further information on the properties and transactions. The available market
data was investigated, analyzed and compared to the subject.
In estimating the value of the site, price per square foot was used since local
investors and brokers typically rely upon this method of analysis. The table on
the facing page summarizes pertinent details of the sales and the adjustments
made. Following is a brief description of the adjustments by relevant
characteristics. Details of each sale are located in the addenda.
The market sales used ranged in date from September 1993 to October 1994, in
size from 26,825 to 152,460 square feet and have unadjusted sales prices from
$1.03 for a current listing to $3.36 per square foot.
PROPERTY RIGHTS CONVEYED - All sales were reportedly fee simple transfers.
FINANCING TERMS - All sales were reportedly cash transactions or financed at
terms equivalent to cash.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 28
<PAGE>
CONDITIONS OF SALE - None of the sales were found to include any abnormal
conditions affecting the final sale price.
MARKET CONDITIONS - As discussed in the area analysis section of this report,
the Poplar Bluff area has improved over the past few years. A lot of this can
be explained by the increasing popularity of Branson, Missouri as a vacation
destination, and the draw to Poplar Bluff which has been generated by the newly
developed Wal Mart Superstore located at the south end of Highway 67. In
addition to these factors, the economy as a whole has improved over the last
year and a half since the recession of the early 1990s. With the improvement in
the economy, coupled with the fact that vacant land along the Highway is
becoming more and more scarce, the values for vacant land have increased over
the past year. Sale 1 occurred in September of 1993, and therefore required a
slight upward adjustment to make it more current as of the date of our
valuation.
LOCATION - Sales 1 and 3 are both located along Highway 67, but they are further
south of the Super 8 Motel. According to interviews which were conducted with
local brokers and appraisers, the south end of the Highway is much more
desirable for location, due to the fact that it is closer to the Wal Mart
Superstore. This is the main shopping facility in Poplar Bluff, and draws
people from all over the area to come shopping. The closer a site is to the Wal
Mart Superstore, the more traffic flow it has, and thus the land is much more
valuable. Sale 1 is now improved with a drive thru hamburger restaurant, and is
located directly across the street from the Wal Mart Superstore, so a
significant downward adjustment was made to this land sale for its superior
location. Also, Sale 3 was adjusted downward for superior location, as it was
also further south on the Highway and in a more developed area. Sale 2, as well
as the current listing were both adjusted upward for their inferior locations.
Sale 3 is located north of the Super 8 Motel and is on the outer fringe of where
the core of the commercial development begins. The current listing is a small
site which is located behind sale 2 and it does not have very good visibility
from Highway 67. For this reason we made an upward adjustment to the asking
price to reflect its inferior location.
SIZE - The larger the size of a property, the smaller the per unit price, and
vice versa, assuming all other variables are constant. Sale 2 was significantly
larger than the size of the site, and therefore required an upward adjustment
for this category. Conversely, Sale 1 was smaller than the subject site, and
required a downward adjustment for size.
ACCESS/FRONTAGE - We considered the significance and degree of road frontage,
exposure, traffic and general activity in estimating the appropriate adjustment.
Except for the current listing, all of the sites had superior access from
Highway 67. The subject has access from Highway 67 via a shared entrance with
the McDonald's Restaurant adjacent to it. There is a small service driveway
which branches off of the main
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 29
<PAGE>
driveway to McDonald's and extends down to the site. However, the access can be
confusing and cumbersome to newcomers, and it is not near as convenient as a
direct curb cut leading into the property. Therefore, we have made a downward
adjustment to sales 1, 2, and 3 to account for their superior access.
Conversely, the current listing is located behind sale 2 and does not have
access to Highway 67, therefore a significant upward adjustment was necessary.
ZONING/USE -All of the land sales which were analyzed in our report were zoned
for commercial uses like the property being appraised, so no adjustments were
necessary for this category.
SHAPE/TOPOGRAPHY - All sales were basically level and similar in shape. No
adjustments were necessary.
The adjusted sales prices range from $1.80 to $2.10 per square foot. Based on
our analysis, it is our opinion that the market value of the site as if vacant,
as of December 1, 1994, is $2.00 per square foot, or as follows:
74,445 square feet x $2.00/square foot = $148,890
Rounded: $149,000
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 30
<PAGE>
COST APPROACH SUMMARY
SUPER 8 MOTEL, POPLAR BLUFF, MO.
DECEMBER 1, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Estimated Replacement Cost of the Improvements $ 1,186,247
Less: Physical Deterioration 20% (237,249)
-------------
Estimated Replacement Cost less Physical Deterioration $ 948,998
Less: Functional Obsolescence 0% 0
External Obsolescence 0% -
-------------
Total Depreciated Replacement Cost of Improvements $ 948,998
Plus: Depreciated Value of Site Improvements 82,000
Land Value 149,000
-------------
Total Depreciated Value of Real Estate $ 1,179,998
Plus: Personal Property 268,000
-------------
Value Estimate via the Cost Approach $ 1,447,998
(NOT INCLUDING INTANGIBLE BUSINESS VALUE) Rounded $ 1,450,000
To this we must add an allowance for Intangible Business Value. This is estimated
based on the difference between the income and cost approaches as follows:
Income Capitalization Approach Conclusion $ 2,160,000
Less: Cost Approach Conclusion 1,450,000
------------
Intangible Business Value $ 710,000
Total Value Estimate via the Cost Approach $ 2,160,000
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
The following figures from the HVS Hotel Development Cost Survey are provided
as a check to the reasonableness of the indicated intangible business value
<TABLE>
<CAPTION>
Low High Avg
---- ---- ---
<S> <C> <C> <C>
Intangible Business Value/Room -- (Economy/Standard) $2,864 $8,004 $5,434
# of Rooms 63 63 63
-- -- --
Total Intangible Business Value Range $180,407 $504,242 $342,325
</TABLE>
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 31
<PAGE>
VALUATION OF IMPROVEMENTS
The most accurate method of estimating replacement cost is to obtain bids from
contractors. In lieu of actually obtaining bids, we have estimated the
replacement cost new using MARSHALL VALUATION SERVICE manual published by
Marshall and Swift. A summary of the cost approach conclusions is located on
the facing page. Following is a brief explanation of each component.
ESTIMATE OF BUILDING REPLACEMENT COST
The Marshall Valuation Service calculator method, indicated a base construction
cost of $49.75 per square foot of gross area for a Class D average quality
construction motel. After refining for HVAC, elevators, and floor area-
perimeter, and then applying current cost and local area multipliers, a base
price of $44.90 per square foot was obtained. We added additional costs for
canopies and the exterior wall mounted flood lights which totaled $25,050.
We then added an additional amount for soft costs not included in this figure.
These costs include professional fees, property taxes and carrying costs during
construction. The soft costs amounted to 7.00 percent of the total replacement
cost new of the improvement or $70,550.
ENTREPRENEURIAL PROFIT
Entrepreneurial profit is a necessary factor of production, without which a
project would not be created. The appropriate level of entrepreneurial profit
depends on the riskiness of the subject investment in relation to alternative
investments of similar risks available in the market. It is our opinion that
the appropriate level of entrepreneurial profit would be in the 5 percent to 15
percent range. We have selected 10 percent as an appropriate level for the
subject or $107,840. This results in the following calculation:
<TABLE>
<CAPTION>
<S> <C>
Adjusted Base Cost x Area $982,807
+ Additional costs 25,050
+ Soft Costs 70,550
------
Total Development Costs $1,078,407
Entrepreneurial Profit 107,840
----------
Estimated RCN $1,186,247
</TABLE>
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 32
<PAGE>
DEPRECIATION
PHYSICAL DETERIORATION - Physical deterioration encompasses wear and tear which
is evident during the field inspection, and typical wear associated with a
building of this quality and use. We utilized the effective age-economic life
method which estimates depreciation by dividing the effective age by its
economic life. The actual age of the building is 9 years. Considering the
current condition of the improvements, the effective age of the improvements is
7 years. Based on a useful life of 35 years, we arrived at an estimate of
physical deterioration of 20 percent.
FUNCTIONAL OBSOLESCENCE - Functional obsolescence reflects impairment of
operational capacity or efficiency, or simply the inability of a facility to
perform adequately the function for which it is employed. In our opinion the
property does not suffer from functional obsolescence under the replacement cost
method.
EXTERNAL OBSOLESCENCE - External obsolescence is defined at the diminished
utility of a structure due to negative influences from outside the site. The
potential net income the property generates based on stabilized revenues and
expenses supports the current development costs of a property similar to the
subject less physical depreciation. Based on this analysis, the property does
not suffer from external obsolescence.
SITE IMPROVEMENTS
Site improvements consist primarily of asphalt and concrete paving, concrete
sidewalks and curbs, signage, moderate landscaping, parking bumpers, and highway
signage. The replacement cost of these items is estimated at $124,000. The
depreciated cost is $82,000.
PERSONAL PROPERTY
The cost estimate for furniture, fixtures and equipment was based on an industry
standard for this type of property at $7,100 per room or $447,300. The
depreciated cost of the personal property totals $268,000.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 33
<PAGE>
INTANGIBLE BUSINESS VALUE
The property requires that certain expenditures be made to ensure the proper
operation and management of the hotel as a "going concern". For a new hotel,
these items include pre-opening marketing and operating costs and the initial
franchise fee. In addition to these costs is a component for goodwill which is
a value created through a proven business operation above and beyond the initial
costs. The intangible business value estimate was based on the difference
between the income and cost approaches. This cost estimate was then checked
against industry standards indicated by HVS, which do not include goodwill, for
reasonableness. Details of this analysis is located on cost approach summary at
the beginning of the "Valuation of the Improvements" section.
Management has been satisfied with the past performance and support from the
Super 8 in terms of reservations and marketing. In addition, the property has
done very well compared to the average limited service motel. Thus, it is
reasonable to conclude there is intangible business value related to the
business beyond the actual costs. We have calculated a business value of
approximately $710,000. Details of this analysis are located on the Cost
Approach Summary located in the beginning of this section.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 34
<PAGE>
IMPROVED SALES ADJUSTMENT GRID
SUPER 8 MOTEL, POPLAR BLUFF, MO
DECEMBER 1, 1994
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
SUBJECT SALE NO. 1 SALE NO. 2 SALE NO. 3
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Property Name Super 8 Motel Comfort Inn Thrifty Inn Motel 6 (Knights Inn)
Location 2831 North Westwood 2889 Austin Peay Hwy Macon Rd. at I-40 1860 Intertech Drive
City, State Poplar Bluff, Mo. Memphis, TN Memphis, TN Fenton, MO (St. Louis)
Sale Price ---- 2,330,000 1,925,000 2,200,000
Sale Price/Room ---- $33,286 $18,160 $19,820
Adjustments
-----------------------------------------------------------------------------------------------------
Property Rights Conveyed Fee Simple = Fee Simple = Fee Simple =
Adjusted Unit Sales Price $33,286 $18,160 $19,820
Financing Terms Market = Market = Market =
Adjusted Unit Sales Price $33,286 $18,160 $19,820
Conditions of Sale Normal = Normal = Normal =
Adjusted Unit Sales Price $33,286 $18,160 $19,820
Market Conditions Mar-92 + Jan-92 + Sep-90 +
Adjusted Unit Sales Price $39,943 $21,792 $26,757
------------------------------------------------------------------------------------------------------
Location/Physical Adjustments
------------------------------------------------------------------------------------------------------
Location Highway Highway + Highway + Highway +
Number of Rooms 63 70 = 106 + 111 +
Age/Condition 1985/Good 1988/Good - 1989/Good - 1985/Average =
Quality of Construction Average Average = Below Average + Average =
Amenities Limited Limited = Limited = Limited -
Occupancy 71% 69% = 81% - 60% +
------------------------------------------------------------------------------------------------------
Total Location/Physical Adjustments - + +
----------------------------------------------------------------------
----------------------------------------------------------------------
Adjusted Price/Room $37,900 $34,900 $36,100
----------------------------------------------------------------------
Minimum Adjusted Price: $34,900
Maximum Adjusted Price: $37,900
Mean Adjusted Price: $36,300
Concluded Price/Room $36,000
Concluded Value: $2,268,000
Rounded: $2,270,000
</TABLE>
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 35
<PAGE>
SALES COMPARISON APPROACH
The sales comparison approach is based upon the principle of substitution, which
assumes that a prudent buyer will not pay more for a property than it would cost
to purchase an equally desirable property, assuming no costly delay in making
that substitution. The reliability of this approach is dependent upon there
being an adequate volume of comparable sale data. In addition, the comparable
sales must be "arm's length" and there must be no unusual conditions affecting
the price paid. We conducted a search through real estate brokers, appraisers,
and county records in order to determine what transactions had occurred over the
past few years.
We collected data on 3 sales that were considered similar to the property. The
unit of comparison used is price per room, chosen because it is standard for
this type of property and generally gives reliable results. Prior to adjustment
for differences due to market conditions, age/condition, etc., the sales ranged
in price from $18,160 to $33,286 per room.
The table on the facing page summarizes the sales and the adjustments made.
Following is a brief description of the adjustments by relevant characteristics.
Details of each sale are located in the Addenda. We attempted to verify the
terms of each sale with the buyer, seller, broker or local reliable appraisers.
We assumed normal conditions unless we were informed otherwise in terms of
financing terms and conditions of sale.
PROPERTY RIGHTS CONVEYED - All sales were reportedly fee simple transfers,
therefore no adjustments were necessary for this category.
FINANCING TERMS - To the best of our knowledge, none of the sales involved
atypical financing and were bought on terms which were considered cash
equivalent. Therefore none of the sales required an adjustment for financing.
CONDITIONS OF SALE - To the best of our knowledge, there were no conditions
associated with any of the sales which would be considered unusual or involving
undue influences, so no adjustment was made for this category.
MARKET CONDITIONS - As discussed in the area section of the report, the Poplar
Bluff area has shown signs of an improving economy, and an increase in the
tourism industry due to the newly developed Wal Mart Superstore, and the
increasing popularity of Branson, Missouri. In addition, the overall motel
industry has
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 36
<PAGE>
improved over the last year causing an increase in the number of buyers in the
market. All of the sales analyzed occurred between 1990 and 1992 warranting
upward adjustments.
LOCATION - The Super 8 Motel in Poplar Bluff, Missouri is a highway motel with
immediate access off Highway 67. Additionally, it is located within 3 miles of
the Wal Mart Superstore, which draws people from around the area. It also has
two restaurants immediately adjacent to it, including a McDonald's Restaurant.
The 3 other motel sales which we analyzed in our report didn't have the superior
locational features as did the Super 8 Motel in Poplar Bluff, Missouri. We made
an upward adjustment to each of the sales to reflect their inferior location
compared to the property being appraised.
NUMBER OF ROOMS - Typically motel properties with more rooms sell for less per
unit, and properties with fewer rooms sell for more per unit, all else being
equal. Sales 2 and 3 both had more rooms than the Super 8 Motel, so an upward
adjustment was made for the number of rooms category.
AGE/CONDITION - Sales 1 and 2 were both newer than the Super 8 Motel in Poplar
Bluff, Missouri, and therefore required a slight downward adjustment for this
category.
QUALITY OF CONSTRUCTION - The construction quality of the subject was superior
to sale 2 which required a positive adjustment to reflect its inferior
construction quality.
AMENITIES -All 3 of the sales which we analyzed were limited service motels
which offered similar amenities to the Super 8 Motel in Poplar Bluff, Missouri.
Sale 3 however had an outdoor pool and required a slight downward adjustment for
this factor.
OCCUPANCY - We were able to obtain occupancy information on the comparable
motels at the time they were sold. Sale 2 had superior occupancy when compared
to the Super 8 Motel, so a downward adjustment was applied to its sale price.
Sale 3 had inferior occupancy, so it was adjusted upward for this category.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 37
<PAGE>
SUMMARY OF THE SALES COMPARISON APPROACH
After adjustments, the sales ranged in value from $34,900 to $37,900 per room
with an average of $36,300 per room. Based on our analysis, it is our opinion
that the market value of the subject property based on the sales comparison
approach, as of December 1, 1994 is as follows:
63 rooms x $36,000 per room = $2,268,000
Rounded: $2,270,000
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 38
<PAGE>
INCOME CAPITALIZATION APPROACH
The Income Capitalization Approach is based on the premise that value is created
by the expectation of future benefits. We estimated the present value of those
benefits to derive an indication of the amount that a prudent, informed
purchaser-investor would pay for the right to receive them as of the valuation
date.
This approach requires an estimation of the net operating income of a property.
The estimated net operating income is then converted to a value indication by
use of the Direct Capitalization Method and/or the Discounted Cash Flow Method.
The direct capitalization method estimates the value of the subject property by
dividing the net income for a typical year by an overall capitalization rate
that is based on an analysis of the relationship between income and sales prices
achieved from recent sales of properties similar to the subject and investor
surveys. The direct capitalization method is most reliable when the income and
expenses maintain a basic level of stability.
The discounted cash flow method estimates the value of the property by
discounting the projected income stream over the holding period and the
estimated reversionary value of the property at the end of the period, to a
present value as of the date of valuation.
ESTIMATE OF PROJECTED REVENUE AND EXPENSES FOR HOLDING PERIOD - The first step
involves projecting the income and expenses for the subject property over a
projected holding period plus an additional year for purposes of estimating a
reversion value. In our analysis, we project the property's income for a period
of 10 years. The income for each of these years is estimated by projecting the
actual occupancy and average daily room rate that will be achieved given
foreseeable market conditions and normal management policies necessary to
establish the market position of the property. Variances in occupancy and room
rate are frequently caused by factors such as: the marketing time necessary to
establish the presence of the subject property through advertising and repeat
business; discounted room rates lower than room rates otherwise supportable to
assist the initial marketing effort; temporary imbalance in local supply and
demand characteristics that may lead to occupancies that are either higher or
lower than those expected on a stabilized basis; and/or the entrance of new,
competitive hotels, or the removal of older economically obsolete properties
from the competitive supply. Expenses in some years of the projection period
can vary from those in the typical year due to such factors as: higher initial
administrative and general expenses because of the establishment of new
ownership, new operating policies and training of new staff; higher marketing
costs than normal to assist the initial marketing effort or meeting the effect
of new competition; and variable property operating and maintenance expenses
dependent on the age of the improvements.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 39
<PAGE>
VALUATION OF THE ESTIMATED INCOME - The projected income stream reflects
foreseeable market conditions that may cause the projected income stream to be
greater than or less than a stabilized income stream. In addition to changes in
market conditions that may impact the occupancy rate, the discounted cash flow
method also considers the impact of inflation and appreciation on the expected
room rates and operating expenses. The reversion value is estimated by
capitalizing the last year of income by an appropriate overall rate to reflect
an assumed sale of the property to another buyer at that time. The resulting
cash flows and reversion value are discounted to an indication of value as of
the date of valuation at a discount rate that reflects the durability, timing
and riskiness of the cash flow stream in light of alternative investments
currently available to investors.
CONCLUSION - The final step in this approach is to reconcile the conclusions of
value reached by the direct capitalization and discounted cash flow methods.
MARKET AND SUBJECT OPERATING TRENDS
Our estimates of future operating results are primarily based on historical
trends of the subject property and statistical data from THE HOST REPORT
published by Arthur Andersen and Smith Travel Research, a publication providing
operating results of full service hotels, limited service hotels and all suite
hotels. The survey breaks these categories down further by various groupings.
We have considered the following categories for comparison of ratios to total
revenues from the limited service section of the Host Report.
* Chain Affiliated
* West North Central
* Under 75 rooms
* Highway
* 1981-1986
We have compared the 1994 budget to THE HOST REPORT data as well as the
property's actual operating history from 1991 to 1993. THE HOST REPORT data and
a schedule of the property's operating history are located on the following
page.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 40
<PAGE>
1993 HOST REPORT -- OPERATING RATIOS
(RATIO TO REVENUES)
SUPER 8 MOTEL, POPLAR BLUFF, MO.
LIMITED SERVICE
<TABLE>
<CAPTION>
Under
Chain West North Central 75 Rooms Highway 1981-1986
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Occupancy 69.9% 66.8% 65.4% 66.7% 69.7%
Average Daily Rate $50.12 $47.26 $43.38 $45.16 $49.82
- -------------------------------------------------------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
- -------------------------------------------------------------------------------------------------------------------------
Rooms 94.7% 95.2% 96.3% 94.7% 94.4%
Telephone 2.0% 2.1% 2.2% 1.8% 1.6%
Minor Operated Depts. 1.1% 1.3% 0.6% 0.9% 1.0%
Rentals and Other 2.2% 1.4% 0.9% 2.6% 3.0%
---- ---- ---- ---- ----
TOTAL REVENUE 100.0% 100.0% 100.0% 100.0% 100.0%
- -------------------------------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
- -------------------------------------------------------------------------------------------------------------------------
Rooms 28.6% 29.5% 26.6% 29.6% 29.4%
Telephone 70.4% 74.9% 126.5% 84.2% 65.1%
Other Departmental Exp. 0.7% 0.8% 0.2% 0.5% 0.8%
---- ---- ---- ---- ----
TOTAL DEPT. EXPENSES 29.2% 30.5% 28.6% 30.1% 29.6%
- -------------------------------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
- -------------------------------------------------------------------------------------------------------------------------
Rooms 71.4% 70.5% 73.5% 70.4% 70.6%
Telephone 29.6% 25.1% -26.5% 15.9% 34.9%
Other Departmental Profit 2.6% 1.9% 1.3% 3.0% 3.2%
---- ---- ---- ---- ----
GROSS OPER INCOME 70.8% 69.5% 71.4% 69.9% 70.4%
- -------------------------------------------------------------------------------------------------------------------------
LESS GENERAL OPER EXPENSES
- -------------------------------------------------------------------------------------------------------------------------
Admin & General 10.0% 10.2% 10.0% 10.1% 9.5%
Marketing 4.7% 5.8% 3.1% 4.0% 4.7%
Franchise Fees 2.3% 2.5% 3.6% 2.0% 1.8%
Energy 5.5% 5.9% 7.2% 6.0% 5.0%
Property Operations/Maint. 4.8% 5.1% 6.0% 5.0% 4.4%
---- ---- ---- ---- ----
TOTAL OPER EXPENSES 27.3% 29.5% 29.9% 27.1% 25.4%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
HOUSE PROFIT 43.4% 40.0% 41.6% 42.7% 44.9%
- -------------------------------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
- -------------------------------------------------------------------------------------------------------------------------
Management Fee 3.8% 3.0% 3.6% 3.8% 4.4%
Property Taxes 4.3% 5.5% 3.5% 3.9% 4.2%
Insurance 1.3% 1.4% 1.5% 1.4% 1.3%
Leases 0.3% 0.5% 0.6% 0.2% 0.2%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 41
<PAGE>
OPERATING RESULTS -- HISTORICAL AND FORECASTED
SUPER 8 MOTEL, POPLAR BLUFF, MO.
<TABLE>
<CAPTION>
Actual % Of Actual % of % % of %
YEAR 1992 Rev. 1993 Rev. Change *1994 Rev. Change
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 69.4% 71.5% 3.0% 71.2% -0.4%
Average Daily Rate $33.35 $34.00 1.9% $35.51 4.4%
# Rooms Occupied 15,952 16,436 3.0% 16,369 -0.4%
# Rooms Available 22,995 22,995 0.0% 22,995 0.0%
--------------------------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
--------------------------------------------------------------------------------------------
Rooms 531,938 97.2% 558,761 96.0% 5.0% 581,190 95.6% 4.0%
Telephone 6,441 1.2% 13,461 2.3% 109.0% 16,790 2.8% 24.7%
Other Operating Revenues 8,773 1.6% 9,809 1.7% 11.8% 9,725 1.6% -0.9%
--------------------------------------------------------------------------------------------
TOTAL REVENUE 547,152 100.0% 582,031 100.0% 6.4% 607,705 100.0% 4.4%
--------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
--------------------------------------------------------------------------------------------
Rooms 112,847 21.2% 127,070 22.7% 12.6% 123,359 21.2% -2.9%
Telephone 9,231 143.3% 10,409 77.3% 12.8% 10,119 60.3% -2.8%
--------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 122,078 22.3% 137,479 23.6% 12.6% 133,478 22.0% -2.9%
--------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
--------------------------------------------------------------------------------------------
Rooms 419,091 78.8% 431,691 77.3% 3.0% 457,831 78.8% 6.1%
Telephone -2,790 -43.3% 3,052 22.7% 209.4% 6,671 39.7% 118.6%
Other Operating Revenues 8,773 100.0% 9,809 100.0% 11.8% 9,725 100.0% -0.9%
--------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 425,074 77.7% 444,552 76.4% 4.6% 474,227 78.0% 6.7%
--------------------------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
--------------------------------------------------------------------------------------------
Admin & General 93,579 17.1% 117,405 20.2% 25.5% 85,330 14.0% -27.3%
Management Fees 16,096 2.9% 29,018 5.0% 80.3% 30,031 4.9% 3.5%
Marketing 19,337 3.5% 19,852 3.4% 2.7% 24,721 4.1% 24.5%
Property Operations/Maint. 38,607 7.1% 30,693 5.3% -20.5% 31,965 5.3% 4.1%
Energy 22,713 4.2% 23,690 4.1% 4.3% 26,224 4.3% 10.7%
--------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 190,332 34.8% 220,658 37.9% 15.9% 198,271 32.6% -10.1%
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
HOUSE PROFIT 234,742 42.9% 223,894 38.5% -4.6% 275,956 45.4% 23.3%
--------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
--------------------------------------------------------------------------------------------
Property Taxes 9,259 1.7% 9,099 1.6% -1.7% 11,734 1.9% 29.0%
Insurance 8,640 1.6% 6,936 1.2% -19.7% 8,502 1.4% 22.6%
Leases 7,500 1.4% 1,250 0.2% -83.3% 0 0.0% -100.0%
--------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 25,399 4.6% 17,285 3.0% -31.95% 20,236 3.3% 17.1%
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
NET OPERATING INCOME 209,343 38.3% 206,609 35.5% -1.3% 255,720 42.1% 23.8%
--------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
--------------------------------------------------------------------------------------------
Reserves for Replacement 15,959 2.9% 17,410 3.0% 9.1% 18,019 3.0% 3.5%
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
NET CASH FLOW 193,384 35.3% 189,199 32.5% -2.2% 237,701 39.1% 25.6%
--------------------------------------------------------------------------------------------
<FN>
* 1994 income and expense amounts were calculated based upon 10 month actual
Y-T-D information provided to us by the client, and then adding in the budgeted
amounts per the 1994 budget for the months of Nov. and Dec.
</TABLE>
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 42
<PAGE>
INCOME AND FORECAST ASSUMPTIONS
ROOMS DEPARTMENT - We have estimated room revenue using the occupancies and
average daily room rates concluded on page 21 in the market study section of
this report.
TELEPHONE REVENUE - This department is entirely driven by occupancy and guest
dollars. Historically telephone revenue amounted to 1.2 - 2.8 percent of total
revenue. During 1993 the Super 8 Motel began a policy of charging a flat $0.50
per day for opening up the phone lines whether or not any calls were actually
made. This is the main reason behind the increase in the telephone revenue.
Based on past percentages and our discussions with the management we believe the
budgeted 2.8 percent is within a reasonable range given the new policy of
charging a flat fee each day for opening the phone lines. We have projected a
stabilized percentage of 2.8 percent in our analysis for this category.
OTHER OPERATING REVENUES - This category includes income generated from vending
machine sales, pay per view movies, and medicine sales from a vending machine.
Historically these revenues have accounted for 1.6 - 1.7 percent of total
revenues generated. In our stabilized cash flow projection, we have allocated
1.4 percent of total income for this category.
EXPENSES ANALYSIS
In our forecast, most expenses are expressed as a percent of total revenue.
However, the departmental expenses are expressed as a percentage of the
corresponding revenue item which the expense is associated with. Insurance and
real estate taxes are expressed as fixed expenses which are projected to grow
with the inflation rate over the holding period analysis. These two expenses
are fixed and not related to the amount of revenue which the property generates.
In each case, we examined the historical ratios and compared them to those
reported in the HOST REPORT. The following only highlights those expenses that
required further discussion. The remaining, departmental expenses, general
operating expenses and other expenses were considered reasonable and did not
warrant further discussion.
ADMINISTRATIVE AND GENERAL - This expense has historically been 14.0 to 20.2
percent which is above average for this type of property. However, included in
the administrative and general expense category, are expense items for royalty
fees which are based upon approximately 4 percent of room sales. When you take
this into consideration, the administrative and general expense category falls
within industry ranges. In 1993 the expenses were higher than normal, and this
was largely due to a larger than usual legal fee. In our stabilized year cash
flow projection, we have projected 15 percent of total revenue for
administrative
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 43
<PAGE>
and general. This includes the royalty fee associated with the franchise, and
is supported by the historical performance of the property.
MANAGEMENT FEE - According to our client, the properties will be charged a 3
percent management fee with a 10 percent incentive on cash flow. This equates
to an approximate 3.3 percent management fee. The Host Report indicates a range
in management fee, based on our identified categories, of 3.0 to 4.4 percent.
At the request of our client, we have applied a management fee of 3.3 percent
through our projection period.
PROPERTY TAXES - Included in the property tax expense is real estate and
personal property taxes. The property taxes are considered a fixed expense and
are not related to the revenue which is generated at the property. It is
typical to expect the property taxes to grow over time with the rate of
inflation. In some years they could decrease due to declining market conditions
or tax appeals, and in some years they can increase due to additional
expenditures at the property or increases in the assessed value. Over the long
term however, a 4 percent annual increase in the overall property taxes reflects
the average rate of change for this expense item. In our cash flow analysis, we
considered the actual property taxes, and grew this expense over at a constant 4
percent annual rate.
INSURANCE - The insurance policy for the Super 8 Motel is part of a blanket
policy that covers the four other the Super 8 Motel Properties which are owned
by All American Group Limited Partnership. This expense consists of workmen's
compensation and property insurance. The insurance agent allocates a portion of
the total expense to each property. The insurance policy is constantly monitored
for expense levels, and the owners solicit bids every year from various
insurance providers. Historically, this expense has amounted to between 1.2 -
and 1.6 percent of the total revenues to the property, although this expense is
a fixed amount and is not related to revenue levels. We have budgeted the
insurance expense in our cash flow based upon historical levels and the
breakdown which was provided to us by our client allocating the expense among
the different properties. We assumed a constant 4 percent annual growth rate.
RESERVES FOR REPLACEMENT - It is typical for properties to include a reserve in
their budget, for items which are expected to wear out and need repair or
replacement, prior to the end of the remaining economic life of the building.
After talking with the property manager on site, we were informed of items which
would be repaired or replaced within the near future. While many of the costs
for improvements have been incurred a few are still in the process of being
completed or have yet to begin. With the Super 8 Motel, the amount and timing
of the capital expenditures for these type of items are very dependent upon the
franchise inspection which is performed periodically on the property. Many
recent improvements have been made to the subject, including re-surfacing the
parking lot, putting in new TV's, carpeting the interior, putting up
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 44
<PAGE>
new drapes, and more. However, the property management informed us that one of
the main objectives of the owners, was to consistently receive favorable reviews
from the inspections. In order to do this, it is expected that these periodic
capital expenditures will be made on the property. We were not provided with
any actual capital expenditure budgets for the property, but based our reserve
for replacement upon 3 percent of the total revenues the property generates.
This is a typical amount for this type of property.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 45
<PAGE>
INCOME CAPITALIZATION APPROACH CONCLUSION
DIRECT CAPITALIZATION METHOD
SUPER 8 MOTEL, POPLAR BLUFF, MO.
DECEMBER 1, 1994
<TABLE>
<CAPTION>
<S> <C>
Stabilized income
Fiscal year ending
November 30, 1995: $247,852
Overall Capitalization Rate: 11.50%
Capitalized Income: $2,155,235
Rounded to: $2,160,000
</TABLE>
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 46
<PAGE>
DIRECT CAPITALIZATION METHOD
The projected stabilized cash flow is on the following page. In order to
estimate the value of the property by the Direct Capitalization Method, the
estimated stabilized cash flow must be capitalized with an overall
capitalization rate. This rate provides a rate of return of and on the
investment through the relationship of net operating income to a hotel's sale
price. The comparable sales used in this analysis indicated a capitalization
rate range of 9.9 to 17.6 percent. While this provides us with a range of
capitalization rates, these sales were all at least two years old, and don't
necessarily reflect the current relationships between income and value which
investors are using in their capitalization rates as of the date of the
appraisal. In addition, the accuracy of these capitalization rates is
questionable because we were unable to verify a majority of the income
information. We have also consulted a hospitality investor survey published by
Korpacz investor survey which indicated an average of 12.44 percent for an
overall capitalization rate, and CB Commercial which indicated an average
overall capitalization rate of 11.3 percent. While the desirability of hotel
investment has been low in past years, the economy is improving, and the tourism
and lodging industry in Miner/Sikeston show signs of improvement. The values
overall are increasing in the limited service motel market, and investors are
reporting lower capitalization rates as property prices are increasing relative
to the income they generate. Based upon the above factors, we have chosen an
overall rate of 11.5 percent. This lies at the lower end of the surveyed range,
but reflects the fact that the values are going up for these types of properties
due to increased demand by investors. As the competition increases for fewer
and fewer of these types of properties, the required return on and of the
investment (the capitalization rate) will go down. The conclusion of this
method is on the facing page.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 47
<PAGE>
PROJECTED STABILIZED OPERATING RESULTS
FISCAL YEAR 1995
(DECEMBER 1, 1994 THROUGH NOVEMBER 30, 1995)
SUPER 8 MOTEL, POPLAR BLUFF, MO.
<TABLE>
<CAPTION>
% % Change
Stabilized of Total Actual
YEAR FY 1995 Revenue CY 1994
- ---- -----------------------------------
<S> <C> <C> <C>
Occupancy 71.0% -0.3%
Average Daily Rate $37.00 4.2%
Occupied Rooms 16,326 -0.3%
Room-nights Available 22,995 0.0%
-----------------------------------
DEPARTMENTAL REVENUE:
-----------------------------------
Rooms 604,079 95.8% 3.9%
Telephone 17,656 2.8% 5.2%
Other Operating Revenue 8,828 1.4% -9.2%
-----------------------------------
TOTAL REVENUE 630,562 100.0% 3.8%
-----------------------------------
DEPARTMENTAL EXPENSES
-----------------------------------
Rooms 132,897 22.0% 7.7%
Telephone 10,593 60.0% 4.7%
-----------------------------------
TOTAL DEPT. EXPENSES 143,491 22.8% 7.5%
-----------------------------------
DEPARTMENTAL PROFIT
-----------------------------------
Rooms 471,181 78.0% 2.9%
Telephone 7,062 40.0% 5.9%
Other Operating Revenue 8,828 100.0% -9.2%
-----------------------------------
GROSS OPER INCOME 487,072 77.2% 2.7%
-----------------------------------
LESS GENERAL OPER EXPENSES
-----------------------------------
Admin & General 94,584 15.0% 10.8%
Management Fees 20,809 3.3% -30.7%
Marketing 23,331 3.7% -5.6%
Property Operations/Maint. 33,420 5.3% 4.6%
Energy 27,114 4.3% 3.4%
-----------------------------------
TOTAL OPER EXPENSES 199,258 31.6% 0.5%
-----------------------------------
-----------------------------------
HOUSE PROFIT 287,814 45.6% 4.3%
-----------------------------------
LESS OTHER EXPENSES
-----------------------------------
Property Taxes 12,203 1.9% 4.0%
Insurance 8,842 1.4% 4.0%
Leases 0 0.0% 0.0%
-----------------------------------
TOTAL OTHER EXPENSES 21,045 3.3% 4.0%
-----------------------------------
-----------------------------------
NET OPERATING INCOME 266,769 42.3% 4.3%
-----------------------------------
LESS CAPITAL EXPENSES
-----------------------------------
Reserves for Replacement 18,917 3.0% 5.0%
-----------------------------------
-----------------------------------
NET CASH FLOW 247,852 39.3% 4.3%
-----------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 48
<PAGE>
PROJECTED CASH FLOW
SUPER 8 MOTEL, POPLAR BLUFF, MO.
<TABLE>
<CAPTION>
Projected YE Projected YE Projected YE Projected YE
YEAR 12/30/95 % 12/30/96 % 12/30/97 % 12/30/98 %
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 71.0% 71.0% 71.0% 71.0%
Average Daily Rate $37.00 $38.48 $40.02 $41.62
# Rooms Occupied 16,326 16,326 16,326 16,326
Room-Nights Available 22,995 22,995 22,995 22,995
-------------------------------------------------------------------------------------------------------
ADR Growth Rate 4.00% 4.00% 4.00%
----------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
-------------------------------------------------------------------------------------------------------
Rooms 604,079 95.8% 628,242 95.8% 653,371 95.8% 679,506 95.8%
Telephone 17,656 2.8% 18,362 2.8% 19,096 2.8% 19,860 2.8%
Other Operating Revenues 8,828 1.4% 9,181 1.4% 9,548 1.4% 9,930 1.4%
-------------------------------------------------------------------------------------------------------
TOTAL REVENUE 630,562 100.0% 655,785 100.0% 682,016 100.0% 709,297 100.0%
-------------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
-------------------------------------------------------------------------------------------------------
Rooms 132,897 22.0% 138,213 22.0% 143,742 22.0% 149,491 22.0%
Telephone 10,593 60.0% 11,017 60.0% 11,458 60.0% 11,916 60.0%
-------------------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 143,491 22.8% 149,230 22.8% 155,200 22.8% 161,408 22.8%
-------------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
-------------------------------------------------------------------------------------------------------
Rooms 471,181 78.0% 490,029 78.0% 509,630 78.0% 530,015 78.0%
Telephone 7,062 40.0% 7,345 40.0% 7,639 40.0% 7,944 40.0%
Other Operating Revenues 8,828 100.0% 9,181 100.0% 9,548 100.0% 9,930 100.0%
-------------------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 487,072 77.2% 506,554 77.2% 526,817 77.2% 547,889 77.2%
-------------------------------------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
-------------------------------------------------------------------------------------------------------
Admin & General 94,584 15.0% 98,368 15.0% 102,302 15.0% 106,395 15.0%
Management Fees 20,809 3.3% 21,641 3.3% 22,507 3.3% 23,407 3.3%
Marketing 23,331 3.7% 24,264 3.7% 25,235 3.7% 26,244 3.7%
Property Operations/Maint. 33,420 5.3% 34,757 5.3% 36,147 5.3% 37,593 5.3%
Energy 27,114 4.3% 28,199 4.3% 29,327 4.3% 30,500 4.3%
-------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 199,258 31.6% 207,228 31.6% 215,517 31.6% 224,138 31.6%
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
HOUSE PROFIT 287,814 45.6% 299,326 45.6% 311,299 45.6% 323,751 45.6%
-------------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
-------------------------------------------------------------------------------------------------------
Property Taxes 12,203 1.9% 12,691 1.9% 13,199 1.9% 13,727 1.9%
Insurance 8,842 1.4% 9,196 1.4% 9,564 1.4% 9,946 1.4%
Leases 0 0.0% 0 0.0% 0 0.0% 0 0.0%
-------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE 21,045 3.3% 21,887 3.3% 22,762 3.3% 23,673 3.3%
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
NET OPERATING INCOME 266,769 42.3% 277,440 42.3% 288,537 42.3% 300,079 42.3%
-------------------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
-------------------------------------------------------------------------------------------------------
Reserves for Replacement 18,917 3.0% 19,674 3.0% 20,460 3.0% 21,279 3.0%
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
NET CASH FLOW 247,852 39.3% 257,766 39.3% 268,077 39.3% 278,800 39.3%
-------------------------------------------------------------------------------------------------------
<CAPTION>
Projected YE Projected YE Projected YE Projected YE
YEAR 12/30/99 % 12/30/00 % 12/30/01 % 12/30/02 %
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 71.0% 71.0% 71.0% 71.0%
Average Daily Rate $43.28 $45.02 $46.82 $48.69
# Rooms Occupied 16,326 16,326 16,326 16,326
Room-Nights Available 22,995 22,995 22,995 22,995
-------------------------------------------------------------------------------------------------------
ADR Growth Rate 4.00% 4.00% 4.00% 4.00%
-------------------------------------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
-------------------------------------------------------------------------------------------------------
Rooms 706,687 95.8% 734,954 95.8% 764,352 95.8% 794,926 95.8%
Telephone 20,655 2.8% 21,481 2.8% 22,340 2.8% 23,234 2.8%
Other Operating Revenues 10,327 1.4% 10,740 1.4% 11,170 1.4% 11,617 1.4%
-------------------------------------------------------------------------------------------------------
TOTAL REVENUE 737,669 100.0% 767,175 100.0% 797,862 100.0% 829,777 100.0%
-------------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
-------------------------------------------------------------------------------------------------------
Rooms 155,471 22.0% 161,690 22.0% 168,157 22.0% 174,884 22.0%
Telephone 12,393 60.0% 12,889 60.0% 13,404 60.0% 13,940 60.0%
-------------------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 167,864 22.8% 174,578 22.8% 181,562 22.8% 188,824 22.8%
-------------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
-------------------------------------------------------------------------------------------------------
Rooms 551,216 78.0% 573,264 78.0% 596,195 78.0% 620,043 78.0%
Telephone 8,262 40.0% 8,592 40.0% 8,936 40.0% 9,294 40.0%
Other Operating Revenues 10,327 100.0% 10,740 100.0% 11,170 100.0% 11,617 100.0%
-------------------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 569,805 77.2% 592,597 77.2% 616,301 77.2% 640,953 77.2%
-------------------------------------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
-------------------------------------------------------------------------------------------------------
Admin & General 110,650 15.0% 115,076 15.0% 119,679 15.0% 124,467 15.0%
Management Fees 24,343 3.3% 25,317 3.3% 26,329 3.3% 27,383 3.3%
Marketing 27,294 3.7% 28,385 3.7% 29,521 3.7% 30,702 3.7%
Property Operations/Maint. 39,096 5.3% 40,660 5.3% 42,287 5.3% 43,978 5.3%
Energy 31,720 4.3% 32,989 4.3% 34,308 4.3% 35,680 4.3%
-------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 233,103 31.6% 242,427 31.6% 252,125 31.6% 262,210 31.6%
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
HOUSE PROFIT 336,701 45.6% 350,170 45.6% 364,176 45.6% 378,743 45.6%
-------------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
-------------------------------------------------------------------------------------------------------
Property Taxes 14,276 1.9% 14,847 1.9% 15,441 1.9% 16,058 1.9%
Insurance 10,344 1.4% 10,758 1.4% 11,188 1.4% 11,635 1.4%
Leases 0 0.0% 0 0.0% 0 0.0% 0 0.0%
-------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE 24,620 3.3% 25,604 3.3% 26,629 3.3% 27,694 3.3%
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
NET OPERATING INCOME 312,082 42.3% 324,565 42.3% 337,548 42.3% 351,050 42.3%
-------------------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
-------------------------------------------------------------------------------------------------------
Reserves for Replacement 22,130 3.0% 23,015 3.0% 23,936 3.0% 24,893 3.0%
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
NET CASH FLOW 289,952 39.3% 301,550 39.3% 313,612 39.3% 326,156 39.3%
--------------------------------------------------------------------------------------------------------
<CAPTION>
Projected YE Projected YE Projected YE
YEAR 12/30/99 % 12/30/00 % 12/30/01 %
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 71.0% 71.0% 71.0%
Average Daily Rate $50.64 $52.66 $54.77
# Rooms Occupied 16,326 16,326 16,326
Room-Nights Available 22,995 22,995 22,995
----------------------------------------------------------------------------
ADR Growth Rate 4.00% 4.00% 4.00%
----------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
----------------------------------------------------------------------------
Rooms 826,723 95.8% 859,792 95.8% 894,184 95.8%
Telephone 24,163 2.8% 25,130 2.8% 26,135 2.8%
Other Operating Revenues 12,082 1.4% 12,565 1.4% 13,067 1.4%
----------------------------------------------------------------------------
TOTAL REVENUE 862,968 100.0% 897,487 100.0% 933,386 100.0%
----------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
----------------------------------------------------------------------------
Rooms 181,879 22.0% 189,154 22.0% 196,720 22.0%
Telephone 14,498 60.0% 15,078 60.0% 15,681 60.0%
----------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 196,377 22.8% 204,232 22.8% 212,401 22.8%
----------------------------------------------------------------------------
DEPARTMENTAL PROFIT
----------------------------------------------------------------------------
Rooms 644,844 78.0% 670,638 78.0% 697,463 78.0%
Telephone 9,665 40.0% 10,052 40.0% 10,454 40.0%
Other Operating Revenues 12,082 100.0% 12,565 100.0% 13,067 100.0%
----------------------------------------------------------------------------
GROSS OPERATING INCOME 666,591 77.2% 693,255 77.2% 720,985 77.2%
----------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
----------------------------------------------------------------------------
Admin & General 129,445 15.0% 134,623 15.0% 140,008 15.0%
Management Fees 28,478 3.3% 29,617 3.3% 30,802 3.3%
Marketing 31,930 3.7% 33,207 3.7% 34,535 3.7%
Property Operations/Maint. 45,737 5.3% 47,567 5.3% 49,469 5.3%
Energy 37,108 4.3% 38,592 4.3% 40,136 4.3%
----------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 272,698 31.6% 283,606 31.6% 294,950 31.6%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
HOUSE PROFIT 393,893 45.6% 409,649 45.6% 426,035 45.6%
----------------------------------------------------------------------------
LESS OTHER EXPENSES
----------------------------------------------------------------------------
Property Taxes 16,701 1.9% 17,369 1.9% 18,063 1.9%
Insurance 12,101 1.4% 12,585 1.4% 13,088 1.4%
Leases 0 0.0% 0 0.0% 0 0.0%
----------------------------------------------------------------------------
TOTAL OTHER EXPENSE 28,802 3.3% 29,954 3.3% 31,152 3.3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET OPERATING INCOME 365,092 42.3% 379,695 42.3% 394,883 42.3%
----------------------------------------------------------------------------
LESS CAPITAL EXPENSES
----------------------------------------------------------------------------
Reserves for Replacement 25,889 3.0% 26,925 3.0% 28,002 3.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET CASH FLOW 339,203 39.3% 352,771 39.3% 366,881 39.3%
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 49
<PAGE>
DISCOUNTED CASH FLOW METHOD
The projected cash flow for the property is presented on the facing page. In
order to complete the valuation of the property using the Discounted Cash Flow
Approach, we present our analysis of an appropriate discount rate and
capitalization rate, calculate the reversion value of the property at the end of
the holding period, and present the conclusions of value.
REVERSION CAPITALIZATION RATE - Terminal capitalization rates are typically
higher than "going-in" capitalization rates due to the risk associated with the
passage of time and uncertainty into the future. The following table summarizes
terminal capitalization rate ranges for limited service hotels as indicated by
two investor surveys.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Summary Of Terminal Capitalization Rate Ranges
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Publication Publication Date Low High Average
- ----------- ---------------- --- ---- -------
<S> <C> <C> <C> <C>
CB Commercial Investor Survey 2nd Qtr 1994 10.00% 14.00% 12.00%
Korpacz Investor Survey 2nd Qtr 1994 10.00% 16.00% 12.54%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
After considering the future risks of operations in a property similar to the
subject, such as the property's age and condition, we have concluded with a
terminal capitalization rate of 12 percent. This rate will be used to
capitalize the 11th year income estimate into a reversionary value for the
subject property.
DISCOUNT RATE - Discount rates vary according to investor requirements, investor
motivations, property characteristics, and market conditions. For this reason
we reviewed various interest rates as follows:
T-Notes - 10 year 8.20%
Corporate Bonds - High Quality 8.23%
Corporate Bonds - Medium Quality 8.53%
Conventional Fixed Rate Mortgage 8.15%
Prime Rate 8.50%
Source: Wall Street Journal - December 1, 1994
While interest rates overall have decreased in the past few years, they are on
the rise again as the Federal Reserve has raised interest rates several times in
1994. Interest rates generally move together, and therefore the required rate
of return on investments increases with the returns available on alternative
assets. The returns required on real estate investments are no exception to
this, and the discount rates required by investors for hotels has gone up with
the rise in other interest rates. Several national organizations periodically
survey real estate investors for discount rate information on limited service
hotels.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 50
<PAGE>
INCOME CAPITALIZATION APPROACH CONCLUSION
DISCOUNTED CASH FLOW METHOD
SUPER 8 MOTEL, POPLAR BLUFF, MO.
DECEMBER 1, 1994
<TABLE>
<CAPTION>
Discount Rate: 15.00%
Terminal Capitalization Rate: 12.00%
Sales cost: 3.00%
---------------------------------------------------------------------------------------------
Fiscal Year (December 1
through November 30) 1995 1996 1997 1998 1999 2000 2001
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income $247,852 $257,766 $268,077 $278,800 $289,952 $301,550 $313,612
+ Reversion
Total $247,852 $257,766 $268,077 $278,800 $289,952 $301,550 $313,612
x Discount Factor 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759
------ ------ ------ ------ ------ ------ ------
PV of Cash Flow & Reversion $215,523 $194,908 $176,265 $159,405 $144,157 $301,368 $117,898
---------------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------
Fiscal Year (December 1
through November 30) 2002 2003 2004 2005
------------------------------------------------------------
<S> <C> <C> <C> <C>
Income $326,156 $339,203 $352,771 $366,881
+ Reversion 2,965,625
---------
Total $326,156 $339,203 $3,318,396
x Discount Factor 0.3269 0.2843 0.2472
------ ------ ------
PV of Cash Flow & Reversion $106,621 $96,423 $820,257
------------------------------------------------------------
Total Present Value: $2,161,825
Rounded to: $2,160,000
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 51
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Summary Of Discount Rate Surveys
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Discount Rates
- -------------------------------------------------------------------------------
Publication Publication Date Low High Average
- ----------- ---------------- --- ---- -------
<S> <C> <C> <C> <C>
CB Commercial Investor Survey 2nd Qtr 1994 8.00% 17.00% 12.90%
Korpacz Investor Survey 2nd Qtr 1994 11.00% 20.00% 15.58%
PKF Investor Survey 4th Qtr 1993 12.00% 20.00% 16.50%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The subject's ADR and occupancy have steadily increased each year since 1991.
However, one of the main competitors of the Super 8 Motel (The Thrifty Inn) is
undergoing significant renovations and will be reopening as a Pear Tree Inn by
Drury. The Drury Corporation has a very strong name presence in the southeast
part of Missouri, and there is a good possibility that with the remodeling of
this competitor, the Super 8 Motel might lose some of its business to the
remodeled Pear Tree Inn by Drury. Therefore there is some amount of risk
involved in the projected occupancy levels and average daily rates. For these
reasons, and the fact that required discount rates have increased recently with
other interest rates, we have chosen a discount rate of 15 percent to use in our
analysis.
REVERSION VALUE - The reversion value at the end of the 10th full year of the
holding period is based on the 11th year cash flow capitalized using a terminal
capitalization rate of 12 percent. We have deducted an amount equal to 3
percent of the total reversion value to represent the costs of sale upon the
reversion.
The discounted cash flow calculation is presented on the facing page. As shown,
the fee simple value indicated by the discounted cash flow method is $2,160,000.
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<PAGE>
CONCLUSION OF THE INCOME CAPITALIZATION APPROACH
With anticipated changes in market conditions, buyers and sellers of this type
of property consider the discounted cash flow technique, in addition to the
direct capitalization method of valuation. In this case, the occupancy and
average daily rate levels at the Super 8 Motel are at levels which we consider
stabilized. Most of the expenses associated with the Super 8 Motel have shown
signs of consistency in relationship to revenue levels. Those expense items
which varied considerably were accounted for and forecast in our projected cash
flow. The cash flow takes into account expectations of changes in expense
levels, income streams, appreciation and capital expenditures. The direct
capitalization method supports the value indication derived by using a
discounted cash flow technique. We estimated the final value via the income
capitalization approach placing equal emphasis on both methods. We estimate the
value by the income capitalization approach, as of December 1, 1994, at
$2,160,000.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 53
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
The results of the three approaches to value are as follows:
<TABLE>
<CAPTION>
<S> <C>
Cost Approach $2,160,000
Sales Comparison Approach $2,270,000
Income Capitalization Approach $2,160,000
DIRECT CAPITALIZATION $2,160,000
DISCOUNTED CASH FLOW $2,160,000
</TABLE>
The three approaches to value are utilized whenever possible in order to provide
a check whereby all factors are considered in each approach. Inherent in each
approach is an interpretation of market conditions as they affect the subject
property. If only one approach is used, a factor may be overlooked or
misinterpreted. The quality and the quantity of the data in each approach has
been considered, along with the relevancy of each to the subject.
The cost approach relies on the proposition that the market value of the
property is no more than the cost of producing a substitute with the same
utility as the subject. Our estimate under the cost approach assumed fee simple
interest as a going concern. The approach is reasonably accurate in
establishing replacement cost, but less so in establishing physical
deterioration and functional and external obsolescence, especially for older
buildings. The cost approach was only used as a check to the reasonableness of
the income capitalization approach.
The sales comparison approach reflects the behavior of buyers and sellers
transferring property. Buyers and sellers of hotels compare properties that
have sold and those that are offered for sale in the marketplace so they pay no
more than the least amount that a prudent seller would accept. This approach
relies heavily on the availability of sale data and the willingness of buyers
and/or sellers to reveal details of the transactions. Data on limited service
hotel sales which had occurred recently and were within the geographic region of
the Poplar Bluff the Super 8 Motel were difficult to find. In addition, buyers
and/or sellers were not willing to divulge all of the pertinent facts relating
to the sales we did find. The sales we analyzed were a couple of years old, and
needed adjustments to bring them up to the date of the appraisal. Therefore,
little to no consideration was given to this approach.
The income capitalization approach is generally regarded as the most reliable
technique for estimating the value of an income producing property. This
approach primarily emphasizes the economic productivity of the asset. It is
based on the premise that value is created by the expectation of future
benefits. We estimated the present value of those benefits to derive an
indication of the amount that a prudent, informed
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 54
<PAGE>
purchaser-investor would pay for the right to receive them as of the valuation
date. In addition, we estimated the stabilized years income and capitalized it
into an indication of value based upon a capitalization rate supported by
industry surveys of investors in this type of property. In this case we have
considered both the direct capitalization method, and the discounted cash flow
method to valuation
Based on the three approaches to value, with primary consideration given to the
income capitalization approach, we estimate that the fee simple interest in the
subject property as a going concern, as of December 1, 1994, was:
TWO MILLION ONE HUNDRED SIXTY THOUSAND DOLLARS
$2,160,000
The allocation for real property, personal property and business value is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Real Property: $1,182,000
Personal Property: 268,000
Business Value: 710,000
----------
Total: $2,160,000
</TABLE>
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<PAGE>
ADDENDA
- Definitions
- Legal Description
- Land Sales
- Site Plan
- Improved Sales
- Property Photographs
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 56
<PAGE>
DEFINITIONS
(Except as noted, all definitions are as cited in THE APPRAISAL OF REAL ESTATE,
Tenth Edition, Chicago: Appraisal Institute, 1992.)
HIGHEST AND BEST USE: The reasonably probable and legal use of vacant
land or an improved property, which is physically
possible, appropriately supported, financially
feasible, and results in the highest value.
MARKET VALUE: The most probable price, as of a specified date,
in cash, or in terms equivalent to cash, or in
other precisely revealed terms, for which the
specified property rights should sell after
reasonable exposure in a competitive market under
all conditions requisite to fair sale, with the
buyer and seller each acting prudently,
knowledgeably, and for self-interest, and assuming
that neither is under undue duress.
USE VALUE: The value a specific property has for a specific
use. Use value focuses on the value the real
estate contributes to the enterprise of which it
is a part, without regard to the property's
highest and best use or the monetary amount that
might be realized upon its sale.
GOING-CONCERN VALUE: The value of a proven property operation. It
includes the incremental value associated with the
business concern, which is distinct from the value
of the real estate only.
REPLACEMENT COST NEW: The estimated cost to construct, at current prices
as of the effective appraisal date, a building
with utility equivalent to the building being
appraised, using modern materials and current
standards, design, and layout.
REPRODUCTION COST NEW: The estimated cost to construct, at current prices
as of the effective appraisal date, an exact
duplicate or replica of the building being
appraised, using the same materials, construction
standards, design, layout, and quality of
workmanship, and embodying all the deficiencies,
superadequacies, and obsolescence of the subject
building.
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<PAGE>
ACCRUED DEPRECIATION: The difference between the reproduction or
replacement cost of the improvements on the
effective date of the appraisal and the market
value of the improvements on the same date.
PHYSICAL DETERIORATION: A reduction in utility resulting from an
impairment of physical condition.
FUNCTIONAL OBSOLESCENCE: An impairment of the functional capacity of a
property or building according to market tastes
and standards.
EXTERNAL OBSOLESCENCE: The diminished utility of a structure due to
negative influences emanating from outside the
building.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 58
<PAGE>
- --------------------------------------------------------------------------------
LEGAL DESCRIPTION
The following is the legal description of the property:
All that part of the Northwest Quarter (1/4) of the Southeast Quarter (1/4) of
Section 29, Township 25 North, Range 6 East of the Fifth Principal Meridian,
Butler County, Missouri, which is described as follows: From the Northeast
Corner of said North-west Quarter of the Southeast Quarter, measure South 00
degrees 58 minutes West along and with the East line of said Quarter-Quarter
Section a distance of 20.0 feet to the South 89 degrees 47 minutes West along
and with the right-of-way line a distance of 50.0 feet to the POINT OF
BEGINNING; thence, South 00 degrees 58 minutes West a distance of 200.0 feet;
thence, North 00 degrees 58 minutes East a distance of 200 feet to the South
right-of-way line of said Oak Grove Road; thence, North 89 degrees 47 minutes
East a distance of 84.9 feet to the POINT OF BEGINNING; containing 16,976 square
feet, subject to any utility easements.
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[ARTHUR ANDERSEN LLP LOGO] Poplar Bluff Legal Description
- --------------------------------------------------------------------------------
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 59
<PAGE>
LAND SALE 1 -
IDENTIFICATION
Address: South Highway 67
City, County, State: Poplar Bluff, Butler, Missouri
TRANSACTION DATA
Grantor: George K. Boatner
Grantee: Keith Hutson
Deed: Book 758, Page 567
Date of Sale: September, 1993
Sale Price: $90,000
Price / Square Foot: $3.36
Financing: Cash to Seller
PHYSICAL DATA
Land Area: 26,825 square feet
Utilities: All available
Zoning: Commercial
CONFIRMATION: Karen Bowen-Local Broker
REMARKS: The sale was located across the
street from the new Wal Mart
Superstore. It is currently
improved with a drive thru
hamburger restaurant.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 60
<PAGE>
LAND SALE 2 -
IDENTIFICATION
Address: US 67 & Oak Grove
City, County, State: Poplar Bluff, Butler, Missouri
TRANSACTION DATA
Grantor: Billie Ramsey
Grantee: Phillips Investments, Inc.
Deed: Book 772, Page 630
Date of Sale: October, 1994
Sale Price: $200,000
Price / Square Foot: $1.31
Financing: Cash to Seller
PHYSICAL DATA
Land Area: 152,460 square feet
Utilities: All available
Zoning: Commercial
CONFIRMATION: Karen Bowen - Local Broker
REMARKS: The sale was located at the
intersection of Oak Grove Road and
Highway 67. It is going to be
improved with a restaurant.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 61
<PAGE>
LAND SALE 3 -
IDENTIFICATION
Address: North US 67
City, County, State: Poplar Bluff, Butler, Missouri
TRANSACTION DATA
Grantor: Harry and Vivian Blackwell
Grantee: Commerce Bank
Deed: Book 772, Page 303
Date of Sale: September, 1994
Sale Price: $210,000
Price / Square Foot: $3.21
Financing: Cash to Seller
PHYSICAL DATA
Land Area: 65,340 square feet
Utilities: All available
Zoning: Commercial
CONFIRMATION: Karen Bowen - Local Broker
REMARKS: The sale was located in front of a
furniture store along the east side
of north Highway 67. It is a small
outlot which is going to be
improved with a Commerce Bank.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 62
<PAGE>
CURRENT LISTING
IDENTIFICATION
Address: Highway 67 & Oak Grove Road
City, County, State: Poplar Bluff, Butler, Missouri
TRANSACTION DATA
Owner: Billie Ramsey
Date of Sale: Current Listing
Asking Price: $56,000
Price / Square Foot: $1.03
Financing: N/A
PHYSICAL DATA
Land Area: 54,450 square feet
Utilities: All available
Zoning: Commercial
CONFIRMATION: Karen Bowen - Local Broker
REMARKS: The sale was located behind Land
Sale 2, and was only offered for
sale after the adjacent land (Land
Sale 2) was sold. This piece of
land does not have frontage along
Highway 67.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 63
<PAGE>
[Graph Description]: Poplar Bluff Floor
Plan Showing
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 64
<PAGE>
IMPROVED SALE 1--COMFORT INN
Property Address: 2889 Austin Peay
Memphis, TN
TRANSACTION DATA
Date of Sale: March 1992
Grantor: Sunburst Bank
Grantee: Rick Patel
Property Rights Transferred: Fee Simple
Sale Price: $2,440,000
Cash Equivalent Sales Price: $2,330,000
Sales Price/Room: $32,286
Personal Property Included in Sales Price: Yes
Financing/Terms of Sale: Seller provided a loan in the
amount of $1,850,000 at 9%
amortized over 15 years
PHYSICAL FEATURES:
Year Completed: 1988
Number of Units: 70
Property Description: Masonry construction, average
condition consisting of singles,
doubles, and suites
CONFIRMATION Confirmed with the manager of the
motel
REMARKS At the time of the sale the
property was 69 percent occupied,
and sold at an OAR of 9.9%
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 65
<PAGE>
IMPROVED SALE 2--THRIFTY INN
Property Address: Macon Road at I-40
Memphis, TN
TRANSACTION DATA
Date of Sale: January 1992
Grantor: St. Louis Investment Properties,
Inc.
Grantee: Hotel Enterprises Limited
Partnership, #1
Property Rights Transferred: Fee Simple
Sale Price: $2,025,000
Cash Equivalent Sales Price: $1,925,000
Sales Price/Room: $18,160
Personal Property Included in Sales Price: Yes
Financing/Terms of Sale: Seller holds a non-recourse loan of
$1,725,000 at 9% on a 25 year
amortization schedule with a 5
year call
PHYSICAL FEATURES:
Year Completed: 1989
Number of Units: 106
Property Description: Frame and pre-fabricated consisting
of singles, doubles, and studio
types
CONFIRMATION Southwest Hospitality Management
(Part of General Partnership) -
Owner & Manager
REMARKS Hotel had an 81% occupancy at time
of sale. The reported
capitalization rate was 17.6
percent.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 66
<PAGE>
IMPROVED SALE 3--MOTEL 6
Property Address: 1860 Intertech Drive
Fenton, MO
TRANSACTION DATA
Date of Sale: September 1990
Grantor: Mellon Bank
Grantee: Motel 6 Operating L.P.
Property Rights Transferred: Fee Simple
Sale Price: $2,200,000
Cash Equivalent Sales Price: $2,200,000
Sales Price/Room: $19,820
Personal Property Included in Sales Price: Yes
Financing/Terms of Sale: At market
PHYSICAL FEATURES:
Year Completed: 1985
Number of Units: 111
Property Description: 1 story with brick and concrete
exterior, painted drywall interior
CONFIRMATION Buyer
REMARKS Amenities include an outdoor pool.
The reported OAR was 16.5%
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 67
<PAGE>
[COLOR PHOTOGRAPHS SHOWING
THE MAIN ENTRANCE AND A
TYPICAL GUEST ROOM]
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 68
<PAGE>
Capital Projects Worksheet
Rock Falls IL - Super 8
July 20, 1995
<TABLE>
<CAPTION>
Assumptions
State Sales Tax 7.8% $226,919 $93,853 $38,616
Freight 8.0%
Purchasing Fee 5.5%
Guest Room Cost Tax & Freight Fee Installation Unit Cost # Units Total On Order/Comp 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carpet (40 yd) $353 $56 $19 $250 $678 63 $42,715 $42,715
Carpet pad $40 $6 $2 $49 63 $3,056 $3,056
Vinyl $115 $18 $6 $300 $439 0 $0
Drapes $93 $15 $5 $120 $233 63 $14,664
Shears $38 $6 $2 $46 0 $0
Blackouts $42 $7 $2 $51 0 $0
Drapery rod $60 $9 $3 $73 0 $0
Double Bedspread $80 $13 $4 $97 37 $3,589
Queen Bedspread $85 $13 $5 $103 26 $2,680
King Bedspread $90 $14 $5 $109 0 $0
Double bed set $157 $25 $9 $190 97 $18,465
Queen bed set $180 $28 $10 $218 0 $0
King bed set $222 $35 $12 $269 2 $538
Door lock - Ving mechanical $185 $29 $10 $224 0 $0
Door lock - Ving Electronic $220 $35 $12 $267 66 $17,606
Television w/remote $300 $47 $17 $364 63 $22,916 $14,544 $8,372
Television w/o remote $320 $50 $18 $388 0 $0
Air conditioner $600 $95 $33 $728 50 $36,375 $19,631 $16,744
Case goods
Double head board (2) $136 $21 $7 $165 20 $3,298
Queen head board (2) $136 $21 $7 $165 0 $0
King head board $106 $17 $6 $129 0 $0
Double/Queen night stand (1) $108 $17 $6 $131 20 $2,619
King nightstand $93 $15 $5 $113 0 $0
Double/Queen wall lamp (1) $52 $8 $3 $63 20 $1,261
King wall lamp (2) $104 $16 $6 $126 0 $0
Dresser $217 $34 $12 $263 20 $5,262
Desk $173 $27 $10 $210 20 $4,195
Desk Chair $110 $17 $6 $133 20 $2,668
Art $75 $12 $4 $91 20 $1,819
Mirror $62 $10 $3 $75 20 $1,504
Lounge chair $200 $32 $11 $243 27 $6,548
Desk Lamp $34 $5 $2 $41 20 $825
Floor lamp $60 $9 $3 $73 20 $1,455
Guest Bath
Vinyl $25 $4 $1 $30 0 $0
Vanity $250 $39 $14 $303 10 $3,031
Tub $200 $32 $11 $243 10 $2,425
Public Area
Carpet (yard) High end $50 $8 $3 incl $61 0 $0
Carpet (yard) Low end $37 $6 $2 incl $45 310 $13,907 $13,907
Vinyl (yard) $12 $2 $1 incl $15 0 $0
Systems - Major Maintenance
Property Management $0
F&B Point of Sale $0
Telephone $0
Repair Est. Wall $0 $0
Replace Water Heater $0 $0
Replace Roof $0 $0
Parking lot resurface $5,000 $5,000 $5,000
Property Management System $0 $0
Parking lot restriping $3,500 $3,500 $3,500
Repaint Trim $5,000 $5,000 $5,000
</TABLE>
<PAGE>
EXHIBIT 10.7
<PAGE>
AN APPRAISAL OF THE SUPER 8 MOTEL IN
ROCK FALLS, ILLINOIS
FOR
HOST FUNDING, INC.
AS OF DECEMBER 1, 1994
Copyright 1994, Arthur Andersen LLP, 33 West Monroe Street, Chicago, Illinois
60603, U.S.A.
All rights reserved.
<PAGE>
[ARTHUR ANDERSEN LETTERHEAD]
December 27, 1994
Mr. John S. Phillips
President
Host Funding, Inc.
7825 Fay Avenue, Suite 250
LaJolla, California 92037
312-507-5993
Re: Super 8 Motel, Rock Falls, Illinois
Dear Mr. Phillips:
In accordance with your request, we have performed a complete self-contained
narrative appraisal of the Super 8 Motel located in Rock Falls, Illinois. It is
a limited service hotel with 63 rooms situated on 106,567 square feet of land.
The purpose of this appraisal is to estimate the market value of the fee simple
interest in the property on a going-concern basis, as of December 1, 1994. It
is our understanding that the report is to be used for review by a rating agency
for securitization purposes. A copy of this report may be distributed to Mr.
Guy Hatfield of All American Group LP, and may be included, or referred to, in a
Securities and Exchange Commission Filing. This report can only be used for the
purposes stated and only by our client and the listed third parties.
The accompanying report, of which this letter is a part, describes the building
improvements and methods of appraisal, and contains pertinent data considered in
reaching our value conclusions. The opinion of value is subject to the attached
certification and statement of general assumptions and limiting conditions.
Based on our analysis, the market value of the fee simple interest in the
subject property on a going-concern basis, as of December 1, 1994, was:
TWO MILLION THREE HUNDRED SEVENTY THOUSAND DOLLARS
$2,370,000
Our appraisal of the property, including basic assumptions and limited
conditions, is detailed in the attached report.
Very truly yours,
<PAGE>
TABLE OF CONTENTS
LETTER OF TRANSMITTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SUMMARY OF SALIENT FACTS AND CONCLUSIONS . . . . . . . . . . . . . . . . . . .3
CERTIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
STATEMENT OF GENERAL ASSUMPTIONS AND LIMITING CONDITIONS . . . . . . . . . . .6
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Property Appraised. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Property Rights Appraised . . . . . . . . . . . . . . . . . . . . . . . .8
Purpose and Function of the Appraisal . . . . . . . . . . . . . . . . . .8
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Ownership History . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Date of Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Scope of the Appraisal. . . . . . . . . . . . . . . . . . . . . . . . . .9
DESCRIPTION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Site Description. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Improvement Description . . . . . . . . . . . . . . . . . . . . . . . . 11
Property Taxes and Assessments. . . . . . . . . . . . . . . . . . . . . 12
Zoning and Other Use Restrictions . . . . . . . . . . . . . . . . . . . 13
Area Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Neighborhood Analysis . . . . . . . . . . . . . . . . . . . . . . . . . 15
MARKET ANALYSIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Market Segments/Competitive Supply. . . . . . . . . . . . . . . . . . . 16
Average Daily Rate and Occupancy. . . . . . . . . . . . . . . . . . . . 17
HIGHEST AND BEST USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
VALUATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
COST APPROACH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Site Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Valuation of Improvements . . . . . . . . . . . . . . . . . . . . . . . 24
SALES COMPARISON APPROACH. . . . . . . . . . . . . . . . . . . . . . . . . . 27
Summary of the Sales Comparison Approach. . . . . . . . . . . . . . . . 28
INCOME CAPITALIZATION APPROACH . . . . . . . . . . . . . . . . . . . . . . . 29
Market and Subject Operating Trends . . . . . . . . . . . . . . . . . . 30
Income and Forecast Assumptions . . . . . . . . . . . . . . . . . . . . 32
Expenses Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Direct Capitalization Method. . . . . . . . . . . . . . . . . . . . . . 33
Discounted Cash Flow Method . . . . . . . . . . . . . . . . . . . . . . 36
Conclusion of the Income Capitalization Approach. . . . . . . . . . . . 37
RECONCILIATION AND FINAL VALUE ESTIMATE. . . . . . . . . . . . . . . . . . . 38
ADDENDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
Property Name: Super 8 Motel
Location: 2100 1st Avenue
Rock Falls, Illinois
Owner of Record: All American Group LP
Real Estate Tax Identification Code: 285.01
Date of Valuation: December 1, 1994
Purpose and Function of the Appraisal: Estimate the market value of the fee
simple interest on a going-concern basis
for securitization purposes
Interest Appraised: Fee simple on a going concern basis
Land Area: 106,567 square feet
Building Description: Two story, limited service motel with 63
rooms, wood-frame with masonite veneer
Year Completed/Renovated: 1985
Amenities: Continental breakfast, free local calls
Highest and Best Use
AS VACANT: Commercial
AS IMPROVED: Current Use
Year of Stabilization: 1995(FISCAL YEAR, DECEMBER 1, 1994-
NOVEMBER 30, 1995)
OCCUPANCY: 81%
AVERAGE DAILY RATE: $37.50
Indications of Value
COST APPROACH: $2,370,000
SALES COMPARISON APPROACH: $2,140,000
INCOME CAPITALIZATION APPROACH: $2,370,000
Direct Capitalization Method: $2,440,000
Discounted Cash Flow Method: $2,300,000
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 3
<PAGE>
Final Value Opinion: $2,370,000
Unit Value Conclusion
PER ROOM: $37,600 (rounded)
PER SQUARE FOOT: $109 (rounded)
Allocation of Value: Real Property: $1,276,000
Personal Property: 224,000
Business Value: 870,000
----------
Total: $2,370,000
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 4
<PAGE>
CERTIFICATION
We certify that, to the best of our knowledge and belief,
the statements of fact contained in this report are true and correct;
the reported analyses, opinions, and conclusions are limited only by the
accompanying limiting conditions and assumptions, and are our personal,
unbiased professional analyses, opinions, and conclusions;
we have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved;
our compensation is not contingent on an action or event resulting from the
analyses, opinions or conclusions in, or the use of, this report;
our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice;
as of the date of this report, William J. Carter, MAI, has completed the
requirements of the continuing education program of the Appraisal
Institute;
a personal inspection of the property that is the subject of this report
was made by James M. Graham on November 30, 1994;
William J. Carter, MAI, and Kimberly L. Sass did not inspect the property
that is the subject of this report; William J. Carter, MAI, and Kimberly L.
Sass are general certified real estate appraisers in the State of Illinois;
no one provided significant professional assistance to the persons signing
this report; and that
we certify that the use of this report is subject to the requirements of
the Appraisal Institute relating to review by its duly authorized
representatives.
------------------------------------------------
William J. Carter, MAI
Participating Principal - Real Estate Services
Review Appraiser
IL Certified General R.E. Appraiser--153-000352
------------------------------------------------
Kimberly L. Sass
Manager - Real Estate Services
Review Appraiser
IL Certified General R.E. Appraiser -- 153-000871
- -----------------------------
James M. Graham
Staff Appraiser
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Arthur Andersen LLP - Real Estate Services Group 5
<PAGE>
STATEMENT OF GENERAL ASSUMPTIONS AND LIMITING
CONDITIONS
This appraisal report is subject to the following general assumptions and
limiting conditions:
1. No investigation has been made of, and no responsibility is assumed for,
the legal description or for legal matters including title or encumbrances.
Title to the property is assumed to be good and marketable unless otherwise
stated. The property is further assumed to be free and clear of liens,
easements, encroachments and other encumbrances unless otherwise stated,
and all improvements are assumed to lie within property boundaries.
2. Information furnished by others, upon which all or portions of this report
are based, is believed to be reliable, but has not been verified in all
cases. No warranty is given as to the accuracy of such information.
3. It is assumed that all required licenses, certificates of occupancy,
consents, or other legislative or administrative authority from any local,
state, or national government or private entity or organization have been,
or can readily be obtained, or renewed for any use on which the value
estimates provided in this report are based.
4. Full compliance with all applicable federal, state and local zoning, use,
occupancy, environmental, and similar laws and regulations is assumed,
unless otherwise stated.
5. No responsibility is taken for changes in market conditions and no
obligation is assumed to revise this report to reflect events or conditions
which occur subsequent to the appraisal date hereof.
6. Responsible ownership and competent property management are assumed.
7. The allocation, if any, in this report of the total valuation among
components of the property applies only to the program of utilization
stated in this report. The separate values for any components may not be
applicable for any other purpose and must not be used in conjunction with
any other appraisal.
8. Areas and dimensions of the property were obtained from sources believed to
be reliable. Maps or sketches, if included in this report, are only to
assist the reader in visualizing the property and no responsibility is
assumed for their accuracy. No independent surveys were conducted.
9. It is assumed that there are no hidden or unapparent conditions of the
property, subsoil, or structures that affect value. No responsibility is
assumed for such conditions or for arranging for engineering studies that
may be required to discover them.
10. No soil analysis or geological studies were ordered or made in conjunction
with this report, nor was an investigation made of any water, oil, gas,
coal, or other subsurface mineral and use rights or conditions.
11. Neither Arthur Andersen LLP nor any individuals signing or associated with
this report shall be required by reason of this report to give further
consultation, to provide testimony or appear in court or other legal
proceedings, unless specific arrangements therefor have been made.
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Arthur Andersen LLP - Real Estate Services Group 6
<PAGE>
12. This appraisal has been made in conformance with, and is subject to, the
requirements of the Code of Professional Ethics and Standards of
Professional Conduct of the Appraisal Institute and the Uniform Standards
of Professional Appraisal Practice.
13. This report has been made only for the purpose stated and shall not be used
for any other purpose. Neither this report nor any portions thereof
(including without limitation any conclusions as to value, the identity of
Arthur Andersen LLP or any individuals signing or associated with this
report, or the professional associations or organizations with which they
are affiliated) shall be disseminated to third parties by any means without
the prior written consent and approval of Arthur Andersen LLP
14. We have not been engaged nor are qualified to detect the existence of
hazardous material which may or may not be present on or near the property.
The presence of potentially hazardous substances such as asbestos, urea-
formaldehyde foam insulation, industrial wastes, etc. may affect the value
of the property. The value estimate herein is predicated on the assumption
that there is no such material on, in, or near the property that would
cause a loss in value. No responsibility is assumed for any such
conditions or for any expertise or engineering knowledge required to
discover them. The client should retain an expert in this field if further
information is desired.
15. The date of value to which the conclusions and opinions expressed in this
report apply is set forth in the opinion letter at the front of this
report. Our value opinion is based on the purchasing power of the United
States' dollar as of this date.
16. The Americans with Disabilities Act (ADA) became effective January 26,
1992. We have not made a specific compliance survey and analysis of this
property to determine whether or not it is in conformity with the various
detailed requirements of the ADA. It is possible that a compliance survey
of the property, together with a detailed analysis of the requirements of
the ADA, could reveal that the property is not in compliance with one or
more of the requirements of the Act. If so, this fact could have a
negative effect upon the value of the property. Since we have no direct
evidence relating to this issue, we did not consider possible noncompliance
with the requirements of the ADA in estimating the value of the property.
17. Arthur Andersen LLP's maximum liability relating to services rendered for
this engagement (regardless of form of action, whether in contract,
negligence or otherwise), shall be limited to the fees paid to Arthur
Andersen LLP for its services under this agreement. In no event shall
Arthur Andersen LLP be liable for consequential, special, incidental or
punitive loss, damage or expense (including without limitation, lost
profits, opportunity costs, etc.) even if it has been advised of their
possible existence.
18. Client shall indemnify and hold Arthur Andersen LLP and its personnel from
and against any claims, liabilities, costs and expenses (including, without
limitation, attorney's fees and the time of Arthur Andersen LLP personnel
involved but excluding consequential, special incidental or punitive
damages) brought against, paid or incurred by Arthur Andersen LLP at any
time and in any way arising out of a breach by client of its obligations
under this agreement.
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Arthur Andersen LLP - Real Estate Services Group 7
<PAGE>
INTRODUCTION
PROPERTY APPRAISED
The Super 8 Motel is limited service with 63 rooms located at 2100 1st Avenue,
Rock Falls, Illinois. The improvements were completed in 1985, contain 21,696
square feet and occupy 106,567 square feet of land. A copy of the legal
description is located in the Addenda.
PROPERTY RIGHTS APPRAISED
Since the property is appraised as a going-concern, we assume all property
rights which can be owned are included in our estimate of market value. The
property rights included are as follows:
1. RIGHTS IN REAL ESTATE
- LAND, SITE IMPROVEMENTS AND BUILDING IMPROVEMENTS;
2. RIGHTS IN TANGIBLE PERSONAL PROPERTY
- FURNITURE, FIXTURES AND EQUIPMENT;
3. RIGHTS TO INTANGIBLE PERSONAL PROPERTY (BUSINESS-RELATED ASSETS)
- MANAGEMENT CONTRACTS, FRANCHISE AGREEMENTS AND GOODWILL
Any separate indications that are developed as an allocation of total value on a
going-concern basis are not meant to reflect the intrinsic value of each
component if sold on a liquidation basis. Rather, they should be interpreted as
the approximate contributory value to overall property value as a going-concern.
PURPOSE AND FUNCTION OF THE APPRAISAL
This report estimates the market value of the fee simple interest in the
property on a going-concern basis, as of December 1, 1994. It is our
understanding that this information will be used for securitization purposes.
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Arthur Andersen LLP - Real Estate Services Group 8
<PAGE>
DEFINITIONS
Our appraisal conclusions are subject to the definition of value below and the
Statement of General Assumptions and Limiting Conditions that follows the
Certification. Market value, as used herein, is defined as:
THE MOST PROBABLE PRICE, AS OF A SPECIFIED DATE, IN CASH, OR
IN TERMS EQUIVALENT TO CASH, OR IN OTHER PRECISELY REVEALED
TERMS, FOR WHICH THE SPECIFIED PROPERTY RIGHTS SHOULD SELL
AFTER REASONABLE EXPOSURE IN A COMPETITIVE MARKET UNDER ALL
CONDITIONS REQUISITE TO FAIR SALE, WITH THE BUYER AND SELLER
EACH ACTING PRUDENTLY, KNOWLEDGEABLY AND FOR SELF-INTEREST,
AND ASSUMING THAT NEITHER IS UNDER UNDUE DURESS.
Except as noted, this definitions and other definitions of appraisal terminology
in this report are taken from THE APPRAISAL OF REAL ESTATE, Tenth Edition,
Appraisal Institute.
Going-concern value, as used herein, is defined as:
THE VALUE CREATED BY A PROVEN PROPERTY OPERATION; CONSIDERED
AS A SEPARATE ENTITY TO BE VALUED WITH A SPECIFIC BUSINESS
ESTABLISHMENT.
This definition of appraisal terminology is taken from THE DICTIONARY OF REAL
ESTATE APPRAISAL, Third Edition, Appraisal Institute.
OWNERSHIP HISTORY
Guy Hatfield and family have been the majority owners of the property since it
was developed. In February 1993 ownership was assigned to a limited partnership
called All American Group LP.
DATE OF VALUE
The property was inspected by James M. Graham on November 30, 1994 and the
effective date of our value opinion is December 1, 1994. The property was not
inspected by William J. Carter, MAI, or Kimberly L. Sass.
SCOPE OF THE APPRAISAL
This is complete, self contained, narrative appraisal which has been prepared in
accordance with the Uniform Standards of Professional Appraisal Practice and the
Code of Professional Ethics of the Appraisal Institute.
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Arthur Andersen LLP - Real Estate Services Group 9
<PAGE>
We have assumed that the operating information provided by our client accurately
reflects the historical operating performance of the subject.
In the course of our investigation, we consulted county and city offices for
information about zoning and growth trends, we contacted the county assessor's
office for tax and assessment data, examined the market area and inspected the
property to evaluate its condition, functional qualities, and market appeal. We
also surveyed competitive properties and consulted local real estate offices for
comparable sales, offerings, and operating expense information. When possible,
we inspected those sales and offerings considered to be within or similar to the
subject market and otherwise comparable. We attempted to confirm the chosen
comparable sales with the seller, buyer, broker, participating attorney or local
reliable appraiser. Finally, we collated and applied the resulting information
in the valuation process.
MARKETING TIME
Marketing time is the "REASONABLE AMOUNT OF TIME IT MIGHT TAKE TO SELL AN
INTEREST IN REAL PROPERTY AT ITS ESTIMATED MARKET VALUE DURING THE PERIOD
IMMEDIATELY AFTER THE EFFECTIVE DATE OF THE APPRAISAL." The hotel industry has
shown good improvement in the last year and a half with many buyers in the
market. Some of the most sought after properties are chain affiliated limited
service properties with good cash flows. Since the subject is a Super 8, has a
good cash flow history and is a highway motel, we believe a marketing time of 8
to 12 months is considered reasonable. This estimate is supported by Second
Quarter 1994 Korpacz and CB Commercial Investor Surveys.
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Arthur Andersen LLP - Real Estate Services Group 10
<PAGE>
DESCRIPTION AND ANALYSIS
SITE DESCRIPTION
Location: 2100 1st Avenue
Rock Falls, Illinois
Shape: Rectangular
Frontage: 1st Avenue
Size: 106,567 square feet
Access/Visibility: Good/Good
Topography: Level
Apparent Soil and Subsoil Conditions: None observed
Flood Plain: Zone B, Map 170694B, area of no
flooding
Utilities: All available
Easements: Other than typical utility
easements, no other easements were
evident.
IMPROVEMENT DESCRIPTION
Date of Construction: 1985
Area & Room Mix
GROSS AREA: 21,696 square feet
ROOM MIX: Singles 35
Doubles 24
Handicap 1
King Suites 2
Master Suites 1
Total 63
Meeting Space: None
Elevators: None
Security: Cameras positioned on exterior
doors, office, and front desk; door
buzzer and police alarm button
Fire Protection: Sprinklers in the suite, mechanical
room, and laundry room; fire
extinguishers and emergency
lighting
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Arthur Andersen LLP - Real Estate Services Group 11
<PAGE>
General Construction Features: Wood frame with masonite veneer
Interior Features: Carpeting, vinyl tile, incandescent
and fluorescent lighting in the
common areas, incandescent lighting
in the guest rooms.
Common Areas: Front desk, manager's office,
lobby, laundry room, mechanical
room.
Site Improvements: Asphalt parking, concrete sidewalks
and curbs, rear parking light and
pole, front sign, shed, and
landscaping.
Overall Condition: Rooms and common areas have been
partially renovated in the last 3
years and further work such as
painting all rooms and recarpeting
the rooms and hallways on both
floors is expected. New HVAC units
and TV sets will be purchased over
time. The property has recently
undergone renovations to repair
damages from such unexpected
sources as a fire in the handicap
room and destructive
conventioneers. Overall the
improvements are in good condition.
PROPERTY TAXES AND ASSESSMENTS
The property is assessed by the Whiteside County Assessor every four years. The
assessed value is equal to one-third of the market value. Real estate taxes are
payable in semi-annual installments in June and September. The following table
summarizes the assessed value, tax rate and actual property taxes for the last
three years.
<TABLE>
<CAPTION>
---------------------------------------------------------
Overall
Tax Year Assessed Value Tax Rate R.E. Taxes
-------- -------------- -------- ----------
<S> <C> <C> <C>
1992 345,582 10.0691 34,797
1993 346,405 10.3131 35,725
1994 361,473 10.0171 36,209
--------------------------------------------------------
</TABLE>
Taxes have increased on average 2 percent between 1992 and 1994 while the
overall tax rate has decreased. The assessed value, which is 1/3 of market
value has increased on average 2.2 percent from 1992 to 1994.
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Arthur Andersen LLP - Real Estate Services Group 12
<PAGE>
GRAPH DESCRIPTION: ROCK FALLS, ILLINOIS REGIONAL MAP
WITH AN ARROW POINTING TO THE
LOCATION BY THE MOTEL.
[CRC map]
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 13
<PAGE>
ZONING AND OTHER USE RESTRICTIONS
The property is zoned B-1, General Business Districts, by the City of Rock Falls
Zoning Department. This designation permits any retail business, personal or
business service establishment or wholesale business. Based on our
interpretation of the most recent zoning ordinance, the building appears to be a
legally conforming use.
AREA OVERVIEW
Rock Falls and Sterling, referred to as the "companion communities", are located
in the northwest portion of Illinois, in Whiteside County. It is approximately
115 miles east of Chicago, 146 miles southwest of Milwaukee, and 244 miles
northeast of St. Louis. The two communities are on the east-west route of
Interstate 88 that leads to Chicago and extends the length of the state. The
Whiteside County Airport in Rock Falls is classified by the FAA as a commercial
aviation airport with approximately 31,000 takeoffs and landings chartered each
year. United Express offers shuttle flights to Chicago and other midwestern
cities.
The Whiteside County economy is driven primarily by manufacturing,
wholesale/retail services and agriculture. Companies such as Northwestern Steel
& Wire (the area's largest employer), National Manufacturing, and Wahl Clipper,
are the largest manufacturing employers in the county. Recent developments
among them include Wahl Clipper's addition of 150 employees over the last 3
years, National Manufacturing's addition of 100 employees over the same time
period, and Northwestern Steel's decrease in employment of approximately 150
people over the next year or two through attrition. Raynor and Borg Warner, two
large employers located approximately ten miles east of the Whiteside County
line in Dixon, have recently added 140 and 40 employees, respectively.
Agriculture has also had a strong influence in the development of business and
industry in the area, however, a majority of the employment is only during the
harvest season. More than $119 million is generated by agriculture-related
industries each year. Corn, soybeans, hogs and cattle are the major sources of
agriculture income. Migrant workers, who seasonally pick soybeans in the area,
are a large source of business at the Super 8 in the summer.
The population of Whiteside County grew a slight 0.31 percent per year between
1990 and 1992, however, population decreased between 1980 and 1992. The county
had an unemployment rate of 4.5 percent in October 1994, which was well below
the state of Illinois. This area is expected to maintain a stable economic
environment. The manufacturing sector appears to be in a period of slow growth
which should continue to create a stable demand for the subject's rooms. Since
the major employer, Northwestern Steel and Wire is not hiring but going through
a slow trimming of their workforce through attrition, population is
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Arthur Andersen LLP - Real Estate Services Group 14
<PAGE>
not expected to increase at any substantial rate. However, the growth of the
other two major employers should help maintain the existing population base.
The information in the following tables were obtained from the U.S. Bureau of
Census unless otherwise noted.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Population
Historical Trends
- --------------------------------------------------------------------------------------------------------------------------
Actual Actual Annual Compounded Actual Annual Compound Annual Compound
1980 1990 Change 1980-1990 1992 Change 1990-1992 Change
---- ---- ---------------- ---- ---------------- -----
<S> <C> <C> <C> <C> <C> <C>
City of Rock Falls 10,633 9,654 -0.95% N/A N/A N/A
City of Sterling 16,281 15,132 -0.72% N/A N/A N/A
Whiteside County 65,970 60,186 -0.91% 60,563 -0.31% -0.71%
- ---------------------------------------------------------------------------------------------------------------------------
SOURCE: ROCK FALLS CHAMBER OF COMMERCE
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
----------------------------------------------------------------------
8 Largest Private/Public Employers
----------------------------------------------------------------------
Employer Number of Employees*
<S> <C>
Northwestern Steel & Wire 2,300
CGH Medical Center 750
Raynor Manufacturing Co. 740
National Manufacturing Co. 700
Wahl Clipper 600
Illinois Department of Corrections 516
Sauk Valley College 477
KSB Hospital 450
----------------------------------------------------------------------
<FN>
* INCLUDES DIXON AREA EMPLOYERS
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Unemployment
-----------------------------------------------------------------------------
Whiteside County Illinois United States
---------------- -------- -------------
<S> <C> <C> <C>
Annual Avg 1992 7.1% 7.5% 7.4%
Annual Avg 1993 7.1% 7.4% 6.8%
October 1994 4.5% 5.7% 5.4%
-----------------------------------------------------------------------------
</TABLE>
SOURCE: ILLINOIS DEPARTMENT OF EMPLOYMENT SECURITY
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Arthur Andersen LLP - Real Estate Services Group 15
<PAGE>
NEIGHBORHOOD ANALYSIS
The immediate neighborhood is identified as 1st Avenue. This area is
approximately bounded by E. 7th Street on the north and Interstate 88 on the
south. The subject is located on the west side of 1st Avenue. 1st Avenue
(Illinois 88) is a four lane road that extends through Rock Falls in a north-
south direction. Two blocks north of the subject, 1st Avenue intersects with
Highway 30, a four lane road that extends east-west. Adjacent north is the Red
Apple Family Restaurant, to the south is a vacant field followed by two
warehouse-distribution buildings, to the east is the subject's main competitor,
the Ramada Inn, and to the west is vacant land. The neighborhood is about 65
percent developed. However, little of the developable land is currently listed
on the market. Many of the houses and commercial buildings in the neighborhood
are generally older construction. The main commercial businesses along 1st
Avenue are service stations, fast food restaurants, sit down restaurants,
automotive and retail stores. The subject is very compatible with the
surrounding neighborhood uses.
Interstate 88 and Highway 30 are easily accessible from the subject by 1st
Avenue. These highways provide access to other cities such as Chicago, Peoria
and the Quad Cities. The subject's close proximity to the interstate is a key
factor in its success.
CONCLUSION
Whiteside County has a stable economic base driven by manufacturing, services
and agriculture. This has resulted in an unemployment rate below the national
and state average. Although the population decreased in the 1980s, it has since
leveled off. Little economic and population growth is expected in the near
future. Therefore, the subject is expected to perform at a similar stable
level.
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Arthur Andersen LLP - Real Estate Services Group 16
<PAGE>
COMPETITION SUMMARY
SUPER 8 MOTEL, ROCK FALLS, IL
<TABLE>
<CAPTION>
Proximity # of
Property to Subject Rooms YOC Amenities
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUBJECT --
Super 8 Motel --- 63 1985 Continental Breakfast, coffee,
2100 1st Avenue suites, Truck parking,
Rock Falls, IL free local calls.
PRIMARY COMPETITION
1 Ramada Inn Across street 117 1970's Restaurant and lounge,
2105 S. 1st Avenue meeting rooms, indoor pool
Rock Falls, IL and whirlpool.
2 Super 8 Motel 13 miles east 41 1990 Whirlpool, sauna, game room
1800 S. Galena Avenue truck parking, movie rentals,
Dixon, IL free local calls.
3 Best Western Brandywine 18 miles east 94 1984 Restaurant, lounge, pool and
443 Illinois Route 2 hot tubs, meeting rooms,
Dixon, IL exercise and swim spa.
- --------------------------------------------------------------------------------------------------------------
TOTALS/AVERAGES--
PRIMARY COMPETITION 252/84 -- --
<CAPTION>
Market Segmentation Published Rates Estimated (1994)
--------------------------------- ----------------- ------------------
Property Commercial Mtg/Conv. Leisure Single Double Occupancy ADR
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUBJECT --
Super 8 Motel 65% 10% 25% $34.88 $45.88 81% $36.39
2100 1st Avenue
Rock Falls, IL
PRIMARY COMPETITION
1 Ramada Inn 75% 15% 10% $45.00 $55.00 50% $46.00
2105 S. 1st Avenue
Rock Falls, IL
2 Super 8 Motel 35% 35% 30% $35.88 $41.88 80% $36.00
1800 S. Galena Ave
Dixon, IL
3 Best Western Brand 80% 10% 10% $50.00 $60.00 75% $52.00
443 Illinois Route
Dixon, IL
- -----------------------------------------------------------------------------------------------
TOTALS/AVERAGES--
PRIMARY COMPETITION 63% 20% 17% -- -- 68% $44.67
</TABLE>
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Arthur Andersen LLP - Real Estate Services Group 17
<PAGE>
MARKET ANALYSIS
OVERVIEW
No new motels or hotels have been built in the Rock Falls/Dixon area since the
Super 8 Dixon was constructed in 1990. We spoke with local planning and zoning
officials, economic development coordinators, real estate brokers and motel
managers regarding any proposed motels and they all verified there were none.
Development of a motel and restaurant was proposed for the site immediately
south of the subject in the spring of this year, but the owner of the industrial
buildings to the south bought the land to stop the project. Apparently he did
not want to share his drive way with a motel and restaurant. Two competing
motels closed down within the last two years. One was a primary competitor (Inn
of Sterling), and the other a secondary competitor (Crystal Lake Motel). The
Inn of Sterling went out of business due to its poor location in Sterling, which
has no interstate access. The subject's manager felt they gained a 5 percent
occupancy from the motel closing down. The Crystal Lake Motel converted to an
apartment complex. It had no affect on the subject.
MARKET SEGMENTS/COMPETITIVE SUPPLY
We have identified six motels in our competitive supply. Of these motels, three
are positioned in the primary competitive supply, and three are considered
secondary competition. The primary competitors are associated with established
chains and none of the secondary competitors are associated with a chain.
Details of the competing properties are located on the facing page.
In order to obtain estimates on ADR and occupancy, we surveyed each property in
person and spoke with their managers. In addition, we examined the previous
appraisal, made visual inspections of the properties, and spoke with the
subject's manager who is familiar with the competition. The Ramada Inn and Best
Western would not disclose their average daily rate and occupancy.
The primary segment served in the subject's market area is commercial. Among
the primary competitors and the subject, the distribution among this segment is
approximately 65 percent. Leisure travelers, including groups, comprise about
35 percent of the subject's occupancy. The Ramada Inn, across the street from
the subject, is approximately ten years older but has undergone some renovation
in the lobby, common areas and guest rooms and has a restaurant and bar. The
Ramada primarily serves the commercial segment, is a full-service hotel and
therefore charges a higher rate. It has the lowest occupancy of the primary
competitors, which indicates that most guests are not willing to pay extra for
full service amenities, in this market. Thus they have a higher ADR than the
subject but a lower occupancy. The Super 8 Dixon offers roughly the same
amenities as the subject, but caters to a smaller proportion of the
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Arthur Andersen LLP - Real Estate Services Group 18
<PAGE>
commercial segment. The occupancy and ADR is almost identical to the subject.
The Best Western Brandywine is also about the same age as the subject. It has a
restaurant/bar and pool/spa. The Best Western is considered the luxury motel in
the area. It draws the majority of the higher paying repeat commercial
customers. The Best Western has a higher ADR and higher distribution of
commercial business than the subject.
The secondary competition is comprised of the All Seasons, Rock Falls, and Joe
Wilhelmi Motels. They serve a completely different market. Often renting by
the week, they serve more of a local clientele. Their rack rates vary between
$17 and $21 for a single.
AVERAGE DAILY RATE AND OCCUPANCY
The industry surveys, such as the Host Report, are typically only published once
or twice a year, and therefore, cannot cover the most current state of the hotel
industry. This has not been an issue in past years since declines were
projected and realized. Since the national hotel industry's starting to show
signs of real recovery, based on the increased activity in sales transactions
and the reported increase in occupancy by many markets, we cannot rely solely on
these surveys in projecting future trends.
The competitive properties overall have performed at a higher level in occupancy
than the nationwide limited service market. One way that occupancy and ADR may
grow in the future, besides inflationary growth, is the lack of financing on new
motel construction in the area, according to local sources.
<TABLE>
<CAPTION>
------------------------------------------------------------------
Historical ADR and Occupancy
Nationwide
------------------------------------------------------------------
Year Occupancy ADR
--- --------- ---
<S> <C> <C>
1992 68.2% $50.00
1993 69.5% $50.42
-------------------------------------------------------------------
SOURCES: ICVA, SMITH TRAVEL RESEARCH, ARTHUR ANDERSEN HOST REPORT
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------
Super 8 Motel, Rock Falls, IL
Historical Occupancy and ADR
--------------------------------------------------------------
Average
Year Occupancy ADR
---- --------- ---
<S> <C> <C>
1992 70.2% $34.50
1993 79.2% $35.88
1994* 80.6% $36.39
--------------------------------------------------------------
<FN>
* ACTUAL JANUARY-OCTOBER, PROJECTED NOVEMBER AND DECEMBER
</TABLE>
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Arthur Andersen LLP - Real Estate Services Group 19
<PAGE>
The subject has had steady growth over the period of 1992 to 1993, and slow
growth from 1993 to 1994. The 1994 occupancy is approximately 1.8 percent
higher than the same period in 1993. Further, if we annualize the 1994
occupancy figure by assuming the 1994 actual occupancy figures for the months of
January through October and estimated November through December, the 1994
average occupancy would be approximately 81 percent, slightly higher than the
previous year. Taking into account the stable economic environment in Rock
Falls/Dixon, relatively little competition and the historical performance of the
competitive supply, we believe 81 percent stabilized occupancy beginning in
fiscal year 1995, and extending over the projection period is reasonable.
Average daily rate (ADR) has also grown steadily over the period of 1992 to
1994. Repeat commercial and group business has resulted in increased ADR.
Construction workers and migrant farm workers are the majority of repeat
business. We believe that a stabilized average daily rate of $37.50 for fiscal
year 1995 is reasonable. The rate is projected to grow 3 percent per year over
the ten year projection period. A growth rate of 3 percent is consistent with
the subject's past annual compounded ADR growth of 2.78 percent. It is also
supported by the Korpacz investor survey which indicates investors' growth
projections in the 3 to 5 percent range and the CB Commercial National Investor
Survey of 0 to 4 percent.
Limited service motels along interstate 88 around Rock Falls/Dixon that offer
few amenities and have low published rates have high occupancies. Two of these
hotels surveyed, the subject and the Super 8 Motel Dixon, reported occupancies
of 80 percent and ADRs below $40.00 with published rates below $40.00. This
indicates that the area's motel market attracts the cost conscious traveler and
is ideal for the limited service motel.
<TABLE>
<CAPTION>
------------------------------------------------------------------
Projected Occupancy and Average Daily Rate
------------------------------------------------------------------
Year Beginning ADR Growth Average Daily
August 1, 1994 Rate Rate Occupancy
-------------- ---------- -------------- ---------
<S> <C> <C> <C>
1995 3% $37.50 81%
------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 20
<PAGE>
HIGHEST AND BEST USE
The uses to which a property can be put affect its value. This is recognized by
the concept of highest and best use, generally understood to mean:
THE REASONABLY PROBABLE AND LEGAL USE OF VACANT LAND OR AN IMPROVED
PROPERTY, WHICH IS PHYSICALLY POSSIBLE, APPROPRIATELY SUPPORTED,
FINANCIALLY FEASIBLE AND RESULTS IN THE HIGHEST VALUE.
The highest and best use of the land as if vacant and available for use may be
different from the highest and best use of the improved property. This is true
when the improvement is not an appropriate use, but makes a contribution to the
total property value in excess of the value of the site. Thus, in arriving at
our opinion of the highest and best use, we first analyzed the property as
though the land were vacant and then analyzed it as improved. In both
instances, the conclusion of highest and best use must be determined by
examining the physically possible, legally permissible, financially feasible and
maximally productive uses of the site.
AS VACANT
PHYSICALLY POSSIBLE - The physical aspects of the site such as size, shape, and
topography impose the first constraints on the possible use of the property.
The site is level, rectangular in shape, has good visibility and all normal
utilities are available. No physical characteristics were observed that would
impose constraints on the site's development. Given the characteristics of the
site and the surrounding land uses, possible uses would include a wide range of
commercial uses.
LEGALLY PERMISSIBLE - Legal restrictions, as they apply, include the public
restrictions of zoning. The property is zoned B-1. Permitted uses include any
retail business, personal or business service establishment or wholesale
business.
FINANCIALLY FEASIBLE AND MAXIMALLY PRODUCTIVE - The subject is located on 1st
Avenue, a main commercial thoroughfare that runs through Rock Falls and connects
to the highway system. It is clearly visible from 1st Avenue and is easily
accessed from the southbound traffic. As described in the neighborhood section,
most surrounding uses are service stations, fast food restaurants, sit down
restaurants, automotive and retail stores that cater to the automobile traffic.
All adjacent sites along 1st Avenue are zoned B-1. The traffic along 1st Avenue
and the surrounding service commercial uses would support improvement with a
variety of commercial uses.
CONCLUSION - We believe the highest and best use of the site as though vacant,
as of December 1, 1994, would be commercial.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 21
<PAGE>
AS IMPROVED
PHYSICALLY POSSIBLE - The overall property is in good condition and is well-
suited to its current use.
LEGALLY PERMISSIBLE - The zoning of the property permits the existing commercial
use.
FINANCIALLY FEASIBLE AND MAXIMALLY PRODUCTIVE - We compared the estimated value
of the property as improved to its estimated net value as a vacant site. The
comparable sales we examined in considering land value (shown later) indicate
that the site as vacant is worth less than the property as improved. Even
though the current motel market is adequately supplied and no additional rooms
are expected to be added in the near term, it would not be economically feasible
to demolish the existing improvements. Given the layout, interior design and
apparent level of demand for the existing improvements, it is our opinion that
the only financially feasible and maximally productive use of the property is
its current use.
CONCLUSION - We have concluded that the highest and best use of the property, as
improved, as of December 1, 1994, is its current use.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 22
<PAGE>
VALUATION
Three approaches are generally used to estimate value: the cost, sales
comparison and income capitalization approaches. Each approach assumes
valuation of the property at its highest and best use. These approaches are
more fully discussed on the following pages.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 23
<PAGE>
LAND VALUE ADJUSTMENT GRID
SUPER 8 MOTEL, ROCK FALLS, IL
DECEMBER 1, 1994
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
SUBJECT SALE NO. 1 SALE NO. 2 SALE NO. 3 Current Listing
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Location 2100 1st Ave Hwy 30 & 12th Ave 110 E. Lynn Blvd 3208 E. Lincolnway 2100 block of 1st Avenue
City, State Rock Falls, IL Rock Falls, IL Sterling, IL Sterling, IL Rock Falls, IL
Size (sq ft) 106,567 43,560 72,310 632,056 261,360
Sale Price ---- $45,000 $60,000 $700,000 $360,000
Sales Price per sq ft ---- $1.03 $0.83 $1.11 $1.38
--------------------------------------------------------------------------------------------------------
Adjustments
--------------------------------------------------------------------------------------------------------
Property Rights Conveyed Fee Simple Fee Simple = Fee Simple = Fee Simple = Fee Simple =
Adjusted Unit Sales Price ---- $1.03 $0.83 $1.11 $1.38
Financing Terms Market Cash = Cash = Cash = Cash =
Adjusted Unit Sales Price ---- $1.03 $0.83 $1.11 $1.38
Conditions of Sale Normal Normal = Normal = razed buildings + Normal =
Adjusted Unit Sales Price ---- $1.03 $0.83 $1.16 $1.38
Market Conditions Oct-94 = Mar-92 + Mar-90 + Current Listing -
Adjusted Unit Sales Price ---- $1.03 $0.87 $1.22 $0.96
--------------------------------------------------------------------------------------------------------
Location/Physical
Adjustments --------------------------------------------------------------------------------------------------------
Location 2100 1st Ave Hwy 30 & 12th Ave + 110 E. Lynn 3208 E. 2100 block of
Blvd + Lincolnway - 1st Avenue =
Size (sq ft) 106,567 43,560 - 72,310 - 632,056 + 261,360 +
Access/Frontage Interior/Good Interior/Good = Interior/Good = Interior/Good = Interior/Good =
Zoning/Use B-1 B-1 = B-11 + B-3 = B-1 =
Topography/Shape Level/Rectagular Level/Rectagular = Level/ Level/Rectagular = Level/Rectagular =
Rectagular =
--------------------------------------------------------------------------------------------------------
Total Location/Physical
Adjustments = + - +
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Adjusted Price/Sq. Ft. $1.00 $1.00 $1.10 $1.10
--------------------------------------------------------------------------------------------------------
Minimum Adjusted Price: $1.00
Maximum Adjusted Price: $1.10
Mean Adjusted Price: $1.05
Concluded Price/Sq.Ft.: $1.05
Concluded Land Value: $111,895
Rounded: $112,000
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 24
<PAGE>
COST APPROACH
The cost approach is based upon the principle of substitution which states that
no rational buyer will pay more for a property than the amount for which he can
obtain a comparable site and construct improvements of equal desirability and
utility, assuming no undue delay.
This approach involves the application of several basic steps. First, the value
of the land as if vacant is estimated. Second, the current cost of replacing
the improvements is estimated. Third, an entrepreneurial profit sufficient to
attract a developer to undertake the risk associated with the project is
estimated. Fourth, accrued depreciation is estimated and deducted from the cost
new estimate (inclusive of profit) to arrive at a contributory value of the
improvements. In the fifth step, the land value is added to the contributory
value of the improvements to arrive at a value of the real estate. Finally, we
add amounts for personal property and for intangible business value.
SITE VALUATION
In estimating the value of the site as if vacant, the sales comparison approach
is used. In this approach, value is estimated by comparing the subject site to
similar properties that have been sold recently or are currently being offered
on the market for sale. We have consulted local brokers, appraisers and data
bases for recent sales of comparable properties within the subject area.
Principals and/or the broker handling the sale were then contacted to obtain
further information on the properties and transactions. The available market
data was investigated, analyzed and compared to the subject.
In estimating the value of the site, price per square foot was used since local
investors and brokers typically rely upon this method of analysis. The table on
the facing page summarizes pertinent details of the sales and the adjustments
made. Following is a brief description of the adjustments by relevant
characteristics. Details of each sale are located in the Addenda.
The sales used ranged in date from March 1990 to October 1994, in size from
43,560 to 632,056 square feet and have unadjusted sales prices from $0.83 to
$1.38 per square foot. One current listing was included.
PROPERTY RIGHTS CONVEYED - All sales were reportedly fee simple transfers.
FINANCING TERMS - All sales were reportedly cash transactions or financed at
terms equivalent to cash.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 25
<PAGE>
CONDITIONS OF SALE - Sale 3 had a house and barn on the site. A positive
adjustment was required to reflect the lower purchase price because of the
demolition costs incurred by the buyer.
MARKET CONDITIONS - Sales 2 and 3 occurred between 1990 and 1992. Land values
at the time had decreased from previous years with the downturn in the real
estate industry. Prices have risen slightly since then. Therefore, positive
adjustments were required. The listing required a downward adjustment to
compensate for the inflated asking price which is typical of a listing, and
because no offers have been made for the site.
LOCATION - Sale 1 is located in an older section of Rock Falls, farther from
interstate 88. Sale 2 is located on the north side of Sterling, far from the
interstate, with a large amount of available land in close proximity. Thus the
location of sales 1 and 2 are less desirable than the subject, requiring an
upward adjustment. Sale 3 is located along a high traffic commercial strip and
thus required a downward adjustment.
SIZE - The larger the size of a property, the lower the per unit price, and vice
versa, assuming all other variables are constant. Sales 1 and 2 were smaller
than the subject and negative adjustments were necessary. Sales 3 and 4 were
larger and required a positive adjustment.
ACCESS/FRONTAGE - We considered the significance and degree of road frontage,
exposure, traffic and general activity in estimating the appropriate adjustment.
The sales are similar to the subject, requiring no adjustments.
ZONING/USE - The zoning classification of a site can limit legally permitted
uses on the site which can directly affect the value of the site. Since sale 2
is located in a more restrictive zoning district than the subject, a positive
adjustment was necessary.
SHAPE/TOPOGRAPHY - All sales were basically level and similar in shape. No
adjustments were necessary.
The adjusted sales prices range from $1.00 to $1.10 per square foot, with an
average adjusted price of $1.05 per square foot. Based on our analysis, it is
our opinion that the market value of the site as if vacant, as of December 1,
1994, is $1.05 per square foot, or as follows:
106,567 square feet x $1.05/square foot = $111,895
Rounded: $112,000
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 26
<PAGE>
COST APPROACH SUMMARY
SUPER 8 MOTEL, ROCK FALLS, IL
DECEMBER 1, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Estimated Replacement Cost of the Improvements $1,388,248
Less: Physical Deterioration 20% (277,650)
-----------
Estimated Replacement Cost less Physical Deterioration $1,110,598
Less: Functional Obsolescence 0% 0
--
External Obsolescence 0% 0
Total Depreciated Replacement Cost of Improvements $1,110,598
Plus: Depreciated Value of Site Improvements 50,000
Land Value 112,000
----------
Total Depreciated Value of Real Estate $1,272,598
Plus: Personal Property 224,000
----------
Value Estimate via the Cost Approach $1,496,598
(NOT INCLUDING INTANGIBLE BUSINESS VALUE) Rounded $1,500,000
To this we must add an allowance for Intangible Business Value. This is estimated
based on the difference between the income and cost approaches as follows:
Income Capitalization Approach Conclusion $2,370,000
Less: Cost Approach Conclusion 1,500,000
----------
Intangible Business Value $870,000
Total Value Estimate via the Cost Approach $2,370,000
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
The following figures are from the HVS Hotel Development Cost Survey. These
costs include pre-opening marketing and operating costs and the initial
franchise fee. They do not include a componant for goodwill which created
through a proven business operation above and beyond the initial costs.
<TABLE>
<CAPTION>
Low High Avg
--- ---- ---
<S> <C> <C> <C>
Intangible Business Value/Room -- (Economy/Standard) $2,864 $8,004 $5,272
# of Rooms 63 63 63
-- -- --
Total Intangible Business Value Range $180,407 $504,242 $332,132
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 27
<PAGE>
VALUATION OF IMPROVEMENTS
The most accurate method of estimating replacement cost is to obtain bids from
contractors. In lieu of actually obtaining bids, we have estimated the
replacement cost new using MARSHALL VALUATION SERVICE manual published by
Marshall and Swift. A summary of the cost approach conclusions is located on
the facing page. Following is a brief explanation of each component.
ESTIMATE OF BUILDING REPLACEMENT COST
The Marshall Valuation Service calculator method, indicated a base construction
cost of $49.75 per square foot of gross area for a Class D average quality
construction hotel. After refining for HVAC, elevator, sprinkler, and floor
area-perimeter and then applying current cost and local area multipliers, a base
price of $54.22 per square foot was obtained. We added additional costs for the
front canopy and the lobby fireplace which totaled $14,250.
We then added an additional amount for soft costs not included in this figure.
These costs include professional fees, property taxes and carrying costs during
construction. The soft costs amounted to 6 percent of the total replacement
cost new of the improvement or $71,436.
ENTREPRENEURIAL PROFIT
Entrepreneurial profit is a necessary factor of production, without which a
project would not be created. The appropriate level of entrepreneurial profit
depends on the riskiness of the subject investment in relation to alternative
investments of similar risks available in the market. It is our opinion that
the appropriate level of entrepreneurial profit would be in the 5 percent to 15
percent range. We have selected 10 percent as an appropriate level for the
subject or $126,204. This results in the following calculation:
<TABLE>
<CAPTION>
<S> <C>
Adjusted Base Cost x Area $1,176,358
+ Additional costs 14,250
+ Soft Costs 71,436
----------
Total Development Costs $1,262,044
+ Entrepreneurial Profit 126,204
----------
Estimated RCN $1,388,248
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 28
<PAGE>
DEPRECIATION
PHYSICAL DETERIORATION - Physical deterioration encompasses wear and tear, which
is evident during the field inspection, and typical wear associated with a
building of this quality and use. We utilized the effective age-economic life
method which estimates depreciation by dividing the effective age by its
economic life. The actual age of the building is 9 years. Considering the
current condition of the improvements, the effective age of the improvements is
7 years. Based on a useful life of 35 years, we arrived at an estimate of
physical deterioration of 20 percent.
FUNCTIONAL OBSOLESCENCE - Functional obsolescence reflects impairment of
operational capacity or efficiency, or simply the inability of a facility to
perform adequately the function for which it is employed. In our opinion the
property does not suffer from functional obsolescence under the replacement cost
method.
EXTERNAL OBSOLESCENCE - External obsolescence is defined at the diminished
utility of a structure due to negative influences from outside the site. The
potential net income the property generates based on stabilized revenues and
expenses supports the current development costs of a property similar to the
subject less physical depreciation. Based on this analysis, the property does
not suffer from external obsolescence.
SITE IMPROVEMENTS
Site improvements consist primarily of asphalt paving, concrete sidewalks and
curbs, signage, light poles and parking lights, a shed, and landscaping. The
replacement cost of these items totals $94,000. The depreciated cost is
$50,000.
PERSONAL PROPERTY
The cost estimate for furniture, fixtures and equipment was based on an industry
standard for this type of property at $7,100 per room or $447,300. The
depreciated cost of the personal property totals $224,000.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 29
<PAGE>
INTANGIBLE BUSINESS VALUE
The property requires that certain expenditures be made to ensure the proper
operation and management of the hotel as a "going concern". For a new hotel,
these items include pre-opening marketing and operating costs and the initial
franchise fee. In addition to these costs is a component for goodwill which is
a value created through a proven business operation. Above and beyond the
initial costs, the intangible business value estimate is based on the difference
between the income and cost approaches. This estimate was then compared against
industry standards indicated by HVS.
Management has been satisfied with the past performance and support from the
Super 8 in terms of reservations and marketing. In addition, the property has
done very well compared to the average limited service motel. Thus, it is
reasonable to conclude there is intangible value related to the business. We
have calculated a business value of approximately $870,000. Details of this
analysis are located on the Cost Approach Summary in the beginning of this
section.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 30
<PAGE>
IMPROVED SALES ADJUSTMENT GRID
SUPER 8 MOTEL, ROCK FALLS, IL
DECEMBER 1, 1994
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
SUBJECT SALE NO. 1 SALE NO. 2
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Property Name Super 8 Motel Holiday Inn Express Hampton Inn
Location 2100 1st Avenue 11111 W. North Ave. 13330 S. Cicero Ave.
City, State Rock Falls, IL Wauwatosa, WI Crestwood, IL
Sale Price ---- $5,510,000 $3,575,000
Sale Price/Room ---- $45,164 $29,065
Adjustments
------------------------------------------------------------------------------------------------
Property Rights Conveyed Fee Simple Fee Simple = Fee Simple =
Adjusted Unit Sales Price $45,164 $29,065
Financing Terms Normal Market = Market =
Adjusted Unit Sales Price $45,164 $29,065
Conditions of Sale Normal Normal = Normal =
Adjusted Unit Sales Price $45,164 $29,065
Market Conditions Dec-94 Jun-94 = Jan-94 +
Adjusted Unit Sales Price $45,164 $30,518
------------------------------------------------------------------------------------------------
Location/Physical Adjustments
Location Highway Highway - Highway -
Number of Rooms 63 122 + 123 +
Age/Condition 1985/Good 1985/Good = 1990/Good =
Quality of Construction Average Average = Average =
Amenities Limited Limited = Limited =
Occupancy 81% 75% = 75% =
------------------------------------------------------------------------------------------------
Total Location/Physical Adjustments - +
------------------------------------------------
Adjusted Price/Room $36,100 $32,000
------------------------------------------------
<CAPTION>
------------------------------------------------------------------
SALE NO. 3 SALE NO. 4
------------------------------------------------------------------
<S> <C> <C>
------------------------------------------------------------------
Property Name Knights Inn Knights Inn
Location 4110 State Road 26 East 7313 Kingsgate Way
City, State Lafayette, IN Michigan City, IN
Sale Price $2,500,000 $2,369,000
Sale Price/Room $22,321 $22,779
Adjustments
------------------------------------------------------------------
Property Rights Conveyed Fee Simple = Fee Simple =
Adjusted Unit Sales Price $22,321 $22,779
Financing Terms Market = Market =
Adjusted Unit Sales Price $22,321 $22,779
Conditions of Sale Normal = Normal =
Adjusted Unit Sales Price $22,321 $22,779
Market Conditions Apr-91 + Apr-91 +
Adjusted Unit Sales Price $27,902 $28,474
------------------------------------------------------------------
------------------------------------------------------------------
Location/Physical Adjustments
Location Highway = Highway -
Number of Rooms 112 + 104 +
Age/Condition 1987/Good = 1986/Good =
Quality of Construction Average = Average =
Amenities Limited = Limited =
Occupancy 69% + 70% +
Total Location/Physical Adjustments + +
------------------------------------------------------------------
Adjusted Price/Room $32,100 $31,300
------------------------------------------------------------------
Minimum Adjusted Price: $31,300
Maximum Adjusted Price: $36,100
Mean Adjusted Price: $32,875
Concluded Price/Room $34,000
Concluded Value: $2,142,000
Rounded: $2,140,000
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 31
<PAGE>
SALES COMPARISON APPROACH
The sales comparison approach is based upon the principle of substitution, which
assumes that a prudent buyer will not pay more for a property than it would cost
to purchase an equally desirable property, assuming no costly delay in making
that substitution. The reliability of this approach is dependent upon there
being an adequate volume of comparable sale data. In addition, the comparable
sales must be "arm's length" and there must be no unusual conditions affecting
the price paid. We conducted a search through real estate brokers, appraisers,
and county records in order to determine what transactions had occurred over the
past few years.
We collected data on 4 recent sales that were considered similar to the
property. The unit of comparison used is price per room, chosen because it is
standard for this type of property and generally gives reliable results. Prior
to adjustment for differences due to market conditions, age/condition, etc., the
sales ranged in price from $22,321 to $45,164 per room.
The table on the facing page summarizes the sales and the adjustments made.
Following is a brief description of the adjustments by relevant characteristics.
Details of each sale are located in the Addenda. We attempted to verify the
terms of each sale with the buyer, seller, broker or local reliable appraisers.
We assumed normal conditions unless we were informed otherwise in terms of
financing terms and conditions of sale.
PROPERTY RIGHTS CONVEYED - All sales were reportedly fee simple transfers.
FINANCING TERMS - All sales were market transactions, requiring no adjustments.
CONDITIONS OF SALE - All sales occurred under normal conditions of sale.
MARKET CONDITIONS - As discussed in the Market Study section the national hotel
industry has recently been showing signs of recovery. A large number of
individual and institutional investors have entered the market, increasing the
number of sales and driving prices upward. Sales 2, 3, and 4 occurred between
1991 and early 1994 during a low period in the hotel industry. Positive
adjustments were necessary.
LOCATION - Sale 1 is located in an upscale Milwaukee suburb, Sale 2 is located
in a Chicago suburb, and Sale 4 is located in a resort area. Thus Sales 1, 2,
and 4 were in more desirable areas. Negative adjustments were necessary.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 32
<PAGE>
NUMBER OF ROOMS - Typically hotel properties with more rooms sell for less per
unit than properties with fewer units. All of the sales had nearly twice the
number of rooms than the subject and positive adjustments were necessary.
AGE/CONDITION - All sales were of a similar age/condition, requiring no
adjustments.
QUALITY OF CONSTRUCTION - The construction quality of the sales are similar to
that of the subject. Therefore, no adjustment was made.
AMENITIES - All the sales were limited service requiring no adjustments.
OCCUPANCY - Sale 3 had a lower occupancy at the time of sale than the subject
and a positive adjustment was necessary.
SUMMARY OF THE SALES COMPARISON APPROACH
After adjustments, the sales ranged in value from $31,300 to $36,100 per room.
We placed the most emphasis on Sales 1 and 2 because of the recent upturn in the
hotel market. Based on our analysis, it is our opinion that the market value of
the subject property based on the sales comparison approach, as of December 1,
1994 is as follows:
63 rooms x $34,000 per room = $2,142,500
Rounded: $2,140,000
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 33
<PAGE>
INCOME CAPITALIZATION APPROACH
The Income Capitalization Approach is based on the premise that value is created
by the expectation of future benefits. We estimated the present value of those
benefits to derive an indication of the amount that a prudent, informed
purchaser-investor would pay for the right to receive them as of the valuation
date.
This approach requires an estimation of the net operating income of a property.
The estimated net operating income is then converted to a value indication by
use of the Direct Capitalization Method and/or the Discounted Cash Flow Method.
The direct capitalization method estimates the value of the subject property by
dividing the net income for a typical year by an overall capitalization rate
that is based on an analysis of the relationship between income and sales prices
achieved from recent sales of properties similar to the subject and investor
surveys. The direct capitalization method is most reliable when the income and
expenses maintain a basic level of stability.
The discounted cash flow method estimates the value of the property by
discounting the projected income stream over the holding period and the
estimated reversionary value of the property at the end of the period, to a
present value as of the date of valuation.
ESTIMATE OF PROJECTED REVENUE AND EXPENSES FOR HOLDING PERIOD - The first step
involves projecting the income and expenses for the subject property over a
projected holding period plus an additional year for purposes of estimating a
reversion value. In our analysis, we project the property's income for a period
of 10 years. The income for each of these years is estimated by projecting the
actual occupancy and average daily room rate that will be achieved given
foreseeable market conditions and normal management policies necessary to
establish the market position of the property. Variances in occupancy and room
rate are frequently caused by factors such as: the marketing time necessary to
establish the presence of the subject property through advertising and repeat
business; discounted room rates lower than room rates otherwise supportable to
assist the initial marketing effort; temporary imbalance in local supply and
demand characteristics that may lead to occupancies that are either higher or
lower than those expected on a stabilized basis; and/or the entrance of new,
competitive hotels, or the removal of older economically obsolete properties
from the competitive supply. Expenses in some years of the projection period
can vary from those in the typical year due to such factors as: higher initial
administrative and general expenses because of the establishment of new
ownership, new operating policies and training of new staff; higher marketing
costs than normal to assist the initial marketing effort or meeting the effect
of new competition; and variable property operating and maintenance expenses
dependent on the age of the improvements.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 34
<PAGE>
VALUATION OF THE ESTIMATED INCOME - The projected income stream reflects
foreseeable market conditions that may cause the projected income stream to be
greater than or less than a stabilized income stream. In addition to changes in
market conditions that may impact the occupancy rate, the discounted cash flow
method also considers the impact of inflation and appreciation on the expected
room rates and operating expenses. The reversion value is estimated by
capitalizing the last year of income by an appropriate overall rate to reflect
an assumed sale of the property to another buyer at that time. The resulting
cash flows and reversion value are discounted to an indication of value as of
the date of valuation at a discount rate that reflects the durability, timing
and riskiness of the cash flow stream in light of alternative investments
currently available to investors.
CONCLUSION - The final step in this approach is to reconcile the conclusions of
value reached by the direct capitalization and discounted cash flow methods.
MARKET AND SUBJECT OPERATING TRENDS
Our estimates of future operating results are primarily based on historical
trends of the subject property and statistical data from THE HOST REPORT
published by Arthur Andersen and Smith Travel Research, a publication providing
operating results of full service hotels, limited service hotels and all suite
hotels. The survey breaks these categories down further by various groupings.
We have considered the following categories for comparison of ratios to total
revenues from the limited service section of the Host Report.
* Chain Affiliated
* East North Central
* Under 75 rooms
* 1981-1986 construction
* Highway
We have compared the January through October actual 1994 operating statements
and November and December 1994 budget to THE HOST REPORT data as well as the
property's actual operating history from 1992 to 1993. THE HOST REPORT data and
a schedule of the property's operating history are located on the following
page.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 35
<PAGE>
1993 HOST REPORT -- OPERATING RATIOS
(RATIO TO TOTAL REVENUES)
SUPER 8 MOTEL, ROCK FALLS, IL
LIMITED - SERVICE
<TABLE>
<CAPTION>
Under
Chain East North Central 75 Rooms 1981-1986 Highway
----- ------------------ -------- --------- -------
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Occupancy 69.9% 68.3% 65.4% 69.7% 66.7%
Average Daily Rate $50.12 $50.39 $43.38 $49.82 $45.16
------------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
------------------------------------------------------------------------------
Rooms 94.7% 95.2% 96.3% 94.5% 94.7%
Telephone 2.0% 2.3% 2.2% 1.6% 1.8%
Minor Operated Depts. 1.1% 1.5% 0.6% 1.0% 0.9%
Rentals and Other 2.2% 0.9% 0.9% 3.0% 2.6%
------ ------ ------ ------ ------
TOTAL REVENUE 100.0% 100.0% 100.0% 100.0% 100.0%
------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
------------------------------------------------------------------------------
Rooms 28.6% 26.5% 26.6% 29.4% 29.6%
Telephone 70.4% 69.5% 126.5% 65.1% 84.2%
Other Departmental Exp. 0.7% 0.4% 0.2% 0.8% 0.5%
------ ------ ------ ------ ------
TOTAL DEPT. EXPENSES 29.2% 27.3% 28.6% 29.6% 30.1%
------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
------------------------------------------------------------------------------
Rooms 71.4% 73.5% 73.5% 70.6% 70.4%
Telephone 29.6% 30.5% -26.5% 34.9% 15.9%
Other Departmental Profit 2.6% 2.0% 1.3% 3.2% 3.0%
------ ------ ------ ------ ------
GROSS OPER INCOME 70.8% 72.7% 71.4% 70.4% 69.9%
------------------------------------------------------------------------------
LESS GENERAL OPER EXPENSES
------------------------------------------------------------------------------
Admin & General 10.0% 10.5% 10.0% 9.5% 10.1%
Marketing 4.7% 4.9% 3.1% 4.7% 4.0%
Franchise Fees 2.3% 2.6% 3.6% 1.8% 2.0%
Heat Light & Power 5.5% 5.3% 7.2% 5.0% 6.0%
Repairs & Maint. 4.8% 4.8% 6.0% 4.4% 5.0%
------ ------ ------ ------ ------
TOTAL OPER EXPENSES 27.4% 28.0% 29.8% 25.5% 27.2%
------------------------------------------------------------------------------
------------------------------------------------------------------------------
HOUSE PROFIT 43.4% 44.7% 41.6% 44.9% 42.7%
------------------------------------------------------------------------------
LESS OTHER EXPENSES
------------------------------------------------------------------------------
Management Fee 3.8% 3.3% 3.6% 4.4% 3.8%
Property Taxes 4.3% 5.2% 3.5% 4.2% 3.9%
Insurance 1.3% 1.1% 1.5% 1.3% 1.4%
Leases 0.3% 0.7% 0.6% 0.2% 2.0%
------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 36
<PAGE>
OPERATING RESULTS -- HISTORICAL AND FORECASTED
SUPER 8 MOTEL, ROCK FALLS, IL
<TABLE>
<CAPTION>
% of
Actual % Of Actual Total % Annualized Total %
YEAR 1992 Tot. Rev. 1993 Rev. Change 1994 Rev. Change
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------
Occupancy 70.2% 79.2% 12.9% 80.6% 1.8%
Average Daily Rate $34.50 $35.88 4.0% $36.39 1.4%
# Rooms Occupied 16,141 18,218 12.9% 18,545 1.8%
# Rooms Available 22,995 22,995 0.0% 22,995 0.0%
--------------------------------------------------------------------------------------------------------
DEPARTMENTAL REVENUE
---------------------------------------------------------------------------------------------------------
Rooms 556,938 96.6% 653,731 94.4% 17.4% 674,985 94.2% 3.3%
Telephone 11,817 2.1% 19,641 2.8% 66.2% 23,475 3.3% 19.5%
Other 7,502 1.3% 19,210 2.8% 156.1% 18,259 2.5% -5.0%
--------------------------------------------------------------------------------------------------------
TOTAL REVENUE 576,257 100.0% 692,582 100.0% 20.2% 716,719 100.0% 3.5%
--------------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
--------------------------------------------------------------------------------------------------------
Rooms 116,533 20.9% 129,945 19.9% 11.5% 145,358 21.5% 11.9%
Telephone 15,432 130.6% 13,612 69.3% -11.8% 13,039 55.5% -4.2%
Other 0 0.0% 0 0.0% 0.0% 0 0.0% 0.0%
--------------------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 131,965 22.9% 143,557 20.7% 8.8% 158,397 22.1% 10.3%
--------------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
--------------------------------------------------------------------------------------------------------
Rooms 440,405 79.1% 523,786 80.1% 18.9% 529,627 78.5% 1.1%
Telephone -3,615 -30.6% 6,029 30.7% 266.8% 10,4364 4.5% -73.1%
Other 7,502 100.0% 19,210 100.0% 156.1% 18,259 100.0% -5.0%
--------------------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 444,292 77.1% 549,025 79.3% 23.6% 558,322 77.9% 1.7%
--------------------------------------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
--------------------------------------------------------------------------------------------------------
Admin & General 102,275 17.7% 130,331 18.8% 27.4% 102,209 14.3% -21.6%
Marketing 7,355 1.3% 10,323 1.5% 40.4% 10,231 1.4% -0.9%
Energy Costs 30,721 5.3% 32,839 4.7% 6.9% 35,454 4.9% 8.0%
Repairs & Maint. 42,808 7.4% 30,534 4.4% -28.7% 40,297 5.6% 32.0%
--------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 183,159 31.8% 204,027 29.5% 11.4% 188,191 26.3% -7.8%
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
HOUSE PROFIT 261,133 45.3% 344,998 49.8% 32.1% 370,131 51.6% 7.3%
---------------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
---------------------------------------------------------------------------------------------------------
Management Fee 16,961 2.9% 34,070 4.9% 100.9% 34,955 4.9% 2.6%
Property Taxes 32,024 5.6% 35,725 5.2%1 1.6% 36,209 5.1% 1.4%
Insurance 9,708 1.7% 7,849 1.1% -19.1% 9,883 1.4% 25.9%
Leases 7,500 1.3% 1,2500 .2% -83.3% 0 0.0% -100.0%
--------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 66,193 11.5% 78,894 11.4% 16.1% 81,047 11.3% 2.7%
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
NET OPERATING INCOME 194,940 33.8% 266,104 38.4% 26.7% 289,084 40.3% 7.9%
--------------------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
---------------------------------------------------------------------------------------------------------
Reserves for Replacement 16,708 2.9% 20,442 3.0% 22.3% -15,085 -2.1% -173.8%
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
NET CASH FLOW 178,232 30.9% 245,662 35.5% 37.8% 304,169 42.4% 23.8%
---------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 37
<PAGE>
INCOME AND FORECAST ASSUMPTIONS
ROOMS DEPARTMENT - We have estimated room revenue using the occupancies and
average daily room rates concluded on page 18 in the market study section of
this report.
TELEPHONE REVENUE - This department is entirely driven by occupancy and guest
dollars. Historically telephone revenue equated to 2.1 to 3.3 of total revenue.
Based on past percentages and our discussions with the management we have
projected a stabilized 3.3 percent telephone revenue. Telephone revenue more
than doubled between 1992 and 1994, due to a 50 cent phone charge per night on
every occupied room and a $10 deposit required for guests who pay cash for their
room. According to the motel manager, a number of guests do not pick up the
deposit.
OTHER REVENUE - Other revenue comes from vending machines, Super 8 Dixon royalty
fees, and occasional sales of used furniture, fixtures, and equipment. The
subject has a protection clause in their franchise agreement which states that
no Super 8 Motel may be built within 20 miles. The Super 8 Dixon violates that
clause. The franchisor, Super 8 Motels Inc., is required to pay 1/2 of Super 8
Dixon's 4 Percent royalty fee to the subject. Past percentages of other revenue
varied from 1.3 to 2.8. With this in mind, we believe 2.5 percent is
reasonable.
EXPENSES ANALYSIS
In our forecast rooms and telephone expenses are expressed as a percent of their
respective gross revenue. "General Operating and "Other" expenses are expressed
as a percent of total revenue. In each case, we examined the historical ratios
and compared them to those reported in the HOST REPORT. The following only
highlights those expenses that required further discussion. The remaining,
departmental expenses, general operating expenses and other expenses were
considered reasonable and did not warrant further discussion.
ROOMS EXPENSE - Other expenses have been placed in this expense to remain
consistent with the subjects accounting system. Historically rooms expenses
have been lower than industry standards, ranging from 19.9 to 21.5 percent. We
feel that 21.5 percent is reasonable for the subject.
ADMINISTRATIVE AND GENERAL - This expense has historically been 14.3 to 18.8
percent which is high compared to the industry range of 9.5 to 10.5 percent.
However, this account includes the 4 percent franchise fee. We believe that
14.3 percent is reasonable.
MARKETING - Historically marketing expenses for the Super 8 have ranged from 1.3
to 1.5 percent of total revenue. The Host report indicates a marketing cost for
limited service hotels between 3.1 to 4.9 percent. According to the property
manager little to no marketing has been done. However, in 1995 the regional
manager will hire a college student to market the motel. As a result they
expect more effective marketing.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 38
<PAGE>
In light of this, we are projecting marketing expense at 2.5 percent of total
revenue for fiscal year 1995 and 3.5 percent thereafter. 3.5 percent was
applied in the cash flow.
REPAIRS AND MAINTENANCE - The Super 8 has undergone a few major repairs during
the past year. Therefore, management expects less expenses associated with
property repairs and maintenance. The Host report indicates a repairs and
maintenance ratio of 4.4 to 6.0 percent. In light of this, we project a repairs
and maintenance of 4.6 percent over the projection period.
MANAGEMENT FEE - According to our client, the properties will be charged a 3
percent management fee with a 10 percent incentive on cash flow. This equates
to an approximate 3.3 percent management fee. The Host Report indicates a range
in management fee, based on our identified categories, of 3.3 to 4.4 percent.
At the request of our client, we have applied a management fee of 3.3 percent
through our projection period.
PROPERTY TAXES - Included in the property tax expense are real estate taxes.
The taxes have been 5.1 to 5.6 percent, slightly higher than the Host report.
Based on a review of historical assessments, tax rates and taxes, we estimate
property taxes at 5.1 percent of total revenues in year 1 of our projection.
This expense is estimated to grow on average 3 percent per year.
INSURANCE - The insurance policy for the Super 8 is part of a blanket policy
that covers five hotels owned by Guy Hatfield. This expense consists of
business and property insurance. The insurance agent allocates a portion of the
total expense to each property. We were given the actual insurance expense
which equates to 1.4 percent of total revenue. This expense is projected to
grow at 4 percent per year.
RESERVES FOR REPLACEMENT - It is typical for properties to include a reserve in
their budget, for items which are expected to wear out and need repair or
replacement, prior to the end of the remaining economic life of the building.
After talking with the property manager on site, we were informed of items which
would be repaired or replaced within the near future. Per a summary from Emily
Gross of All American Group, LP, dated November 1994, some of the upcoming
renovations expected to be completed in 1995 include painting all the rooms and
recarpeting the floors. No cost estimates were provided with the summary,
however, since the property has maintained a reserve in the past this fund
should cover the upgrades. We have projected a continued reserve for
replacement at 3 percent of total revenue.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 39
<PAGE>
INCOME CAPITALIZATION APPROACH CONCLUSION
DIRECT CAPITALIZATION METHOD
SUPER 8 MOTEL, ROCK FALLS, IL
DECEMBER 1, 1994
<TABLE>
<CAPTION>
<S> <C>
Stabilized income
Fiscal year ending
November 30, 1995: $280,687
Overall Capitalization Rate: 11.50%
Capitalized Income: $2,440,755
Rounded to: $2,440,000
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 40
<PAGE>
DIRECT CAPITALIZATION METHOD
The projected stabilized cash flow is on the following page. In order to
estimate the value of the property by the Direct Capitalization Method, the
estimated stabilized cash flow must be capitalized with an overall
capitalization rate. This rate provides a rate of return of and on the
investment through the relationship of net operating income to a hotel's sale
price. We have consulted a hospitality investor survey published by Korpacz for
limited service overall capitalization rates, which indicated 12.44 percent and
CB Commercial which indicated 11.3 percent. In past years the desirability of
hotel investment has been low. In addition, the Whiteside County is driven by
one large and several medium-sized employers. This adds to the risk of an
investment. With market conditions improving nationwide, more investor interest
in hotel properties, and stability in the local market investors see some
potential for occupancy and ADR increases and many are purchasing hotels with
the expectation of renovation and reaffiliation. Based upon the above factors,
we have chosen an overall rate of 11.5 percent. The conclusion of this method
is on the facing page.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 41
<PAGE>
PROJECTED STABILIZED OPERATING RESULTS
FISCAL YEAR 1995
(DECEMBER 1, 1994 THROUGH NOVEMBER 30, 1995)
SUPER 8 MOTEL, ROCK FALLS, IL
<TABLE>
<CAPTION>
% % Change
Stabilized of Actual
YEAR FY 1995 Revenue CY 1994
- ---- ------------------------------------------
<S> <C> <C> <C>
Occupancy 81.0% 0.4%
Average Daily Rate $37.50 3.1%
Occupied Rooms 18,626 0.4%
Room-nights Available 22,995 0.0%
------------------------------------------
DEPARTMENTAL REVENUE:
------------------------------------------
Rooms 698,473 94.2% 3.5%
Telephone* 24,469 3.3% 4.2%
Other 18,537 2.5% 1.5%
------------------------------------------
TOTAL REVENUE 741,479 100.0% 3.5%
------------------------------------------
DEPARTMENTAL EXPENSES
------------------------------------------
Rooms 150,172 21.5% 3.3%
Telephone* 13,580 55.5% 4.2%
Other 0 0.0% 0.0%
------------------------------------------
TOTAL DEPT. EXPENSES 163,752 22.1% 3.4%
------------------------------------------
DEPARTMENTAL PROFIT
------------------------------------------
Rooms 548,301 78.5% 3.5%
Telephone* 10,889 44.5% 4.3%
Other 18,537 100.0% 1.5%
------------------------------------------
GROSS OPER INCOME 577,727 77.9% 3.5%
------------------------------------------
LESS GENERAL OPER EXPENSES
------------------------------------------
Admin & General 106,031 14.3% 3.7%
Marketing 25,952 3.5% 153.7%
Energy 36,332 4.9% 2.5%
Repairs & Maint. 34,108 4.6% -15.4%
------------------------------------------
TOTAL OPER EXPENSES 202,424 27.3% 7.6%
------------------------------------------
------------------------------------------
HOUSE PROFIT 375,303 50.6% 1.4%
------------------------------------------
LESS OTHER EXPENSES
------------------------------------------
Management Fee 24,469 3.3% -30.0%
Property Taxes 37,657 5.1% 4.0%
Insurance 10,246 1.4% 3.7%
Leases 0 0.0% 0.0%
------------------------------------------
TOTAL OTHER EXPENSES 72,372 9.8% -10.7%
------------------------------------------
------------------------------------------
NET OPERATING INCOME 302,931 40.9% 4.8%
------------------------------------------
LESS CAPITAL EXPENSES
------------------------------------------
Reserves for Replacement 22,244 3.0% 100.0%
------------------------------------------
------------------------------------------
NET CASH FLOW 280,687 37.9% -7.7%
------------------------------------------
<FN>
*Telephone revenue is 3.30% of total revenue.
Telephone expense is 55.5% of telephone revenue.
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 42
<PAGE>
PROJECTED CASH FLOW
SUPER 8 MOTEL, ROCK FALLS, IL
<TABLE>
<CAPTION>
Projected YE Projected YE Projected YE Projected YE
YEAR 11/30/95 % 11/30/96 % 11/30/97 % 11/30/98 %
- ---- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 81.0% 81.0% 81.0% 81.0%
Average Daily Rate $37.50 $38.63 $39.78 $40.98
Rooms Occupied 18,626 18,626 18,626 18,626
Room-Nights Available 22,995 22,995 22,995 22,995
-----------------------------------------------------------------------------------------------
ADR Growth Rate 3.00% 3.00% 3.00%
-----------------------------------------------------------------------
DEPARTMENTAL REVENUE:
-----------------------------------------------------------------------------------------------
Rooms 698,473 94.2% 719,427 94.2% 741,010 94.2% 763,240 94.2%
Telephone 24,469 3.3% 25,203 3.3% 25,959 3.3% 26,738 3.3%
Other 18,537 2.5% 19,093 2.5% 19,666 2.5% 20,256 2.5%
-----------------------------------------------------------------------------------------------
TOTAL REVENUE 741,479 100.0% 763,723 100.0% 786,635 100.0% 810,234 100.0%
-----------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
-----------------------------------------------------------------------------------------------
Rooms 150,172 21.5% 154,677 21.5% 159,317 21.5% 164,097 21.5%
Telephone 13,580 55.5% 13,9885 5.5% 14,407 55.5% 14,839 55.5%
Other 0 0.0% 0 0.0% 0 0.0% 0 0.0%
-----------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 163,752 22.1% 168,664 22.1% 173,724 22.1% 178,936 22.1%
-----------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
Rooms 548,301 78.5% 564,750 78.5% 581,693 78.5% 599,144 78.5%
Telephone 10,889 44.5% 11,215 44.5% 11,552 44.5% 11,898 44.5%
Other 18,537 100.0% 19,093 100.0% 19,666 100.0% 20,256 100.0%
-----------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 577,727 77.9% 595,059 77.9% 612,911 77.9% 631,298 77.9%
-----------------------------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
-----------------------------------------------------------------------------------------------
Admin & General 106,031 14.3% 109,212 14.3% 112,489 14.3% 115,863 14.3%
Marketing 18,537 2.5% 26,730 3.5% 27,532 3.5% 28,358 3.5%
Energy Costs 36,332 4.9% 37,422 4.9% 38,545 4.9% 39,701 4.9%
Repairs & Maint. 34,108 4.6% 35,131 4.6% 36,185 4.6% 37,271 4.6%
-----------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 195,009 26.3% 208,496 27.3% 214,751 27.3% 221,194 27.3%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
HOUSE PROFIT 382,718 51.6% 386,562 50.6% 398,159 50.6% 410,104 50.6%
-----------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
-----------------------------------------------------------------------------------------------
Management Fee 24,469 3.3% 25,203 3.3% 25,959 3.3% 26,738 3.3%
Property Taxes 37,657 5.1% 39,164 5.1% 40,730 5.2% 42,360 5.2%
Insurance 10,246 1.4% 10,656 1.4% 11,082 1.4% 11,525 1.4%
Leases 0 0.0% 0 0.0% 0 0.0% 0 0.0%
-----------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE 72,372 9.8% 75,022 9.8% 77,771 9.9% 80,622 10.0%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
NET OPERTING INCOME 310,346 41.9% 311,540 40.8% 320,388 40.7% 329,482 40.7%
-----------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
-----------------------------------------------------------------------------------------------
Reserves for Replacement 22,244 3.0% 22,912 3.0% 23,599 3.0% 24,307 3.0%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
NET CASH FLOW 288,102 38.9% 288,628 37.8% 296,789 37.7% 305,175 37.7%
-----------------------------------------------------------------------------------------------
<CAPTION>
Projected YE Projected YE Projected YE Projected YE
YEAR 11/30/99 % 11/30/00 % 11/30/01 % 11/30/02 %
- ---- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 81.0% 81.0% 81.0% 81.0%
Average Daily Rate $42.21 $43.47 $44.78 $46.12
Rooms Occupied 18,626 18,626 18,626 18,626
Room-Nights Available 22,995 22,995 22,995 22,995
-----------------------------------------------------------------------------------------------
ADR Growth Rate 3.00% 3.00% 3.00% 3.00%
-----------------------------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
-----------------------------------------------------------------------------------------------
Rooms 786,138 94.2% 809,722 94.2% 834,013 94.2% 859,034 94.2%
Telephone 27,540 3.3% 28,366 3.3% 29,217 3.3% 30,094 3.3%
Other 20,864 2.5% 21,489 2.5% 22,134 2.5% 22,798 2.5%
-----------------------------------------------------------------------------------------------
TOTAL REVENUE 834,541 100.0% 859,577 100.0% 885,365 100.0% 911,926 100.0%
-----------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
-----------------------------------------------------------------------------------------------
Rooms 169,020 21.5% 174,090 21.5% 179,313 21.5% 184,692 21.5%
Telephone 15,285 55.5% 15,7435 5.5% 16,2155 5.5% 16,702 55.5%
Other 0 0.0% 0 0.0% 0 0.0% 0 0.0%
-----------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 184,304 22.1% 189,833 22.1% 195,528 22.1% 201,394 22.1%
-----------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
-----------------------------------------------------------------------------------------------
Rooms 617,118 78.5% 635,632 78.5% 654,701 78.5% 674,342 78.5%
Telephone 12,255 44.5% 12,623 44.5% 13,002 44.5% 13,392 44.5%
Other 20,864 100.0% 21,489 100.0% 22,134 100.0% 22,798 100.0%
-----------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 650,237 77.9% 669,744 77.9% 689,836 77.9% 710,531 77.9%
-----------------------------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
-----------------------------------------------------------------------------------------------
Admin & General 119,339 14.3% 122,920 14.3% 126,607 14.3% 130,405 14.3%
Marketing 29,209 3.5% 30,085 3.5% 30,988 3.5% 31,917 3.5%
Energy Costs 40,893 4.9% 42,119 4.9% 43,383 4.9% 44,684 4.9%
Repairs & Maint. 38,389 4.6% 39,541 4.6% 40,727 4.6% 41,949 4.6%
-----------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 227,830 27.3% 234,665 27.3% 241,705 27.3% 248,956 27.3%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
HOUSE PROFIT 422,407 50.6% 435,079 50.6% 448,132 50.6% 461,576 50.6%
-----------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
-----------------------------------------------------------------------------------------------
Management Fee 27,540 3.3% 28,366 3.3% 29,217 3.3% 30,094 3.3%
Property Taxes 44,054 5.3% 45,816 5.3% 47,649 5.4% 49,555 5.4%
Insurance 11,986 1.4% 12,466 1.5% 12,964 1.5% 13,483 1.5%
Leases 0 0.0% 0 0.0% 0 0.0% 0 0.0%
-----------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE 83,580 10.0% 86,648 10.1% 89,830 10.1% 93,131 10.2%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
NET OPERTING INCOME 338,827 40.6% 348,432 40.5% 358,302 40.5% 368,445 40.4%
-----------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
-----------------------------------------------------------------------------------------------
Reserves for Replacement 25,036 3.0% 25,787 3.0% 26,561 3.0% 27,358 3.0%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
NET CASH FLOW 313,791 37.6% 322,644 37.5% 331,741 37.5% 341,087 37.4%
-----------------------------------------------------------------------------------------------
<CAPTION>
Projected YE Projected YE Projected YE
YEAR 11/30/03 % 11/30/04 % 11/30/05 %
- ---- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 81.0% 81.0% 81.0%
Average Daily Rate $47.50 $48.93 $50.40
Rooms Occupied 18,626 18,626 18,626
Room-Nights Available 22,995 22,995 22,995
-----------------------------------------------------------------------
ADR Growth Rate 3.00% 3.00% 3.00%
-----------------------------------------------------------------------
DEPARTMENTAL REVENUE:
-----------------------------------------------------------------------
Rooms 884,805 94.2% 911,349 94.2% 938,689 94.2%
Telephone 30,996 3.3% 31,926 3.3% 32,884 3.3%
Other 23,482 2.5% 24,187 2.5% 24,912 2.5%
-----------------------------------------------------------------------
TOTAL REVENUE 939,283 100.0% 967,462 100.0% 996,486 100.0%
-----------------------------------------------------------------------
DEPARTMENTAL EXPENSES
-----------------------------------------------------------------------
Rooms 190,233 21.5% 195,940 21.5% 201,818 21.5%
Telephone 17,203 55.5% 17,719 55.5% 18,251 55.5%
Other 0 0.0% 0 0.0% 0 0.0%
-----------------------------------------------------------------------
TOTAL DEPT. EXPENSES 207,436 22.1% 213,659 22.1% 220,069 22.1%
-----------------------------------------------------------------------
DEPARTMENTAL PROFIT
-----------------------------------------------------------------------
Rooms 694,572 78.5% 715,409 78.5% 736,871 78.5%
Telephone 13,793 44.5% 14,207 44.5% 14,633 44.5%
Other 23,482 100.0% 24,187 100.0% 24,912 100.0%
-----------------------------------------------------------------------
GROSS OPERATING INCOME 731,847 77.9% 753,803 77.9% 776,417 77.9%
-----------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
-----------------------------------------------------------------------
Admin & General 134,318 14.3% 138,347 14.3% 142,497 14.3%
Marketing 32,875 3.5% 33,861 3.5% 34,877 3.5%
Energy Costs 46,025 4.9% 47,406 4.9% 48,828 4.9%
Repairs & Maint. 43,207 4.6% 44,503 4.6% 45,838 4.6%
-----------------------------------------------------------------------
TOTAL OPERATING EXPENSES 256,424 27.3% 264,117 27.3% 272,041 27.3%
-----------------------------------------------------------------------
-----------------------------------------------------------------------
HOUSE PROFIT 475,423 50.6% 489,686 50.6% 504,376 50.6%
-----------------------------------------------------------------------
LESS OTHER EXPENSES
-----------------------------------------------------------------------
Management Fee 30,996 3.3% 31,926 3.3% 32,884 3.3%
Property Taxes 51,537 5.5% 53,598 5.5% 55,742 5.6%
Insurance 14,022 1.5% 14,583 1.5% 15,166 1.5%
Leases 0 0.0% 0 0.0% 0 0.0%
-----------------------------------------------------------------------
TOTAL OTHER EXPENSE 96,555 10.3% 100,108 10.3% 103,793 10.4%
-----------------------------------------------------------------------
-----------------------------------------------------------------------
NET OPERTING INCOME 378,868 40.3% 389,578 40.3% 400,584 40.2%
-----------------------------------------------------------------------
LESS CAPITAL EXPENSES
-----------------------------------------------------------------------
Reserves for Replacement 28,178 3.0% 29,024 3.0% 29,895 3.0%
-----------------------------------------------------------------------
-----------------------------------------------------------------------
NET CASH FLOW 350,689 37.3% 360,554 37.3% 370,689 37.2%
-----------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 43
<PAGE>
DISCOUNTED CASH FLOW METHOD
The projected cash flow for the property is presented on the facing page. In
order to complete the valuation of the property using the Discounted Cash Flow
Approach, we present our analysis of an appropriate discount rate and
capitalization rate, calculate the reversion value of the property at the end of
the holding period, and present the conclusions of value.
REVERSION CAPITALIZATION RATE - Terminal capitalization rates are typically
higher than "going-in" capitalization rates due to the risk associated with the
passage of time and uncertainty into the future. The following table summarizes
terminal capitalization rate ranges for limited service hotels as indicated by
two investor surveys.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Summary Of Terminal Capitalization Rate Ranges
-----------------------------------------------------------------------------------------
Publication Publication Date Low High Average
----------- ---------------- --- ---- -------
<S> <C> <C> <C> <C>
CB Commercial Investor Survey 2nd Qtr 1994 10.00% 14.00% 12.00%
Korpacz Investor Survey 2nd Qtr 1994 10.00% 16.00% 12.54%
-----------------------------------------------------------------------------------------
</TABLE>
After considering the future risks of operations in a property similar to the
subject, such as the property's age and condition, we have concluded with a
terminal capitalization rate of 12 percent. This rate will be used to
capitalize the 11th year income estimate into a reversionary value for the
subject property.
DISCOUNT RATE - Discount rates vary according to investor requirements, investor
motivations, property characteristics, and market conditions. For this reason
we reviewed various interest rates as follows:
<TABLE>
<CAPTION>
<S> <C>
T-Notes - 10 year 8.20%
Corporate Bonds - High Quality 8.23%
Corporate Bonds - Medium Quality 8.53%
Conventional Fixed Rate Mortgage 8.15%
Prime Rate 8.50%
Source: Wall Street Journal - December 1, 1994
</TABLE>
While interest rates have decreased overall in the last few years before 1994,
the trend has been edging upwards again. Investors in real estate recognize
that real estate is a risky investment and are demanding higher risk premiums.
According to the Korpacz Investor Survey, some investors are shifting away from
the economy/limited service market due to the lack of existing quality assets.
These investors believe the most economical route and one in which they can
achieve a greater return is new development. However, the chain-affiliated
properties are still the most popular and with REITs entering the investor pool
demand is still significant. Consequently, the required rate of return for real
estate is still high. The following national organizations periodically survey
real estate investors for discount rate information.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 44
<PAGE>
INCOME CAPITALIZATION APPROACH CONCLUSION
DISCOUNTED CASH FLOW METHOD
SUPER 8 MOTEL, ROCK FALLS, IL
DECEMBER 1, 1994
<TABLE>
<CAPTION>
Discount Rate: 15.00%
Terminal Capitalization Rate: 12.00%
Sales cost: 3.00%
---------------------------------------------------------------------------------------
Fiscal Year (August 15 through August 14) 1995 1996 1997 1998 1999 2000
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income $288,102 $288,628 $296,789 $305,175 $313,791 $322,644
+ Reversion
Total $288,102 $288,628 $296,789 $305,175 $313,791 $322,644
x Discount Factor 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323
PV of Cash Flow & Reversion $250,523 $218,245 $195,144 $174,485 $156,010 $139,488
---------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------
Fiscal Year (August 15 through August 14) 2001 2002 2003 2004 2005
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income $331,741 $341,087 $350,689 $360,554 $370,689
+ Reversion 2,996,403
Total $331,741 $341,087 $350,689 $3,356,957
x Discount Factor 0.3759 0.3269 0.2843 0.2472
PV of Cash Flow & Reversion $124,714 $111,502 $99,688 $829,788
Total Present Value: $2,299,585
Rounded to: $2,300,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Summary Of Discount Rate Surveys
----------------------------------------------------------------------------------------
Discount Rates
----------------------------------------------------------------------------------------
Publication Publication Date Low High Average
----------- ---------------- --- ---- -------
<S> <C> <C> <C> <C>
CB Commercial Investor Survey 2nd Qtr 1994 8.00% 17.00% 12.90%
Korpacz Investor Survey 2nd Qtr 1994 11.00% 20.00% 15.58%
PKF Investor Survey 4th Qtr 1993 12.00% 20.00% 16.50%
----------------------------------------------------------------------------------------
</TABLE>
The subject's ADR and occupancy have steadily increased each year since 1992,
and are well above the average limited service motel. For this reason, we have
chosen a discount rate of 15 percent.
REVERSION VALUE - The reversion value at the end of the 10th full year of the
holding period is based on the 11th year cash flow capitalized using a terminal
capitalization rate of 12 percent. We have deducted an amount equal to 3
percent of the total reversion value to represent the costs of sale upon the
reversion.
The discounted cash flow calculation is presented on the facing page. As shown,
the fee simple value indicated by the discounted cash flow method is $2,300,000.
CONCLUSION OF THE INCOME CAPITALIZATION APPROACH
Buyers and sellers of this type of property place heavy emphasis on the direct
capitalization method, which considers how the property is performing at this
moment in time under the current market conditions. This method is also a good
indication of value when the property is at a stabilized level The discounted
cash flow method is also a good indication of value because it takes into
account volatility in the market in future years. Accordingly, placing equal
emphasis on both methods we estimate the value by the income capitalization
approach, as of December 1, 1994, to be $2,370,000.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 46
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
The results of the three approaches to value are as follows:
<TABLE>
<S> <C>
Cost Approach $2,370,000
Sales Comparison Approach $2,140,000
Income Capitalization Approach
DIRECT CAPITALIZATION $2,440,000
DISCOUNTED CASH FLOW $2,300,000
</TABLE>
The three approaches to value are utilized whenever possible in order to provide
a check whereby all factors are considered in each approach. Inherent in each
approach is an interpretation of market conditions as they affect the subject
property. If only one approach is used, a factor may be overlooked or
misinterpreted. The quality and the quantity of the data in each approach has
been considered, along with the relevancy of each to the subject.
The cost approach relies on the proposition that the market value of the
property is no more than the cost of producing a substitute with the same
utility as the subject. Our estimate under the cost approach assumed fee simple
interest as a going concern. The approach is reasonably accurate in
establishing replacement cost, but less so in establishing physical
deterioration and functional and external obsolescence, especially for older
buildings. The cost approach was used as a check to the reasonableness of the
income capitalization approach.
The sales comparison approach reflects the behavior of buyers and sellers
transferring property. Buyers and sellers of hotels compare properties that
have sold and those that are offered for sale in the marketplace so they pay no
more than the least amount that a prudent seller would accept. This approach
relies heavily on the availability of sale data and the willingness of buyers
and/or sellers to reveal details of the transactions. Since the buyers and/or
sellers were not willing to divulge many facts we were unable to fully verify
pertinent details of the sales. In addition, two of the available sales in
smaller markets were dated. Therefore, this approach was given little to no
consideration in our final value conclusion.
The income capitalization approach is generally regarded as the most reliable
technique for estimating the value of an income producing property. This
approach primarily emphasizes the economic productivity of the asset. It is
based on the premise that value is created by the expectation of future
benefits. We estimated the present value of those benefits to derive an
indication of the amount that a prudent, informed purchaser-investor would pay
for the right to receive them as of the valuation date. In this case we have
given equal consideration to the direct capitalization method and the discounted
cash flow method.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 47
<PAGE>
Based on the three approaches to value, with primary consideration given to the
income capitalization approach, we estimate that the market value of the fee
simple interest in the subject property on a going-concern basis, as of December
1, 1994, was:
TWO MILLION THREE HUNDRED SEVENTY THOUSAND DOLLARS
$2,370,000
The allocation for real property, personal property and business value is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Real Property: $1,276,000
Personal Property: 224,000
Business Value: 870,000
----------
Total: $2,370,000
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 48
<PAGE>
ADDENDA
- Definitions
- Floor Plans
- Legal Description
- Land Sales
- Improved Sales
- Property Photographs
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 49
<PAGE>
DEFINITIONS
(Except as noted, all definitions are as cited in THE APPRAISAL OF REAL ESTATE,
Tenth Edition, Chicago: Appraisal Institute, 1992.)
HIGHEST AND BEST USE: The reasonably probable and legal use of
vacant land or an improved property, which is
physically possible, appropriately supported,
financially feasible, and results in the
highest value.
MARKET VALUE: The most probable price, as of a specified
date, in cash, or in terms equivalent to
cash, or in other precisely revealed terms,
for which the specified property rights
should sell after reasonable exposure in a
competitive market under all conditions
requisite to fair sale, with the buyer and
seller each acting prudently, knowledgeably,
and for self-interest, and assuming that
neither is under undue duress.
USE VALUE: The value a specific property has for a
specific use. Use value focuses on the value
the real estate contributes to the enterprise
of which it is a part, without regard to the
property's highest and best use or the
monetary amount that might be realized upon
its sale.
GOING-CONCERN VALUE: The value of a proven property operation. It
includes the incremental value associated
with the business concern, which is distinct
from the value of the real estate only.
REPLACEMENT COST NEW: The estimated cost to construct, at current
prices as of the effective appraisal date, a
building with utility equivalent to the
building being appraised, using modern
materials and current standards, design, and
layout.
REPRODUCTION COST NEW: The estimated cost to construct, at current
prices as of the effective appraisal date, an
exact duplicate or replica of the building
being appraised, using the same materials,
construction standards, design, layout, and
quality of workmanship, and embodying all the
deficiencies, superadequacies, and
obsolescence of the subject building.
ACCRUED DEPRECIATION: The difference between the reproduction or
replacement cost of the improvements on the
effective date of the appraisal and the
market value of the improvements on the same
date.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 50
<PAGE>
PHYSICAL DETERIORATION: A reduction in utility resulting from an
impairment of physical condition.
FUNCTIONAL OBSOLESCENCE: An impairment of the functional capacity of a
property or building according to market
tastes and standards.
EXTERNAL OBSOLESCENCE: The diminished utility of a structure due to
negative influences emanating from outside
the building.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 51
<PAGE>
GRAPH DESCRIPTION: ROCK FALLS, ILLINOIS'S FLOOR PLAN SHOWING THE FIRST
FLOOR
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 52
<PAGE>
GRAPH DESCRIPTION: ROCK FALLS, ILLINOIS'S FLOOR PLAN SHOWING THE SECOND
FLOOR
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 53
<PAGE>
LEGAL DESCRIPTION
The following is the legal description of the property:
Part of the Southeast Quarter of Section 33, Township 21 North,
Range 7 East of the Fourth Principal Meridian, Whiteside County,
Illinois described as follows: Beginning at a point on the North
line of the Southeast Quarter of the Southeast Quarter of said
Section 33, 640.0 feet West of the Northeast corner thereof;
thence South parallel with the East line of said Section 33, 50.0
feet; thence East parallel with the said North line of the
Southeast Quarter of the Southeast Quarter, 531.67 feet to the
Westerly right of way line of Illinois Route 88; thence Northerly
on the said Westerly right of way to a point 150 feet North of
the said North line of the Southeast Quarter of the Southeast
Quarter; thence west parallel with the said North line, 534.0
feet to a point 640.0 feet West of the said East line of section
33; thence South parallel with the said East line, 150.0 feet to
the said point of beginning, subject to an easement over the
Westerly 33 feet of the above described property for future
roadway purposes.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 54
<PAGE>
LAND SALE 1
IDENTIFICATION
Address: Highway 30 and 12th Avenue
City, County, State: Rock Falls, Whiteside County, IL
TRANSACTION DATA
Grantor: Amcore Trust Co., Administrator of the William
A. Blum estate
Grantee: Joseph P. McDonald and Joseph C. McDonald
Deed: Book 8985-94
Date of Sale: October 1994
Sale Price: $45,000
Price / Square Foot: $1.03
Financing: Market
PHYSICAL DATA
Land Area: 43,560 square feet
Utilities: All available
Zoning: B-1, Commercial
CONFIRMATION: Broker; Whiteside County Recorders Office
REMARKS: A funeral home is currently under construction
on the site.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 55
<PAGE>
LAND SALE 2
IDENTIFICATION
Address: 110 E. Lynn Boulevard
City, County, State: Sterling, Whiteside County, IL
TRANSACTION DATA
Grantor: Y&D Limited Partnership
Grantee: Thomas Dale Finney
Deed: Book 2014-92
Date of Sale: March 1992
Sale Price: $60,000
Price / Square Foot: $0.83
Financing: Market
PHYSICAL DATA
Land Area: 72,310 square feet
Utilities: All available
Zoning: B-11, Retail Business District
CONFIRMATION: Mark Arians (Appraiser); Whiteside County
Recorders Office
REMARKS: A building occupied by Finney Chiropractic
Health Center has been developed on the site.
Zoning would need to be changed to put up a
motel.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 56
<PAGE>
LAND SALE 3
IDENTIFICATION
Address: 3208 E. Lincolnway
City, County, State: Sterling, Whiteside County, IL
TRANSACTION DATA
Grantor: Carol J. Erling
Grantee: Wolohan Lumber
Deed: Book 1856-90
Date of Sale: March 1990
Sale Price: $700,000
Price / Square Foot: $1.11
Financing: Market
PHYSICAL DATA
Land Area: 632,056 square feet
Utilities: All available
Zoning: B-3, General Wholesale and Business District
CONFIRMATION: Mark Arians (Appraiser); Whiteside County
Recorders Office
REMARKS: A two-story house and barn were on the site at
the time of sale.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 57
<PAGE>
LISTING
IDENTIFICATION
Address: 2100 Block of 1st Avenue
City, County, State: Rock Falls, Whiteside County, IL
TRANSACTION DATA
Grantor: N/A
Grantee: N/A
Deed: N/A
Date of Sale: N/A
Asking Price: $360,000
Price / Square Foot: $1.38
Financing: N/A
PHYSICAL DATA
Land Area: 261,360 square feet
Utilities: All available
Zoning: B-1, Commercial
CONFIRMATION: Listing agent
REMARKS: No offers or contracts have been made on the
site. The parcel is in front of a free-standing
Walgreens.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 58
<PAGE>
IMPROVED SALE 1--HOLIDAY INN EXPRESS
Property Address: 11111 W. North Avenue
Wauwatosa, WI
TRANSACTION DATA
Date of Sale: June 1994
Grantor: MBC, Inc.
Grantee: RFS Partnership LP
Property Rights Transferred: Fee Simple
Sale Price: $5,510,000
Cash Equivalent Sales Price: $5,510,000
Sales Price/Room: $45,164
Personal Property Included in Sales Price: Yes
Financing/Terms of Sale: Market
PHYSICAL FEATURES:
Year Completed: 1985+/-
Number of Units: 122
Property Description: N/A
CONFIRMATION Milwaukee County Register of
Deeds Office
REMARKS The property was part of a
package of 16 hotels,
purchased for $96.3 million,
and included 4,162 rooms in 16
states.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 59
<PAGE>
IMPROVED SALE 2--HAMPTON INN
Property Address: 13330 S. Cicero
Crestwood, IL
TRANSACTION DATA
Date of Sale: January 1994
Grantor: N/A
Grantee: N/A
Property Rights Transferred: Fee Simple
Sale Price: $3,575,000
Cash Equivalent Sales Price: $3,575,000
Sales Price/Room: $29,065
Personal Property Included in Sales Price: Yes
Financing/Terms of Sale: Market
PHYSICAL FEATURES:
Year Completed: 1990
Number of Units: 123
Property Description: N/A
CONFIRMATION Southwest Hospitality
Management (Part of General
Partnership) - Owner & Manager
REMARKS Amenities include an indoor
pool and a fitness center
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 60
<PAGE>
IMPROVED SALE 3--KNIGHTS INN MOTEL
Property Address: 4110 State Road 26 East
Lafayette, IN
TRANSACTION DATA
Date of Sale: April 1991
Grantor: L.B. Investments (Cardinal
Industries)
Grantee: B. G. Pinehurst, Inc.
Property Rights Transferred: Fee Simple
Sale Price: $2,500,000
Cash Equivalent Sales Price: $2,500,000
Sales Price/Room: $22,321
Personal Property Included in Sales Price: Yes
Financing/Terms of Sale: 10% down with market financing
PHYSICAL FEATURES:
Year Completed: 1987
Number of Units: 112
Property Description: Four prefabricated wood frame
structures
CONFIRMATION Assessor's files, confidential
source, and Mitchell Appraisals,
inc.
REMARKS Amenities include an in-ground
pool. The ADR was $32.31 and the
occupancy 69% at the time of
sale. The overall cap rate was
14%.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 61
<PAGE>
IMPROVED SALE 4-- KNIGHTS INN MOTEL
Property Address: I-94 and U.S. 421
Michigan City, IN
TRANSACTION DATA
Date of Sale: April, 1991
Grantor: N/A
Grantee: N/A
Property Rights Transferred: Fee Simple
Sale Price: $2,369,000
Cash Equivalent Sales Price: $2,369,000
Sales Price/Room: $22,779
Personal Property Included in Sales Price: Yes
Financing/Terms of Sale: Market
PHYSICAL FEATURES:
Year Completed: 1986
Number of Units: 104
Property Description: Prefabricated wood frame
structure
CONFIRMATION Draper & Kramer, Incorporated
REMARKS Amenities include outdoor pool.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 62
<PAGE>
[COLOR PHOTOGRAPHS SHOWING THE MAIN ENTRANCE AND A TYPICAL GUEST ROOM]
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 63
<PAGE>
Capital Projects Worksheet
SOMERSET- Super 8
July 20, 1995
<TABLE>
<CAPTION>
Assumptions
State Sales Tax 7.8% $202,741 $729 $22,776
Freight 8.0%
Purchasing Fee 5.5%
Guest Room Cost Tax & Freight Fee Installation Unit Cost # Units Total On Order/Comp 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carpet (40 yd) $353 $56 $19 $250 $678 63 $42,715
Carpet pad $40 $6 $2 $49 63 $3,056
Vinyl $115 $18 $6 $300 $439 0 $0
Drapes $93 $15 $5 $120 $233 10 $2,328
Shears $38 $6 $2 $46 0 $0
Blackouts $42 $7 $2 $51 0 $0
Drapery rod $60 $9 $3 $73 0 $0
Double Bedspread $80 $13 $4 $97 20 $1,940
Queen Bedspread $85 $13 $5 $103 10 $1,031
King Bedspread $90 $14 $5 $109 0 $0
Double bed set $157 $25 $9 $190 20 $3,807
Queen bed set $180 $28 $10 $218 0 $0
King bed set $222 $35 $12 $269 0 $0
Door lock - Ving mechanical $185 $29 $10 $224 0 $0
Door lock - Ving Electronic $220 $35 $12 $267 66 $17,606
Television w/remote $300 $47 $17 $364 51 $18,551 $9,276
Television w/o remote $320 $50 $18 $388 0 $0
Air conditioner $600 $95 $33 $728 57 $41,468
Case goods
Double head board (2) $136 $21 $7 $165 10 $1,649
Queen head board (2) $136 $21 $7 $165 0 $0
King head board $106 $17 $6 $129 0 $0
Double/Queen night stand (1) $108 $17 $6 $131 10 $1,310
King nightstand $93 $15 $5 $113 0 $0
Double/Queen wall lamp (1) $52 $8 $3 $63 10 $631
King wall lamp (2) $104 $16 $6 $126 0 $0
Dresser $217 $34 $12 $263 10 $2,631
Desk $173 $27 $10 $210 10 $2,098
Desk Chair $110 $17 $6 $133 10 $1,334
Art $75 $12 $4 $91 10 $909
Mirror $62 $10 $3 $75 10 $752
Lounge chair $200 $32 $11 $243 10 $2,425
Desk Lamp $34 $5 $2 $41 10 $412
Floor lamp $60 $9 $3 $73 10 $728
Guest Bath
Vinyl $25 $4 $1 $30 0 $0
Vanity $250 $39 $14 $303 10 $3,031
Tub $200 $32 $11 $243 10 $2,425 $729
Public Area
Carpet (yard) High end $50 $8 $3 incl $61 0 $0
Carpet (yard) Low end $37 $6 $2 incl $45 310 $13,907
Vinyl (yard) $12 $2 $1 incl $15 0 $0
Systems - Major Maintenance
Property Management $0
F&B Point of Sale $0
Telephone $0
Repair Est. Wall $2,500 $0
Replace Water Heater $7,500 $7,500
Replace Roof $15,000 $15,000
Parking lot resurface $5,000 $5,000
Property Management System $0 $0 $5,000
Parking lot restriping $3,500 $3,500 $3,500
Repaint Trim $5,000 $5,000 $5,000
</TABLE>
*water heater and roof replacement are shown for information purposes only
<PAGE>
EXHIBIT 10.8
<PAGE>
[ARTHUR ANDERSEN LLP - LETTERHEAD]
AN APPRAISAL OF THE SUPER 8 MOTEL IN
SOMERSET, KENTUCKY
FOR
HOST FUNDING, INC.
AS OF DECEMBER 1, 1994
Copyright 1994, Arthur Andersen LLP, 33 West Monroe Street, Chicago, Illinois
60603, U.S.A.
All rights reserved
<PAGE>
[ARTHUR ANDERSEN - LETTERHEAD]
December 27, 1994
Mr. John S. Phillips
President
Host Funding, Inc.
7825 Fay Avenue, Suite 250
LaJolla, California 92037
312-507-5993
Re: Super 8 Motel, Somerset, Kentucky
Dear Mr. Phillips:
In accordance with your request, we have performed a complete self-contained
narrative appraisal of the Super 8 Motel located in Somerset, Kentucky. It is a
limited service hotel with 63 rooms situated on 56,000 square feet of land.
The purpose of this appraisal is to estimate the market value of the fee simple
interest in the property on a going-concern basis, as of December 1, 1994. It
is our understanding that the report is to be used by a rating agency for
securitization purposes. A copy of this report may be distributed to Mr. Guy
Hatfield of All American Group LP, and may be included, or referred to, in a
Securities and Exchange Commission Filing. This report can only be used for the
purposes stated and only by our client and the listed third parties.
The accompanying report, of which this letter is a part, describes the building
improvements and methods of appraisal, and contains pertinent data considered in
reaching our value conclusions. The opinion of value is subject to the attached
certification and statement of general assumptions and limiting conditions.
Based on our analysis, the market value of the fee simple interest in the
subject property on a going-concern basis, as of December 1, 1994, was:
ONE MILLION EIGHT HUNDRED FIFTY THOUSAND DOLLARS
$1,850,000
Our appraisal of the property, including basic assumptions and limited
conditions, is detailed in the attached report.
Very truly yours,
<PAGE>
TABLE OF CONTENTS
LETTER OF TRANSMITTAL . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY OF SALIENT FACTS AND CONCLUSIONS. . . . . . . . . . . . . . . . . 3
CERTIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
STATEMENT OF GENERAL ASSUMPTIONS AND LIMITING CONDITIONS . . . . . . . . .6
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Property Appraised. . . . . . . . . . . . . . . . . . . . . . . . . .8
Property Rights Appraised . . . . . . . . . . . . . . . . . . . . . .8
Purpose and Function of the Appraisal . . . . . . . . . . . . . . . .8
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Ownership History . . . . . . . . . . . . . . . . . . . . . . . . . .9
Date of Value . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Scope of the Appraisal. . . . . . . . . . . . . . . . . . . . . . . 10
DESCRIPTION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . 11
Site Description. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Improvement Description . . . . . . . . . . . . . . . . . . . . . . 11
Property Taxes and Assessments. . . . . . . . . . . . . . . . . . . 12
Zoning and Other Use Restrictions . . . . . . . . . . . . . . . . . 13
Area Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Neighborhood Analysis . . . . . . . . . . . . . . . . . . . . . . . 15
MARKET ANALYSIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Market Segments/Competitive Supply. . . . . . . . . . . . . . . . . 17
Average Daily Rate and Occupancy. . . . . . . . . . . . . . . . . . 18
HIGHEST AND BEST USE . . . . . . . . . . . . . . . . . . . . . . . . . . 19
VALUATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
COST APPROACH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Site Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Valuation of Improvements . . . . . . . . . . . . . . . . . . . . . 24
SALES COMPARISON APPROACH. . . . . . . . . . . . . . . . . . . . . . . . 26
Summary of the Sales Comparison Approach. . . . . . . . . . . . . . 27
INCOME CAPITALIZATION APPROACH . . . . . . . . . . . . . . . . . . . . . 28
Market and Subject Operating Trends . . . . . . . . . . . . . . . . 29
Income and Forecast Assumptions . . . . . . . . . . . . . . . . . . 31
Expenses Analysis . . . . . . . . . . . . . . . . . . . . . . . . . 31
Direct Capitalization Method. . . . . . . . . . . . . . . . . . . . 33
Discounted Cash Flow Method . . . . . . . . . . . . . . . . . . . . 35
Conclusion of the Income Capitalization Approach. . . . . . . . . . 36
RECONCILIATION AND FINAL VALUE ESTIMATE. . . . . . . . . . . . . . . . . 37
ADDENDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<S> <C>
Property Name: Super 8 Motel
Location: 302 South U.S. Highway 27
Somerset, Kentucky
Owner of Record: All American Group Limited Partnership
Real Estate Tax Identification Code: 42502-0752, 1074950, 5174850, 5176888
Date of Valuation: December 1, 1994
Purpose and Function of the Appraisal: Estimate the market value of the fee
simple interest on a going-concern basis
for securitization purposes
Interest Appraised: Fee simple as a going concern
Land Area: 56,000 square feet or 1.29 acres
Building Description: A 63 room, two-story, limited service
motel containing approximately 21,692
square feet. Wood frame with stucco
exterior and a pitched room with asphalt
shingles.
Year Completed/Renovated: 1985
Amenities: Continental breakfast, cable, waterbeds,
recliners
Highest and Best Use:
AS VACANT: Commercial Use
AS IMPROVED: Current Use
Year of Stabilization: Fiscal Year 1995 (DECEMBER 1, 1994 -
NOVEMBER 30, 1995)
OCCUPANCY: 69%
AVERAGE DAILY RATE: $36.50
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Indications of Value
COST APPROACH: $1,850,000
SALES COMPARISON APPROACH: $1,680,000
INCOME CAPITALIZATION APPROACH
Direct Capitalization Method: $1,900,000
Discounted Cash Flow Method: $1,800,000
Final Value Opinion: $1,850,000
Unit Value Conclusion
PER ROOM: $29,400 (rounded)
PER SQUARE FOOT: $85.00 (rounded)
Allocation of Value: Real Property: $1,292,000
Personal Property: $268,000
Business Value/Going Concern: $290,000
----------
Total: $1,850,000
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 4
<PAGE>
CERTIFICATION
We certify that, to the best of our knowledge and belief,
the statements of fact contained in this report are true and correct;
the reported analyses, opinions, and conclusions are limited only by the
accompanying limiting conditions and assumptions, and are our personal,
unbiased professional analyses, opinions, and conclusions;
we have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved;
our compensation is not contingent on an action or event resulting from the
analyses, opinions or conclusions in, or the use of, this report.
our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice.
as of the date of this report, William J. Carter, MAI has completed the
requirements of the continuing education program of the Appraisal
Institute.
a personal inspection of the property that is the subject of this report
was made by William P. Hynes on November 29, 1994.
William J. Carter, MAI and Kimberly L. Sass did not inspect the property
that is the subject of this report.
no one provided significant professional assistance to the persons signing
this report; and that
we certify that the use of this report is subject to the requirements of
the Appraisal Institute relating to review by its duly authorized
representatives.
----------------------------------------------
William J. Carter, MAI
Participating Principal - Real Estate Services
Review Appraiser
----------------------------------------------
Kimberly L. Sass
Manager - Real Estate Services
Review Appraiser
- ---------------------------
William P. Hynes
Staff Appraiser
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 5
<PAGE>
STATEMENT OF GENERAL ASSUMPTIONS AND LIMITING
CONDITIONS
This appraisal report is subject to the following general assumptions and
limiting conditions:
1. No investigation has been made of, and no responsibility is assumed for,
the legal description or for legal matters including title or encumbrances.
Title to the property is assumed to be good and marketable unless otherwise
stated. The property is further assumed to be free and clear of liens,
easements, encroachments and other encumbrances unless otherwise stated,
and all improvements are assumed to lie within property boundaries.
2. Information furnished by others, upon which all or portions of this report
are based, is believed to be reliable, but has not been verified in all
cases. No warranty is given as to the accuracy of such information.
3. It is assumed that all required licenses, certificates of occupancy,
consents, or other legislative or administrative authority from any local,
state, or national government or private entity or organization have been,
or can readily be obtained, or renewed for any use on which the value
estimates provided in this report are based.
4. Full compliance with all applicable federal, state and local zoning, use,
occupancy, environmental, and similar laws and regulations is assumed,
unless otherwise stated.
5. No responsibility is taken for changes in market conditions and no
obligation is assumed to revise this report to reflect events or conditions
which occur subsequent to the appraisal date hereof.
6. Responsible ownership and competent property management are assumed.
7. The allocation, if any, in this report of the total valuation among
components of the property applies only to the program of utilization
stated in this report. The separate values for any components may not be
applicable for any other purpose and must not be used in conjunction with
any other appraisal.
8. Areas and dimensions of the property were obtained from sources believed to
be reliable. Maps or sketches, if included in this report, are only to
assist the reader in visualizing the property and no responsibility is
assumed for their accuracy. No independent surveys were conducted.
9. It is assumed that there are no hidden or unapparent conditions of the
property, subsoil, or structures that affect value. No responsibility is
assumed for such conditions or for arranging for engineering studies that
may be required to discover them.
10. No soil analysis or geological studies were ordered or made in conjunction
with this report, nor was an investigation made of any water, oil, gas,
coal, or other subsurface mineral and use rights or conditions.
11. Neither Arthur Andersen LLP nor any individuals signing or associated with
this report shall be required by reason of this report to give further
consultation, to provide testimony or appear in court or other legal
proceedings, unless specific arrangements therefor have been made.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 6
<PAGE>
12. This appraisal has been made in conformance with, and is subject to, the
requirements of the Code of Professional Ethics and Standards of
Professional Conduct of the Appraisal Institute and the Uniform Standards
of Professional Appraisal Practice.
13. This report has been made only for the purpose stated and shall not be used
for any other purpose. Neither this report nor any portions thereof
(including without limitation any conclusions as to value, the identity of
Arthur Andersen LLP or any individuals signing or associated with this
report, or the professional associations or organizations with which they
are affiliated) shall be disseminated to third parties by any means without
the prior written consent and approval of Arthur Andersen LLP
14. We have not been engaged nor are qualified to detect the existence of
hazardous material which may or may not be present on or near the property.
The presence of potentially hazardous substances such as asbestos, urea-
formaldehyde foam insulation, industrial wastes, etc. may affect the value
of the property. The value estimate herein is predicated on the assumption
that there is no such material on, in, or near the property that would
cause a loss in value. No responsibility is assumed for any such
conditions or for any expertise or engineering knowledge required to
discover them. The client should retain an expert in this field if further
information is desired.
15. The date of value to which the conclusions and opinions expressed in this
report apply is set forth in the opinion letter at the front of this
report. Our value opinion is based on the purchasing power of the United
States' dollar as of this date.
16. The Americans with Disabilities Act (ADA) became effective January 26,
1992. We have not made a specific compliance survey and analysis of this
property to determine whether or not it is in conformity with the various
detailed requirements of the ADA. It is possible that a compliance survey
of the property, together with a detailed analysis of the requirements of
the ADA, could reveal that the property is not in compliance with one or
more of the requirements of the Act. If so, this fact could have a
negative effect upon the value of the property. Since we have no direct
evidence relating to this issue, we did not consider possible noncompliance
with the requirements of the ADA in estimating the value of the property.
17. Arthur Andersen LLP's maximum liability relating to services rendered under
this letter (regardless of form of action, whether in contract, negligence
or otherwise), shall be limited to the fees paid to Arthur Andersen LLP for
its services under this agreement. In no event shall Arthur Andersen LLP
be liable for consequential, special, incidental or punitive loss, damage
or expense (including without limitation, lost profits, opportunity costs,
etc.) even if it has been advised of their possible existence.
18. Client shall indemnify and hold Arthur Andersen LLP and its personnel from
and against any claims, liabilities, costs and expenses (including, without
limitation, attorney's fees and the time of Arthur Andersen LLP personnel
involved but excluding consequential, special incidental or punitive
damages) brought against, paid or incurred by Arthur Andersen LLP at any
time and in any way arising out of a breach by client of its obligations
under this agreement.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 7
<PAGE>
INTRODUCTION
PROPERTY APPRAISED
The Super 8 Motel is a limited service motel with 63 rooms located at 302 South
U.S. Highway 27 in Somerset, Kentucky. The improvements were completed in 1985,
contain approximately 21,692 square feet and occupy approximately 56,000 square
feet of land. A copy of the legal description is located in the Addenda.
PROPERTY RIGHTS APPRAISED
Since the property is appraised as a going-concern, we assume all property
rights which can be owned are included in our estimate of market value. The
property rights included are as follows:
1. RIGHTS IN REAL ESTATE
- LAND, SITE IMPROVEMENTS AND BUILDING IMPROVEMENTS;
2. RIGHTS IN TANGIBLE PERSONAL PROPERTY
- FURNITURE, FIXTURES AND EQUIPMENT;
3. RIGHTS TO INTANGIBLE PERSONAL PROPERTY (BUSINESS-RELATED ASSETS)
- MANAGEMENT CONTRACTS, FRANCHISE AGREEMENTS AND GOODWILL
Any separate indications that are developed as an allocation of total value on a
going-concern basis are not meant to reflect the intrinsic value of each
component if sold on a liquidation basis. Rather, they should be interpreted as
the approximate contributory value to overall property value as a going-concern.
PURPOSE AND FUNCTION OF THE APPRAISAL
This report estimates the market value of the fee simple interest in the
property on a going-concern basis, as of December 1, 1994. It is our
understanding that this information will be used for securitization purposes.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 8
<PAGE>
DEFINITIONS
Our appraisal conclusions are subject to the definition of value below and the
statement of General Assumptions and limiting Conditions that follow the
Certification Market value, as used herein, is defined as:
THE MOST PROBABLE PRICE, AS OF A SPECIFIED DATE, IN CASH, OR
IN TERMS EQUIVALENT TO CASH, OR IN OTHER PRECISELY REVEALED
TERMS, FOR WHICH THE SPECIFIED PROPERTY RIGHTS SHOULD SELL
AFTER REASONABLE EXPOSURE IN A COMPETITIVE MARKET UNDER ALL
CONDITIONS REQUISITE TO FAIR SALE, WITH THE BUYER AND SELLER
EACH ACTING PRUDENTLY, KNOWLEDGEABLY AND FOR SELF-INTEREST,
AND ASSUMING THAT NEITHER IS UNDER UNDUE DURESS.
Except as noted, this definitions and other definitions of appraisal terminology
in this report are taken from THE APPRAISAL OF REAL ESTATE, Tenth Edition,
Appraisal Institute.
Going-concern value, as used herein, is defined as:
THE VALUE CREATED BY A PROVEN PROPERTY OPERATION; CONSIDERED
AS A SEPARATE ENTITY TO BE VALUED WITH A SPECIFIC BUSINESS
ESTABLISHMENT..
This definition of appraisal terminology is taken from THE DICTIONARY OF REAL
ESTATE APPRAISAL, Third Edition, Appraisal Institute.
OWNERSHIP HISTORY
All American Group Limited Partnership, a Delaware limited partnership,
currently owns the property and Guy Hatfield is the general partner. The
property was originally purchased by a group of investors in June 1985 from
Tradeway, Inc. and Adamis Diamond Corporation. Partial interests belonging to
investors C. Michael Dolan, Arturo H. Peralta-Ramos and Charles and Suzanne
Riedel were then transferred to Sani-Trainer, Inc. and Kearney Office Park, Ltd.
These two owners in turn transferred their interest to Guy E. and Dorothy
Hatfield and James R. Vickery. In March 1993 Karen Riedel transferred all of
her remaining interest to All American Group Limited Partnership.
DATE OF VALUE
The property was inspected on November 29, 1994 and the effective date of our
value opinion is December 1, 1994.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 9
<PAGE>
SCOPE OF THE APPRAISAL
This is complete, self-contained, narrative appraisal which has been prepared in
accordance with the Uniform Standards of Professional Appraisal Practice and the
Code of Professional Ethics of the Appraisal Institute.
We have assumed that the operating information provided by our client accurately
reflects the historical operating performance of the subject.
In the course of our investigation, we consulted county and city offices for
information about zoning and growth trends, we contacted the county assessor's
office for tax and assessment data, examined the market area and inspected the
property to evaluate its condition, functional qualities, and market appeal. We
also consulted local real estate offices and data bases for comparable sales and
offerings, comparable rentals and operating expense information. We inspected
those sales and offerings considered to be within or similar to the subject
market and otherwise comparable and confirmed them with the seller, buyer,
broker or a participating attorney. Finally, we collated and applied the
resulting information in the valuation process.
MARKETING TIME
Marketing time is the "REASONABLE AMOUNT OF TIME IT MIGHT TAKE TO SELL AN
INTEREST IN REAL PROPERTY AT ITS ESTIMATED MARKET VALUE DURING THE PERIOD
IMMEDIATELY AFTER THE EFFECTIVE DATE OF THE APPRAISAL." The hotel industry has
shown good improvement in the last year and a half with many buyers in the
market. Some of the most sought after properties are chain affiliated limited
service properties with good cash flows. Since the subject is a Super 8, has a
good cash flow history and is a highway motel, we believe a marketing time of 8
to 12 months is considered reasonable. This estimate is supported by Second
Quarter 1994 Korpacz and CB Commercial Investor Surveys.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 10
<PAGE>
DESCRIPTION AND ANALYSIS
SITE DESCRIPTION
Location: 302 South U.S. Highway 27
Somerset, Kentucky
Shape: Rectangular
Frontage: U.S. Highway 27 -- 200 feet
Size: 56,000 square feet or 1.29 acres
Access/Visibility: Good (from Hwy 27 south)/Good
Easements: Site access is provided for northbound
traffic by an easement across the south
and west boundaries of the Captain D's
restaurant site to the north of the
subject. The site adjacent to the
subject's west boundary is vacant but
has an access easement across the north
end of the subject site. This easement
does not have any adverse effect on the
utility of the subject.
Ground Lease: Approximately 25,000 square feet of the
gravel lot adjacent to the subject's
west boundary is leased for truck
parking. This is a month-to-month lease
for $100 per month lasting until the
leased site is sold. If the lot is
sold, there would still be adequate
truck parking for the subject.
Topography: Basically Level
Apparent Soil and Subsoil Conditions: None observed
Flood Plain: FEMA #210199B, Zone C, Areas of Minimal
Flooding
Utilities: All available
IMPROVEMENT DESCRIPTION
The following summary is based on our physical inspection and an old appraisal
the owners provided which contained building plans and specifications.
Date of Construction: 1985
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 11
<PAGE>
Area & Room Mix
GROSS AREA: 21,692 square feet (estimated)
ROOM MIX: 2 Queens 25
1-Queen 37
Suites 1
--
Total(1) 63
Meeting Space: None
Security: Security doors, no security cameras
Fire Protection: Smoke alarms, fire extinguishers,
emergency lighting and sprinklers in
the laundry, storage and mechanical
rooms.
General Construction Features: Wood frame, stucco exterior, pitched
roof with asphalt shingles.
Interior Features: Carpeting, ceramic tile, linoleum tile,
florescent lighting in the common areas
and incandescent lighting in the guest
rooms; individual HVAC heat pump units.
Common Areas: Front desk, manager's office, small
lobby, laundry area, storage room,
mechanical room.
Site Improvements: Asphalt and concrete paving, concrete
curbs and sidewalks, concrete parking
bumpers, minimal landscaping, self
illuminating highway sign.
Condition: Many capital improvements were
performed in the summer of 1993.
Exterior painted, lobby refurbished,
new carpet, drapes and bedsheets in
rooms, new recliners in single rooms,
mattresses restuffed, roof in good
condition and well maintained. The
asphalt portion of the parking area was
resurfaced in the summer of 1994 and a
portion in the rear was converted to
concrete for truck parking. The
asphalt paved parking area and parking
bumpers are in good condition The
interior is well kept and the floor
coverings are in good condition.
Overall the improvements are in good
condition.
PROPERTY TAXES AND ASSESSMENTS
The property is assessed by the Pulaski County Property Valuation Administration
(PVA). The assessed value is equal to 100 percent of the "fair cash value".
Pulaski County reassesses property every year. However, the reassessments focus
on properties that have sold or had some change of ownership recorded with the
deeds office. Included in this assessment of property is the real, tangible and
intangible property.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 12
<PAGE>
GRAPH DESCRIPTION: Regional map with an arrow pointing to
the location of the motel.
[CRC Map]
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 13
<PAGE>
GRAPH DESCRIPTION: Regional map with an arrow pointing to
the location of the motel.
[CRC Map]
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 14
<PAGE>
Intangible and tangible property values are filed annually by the property
owners to the PVA by April 15. All locally taxed property is subject to county
and school district taxes and those within the city limits are subject to city
property taxes. Taxes owed on the property are equal to the assessed value, as
of January 1 of each year, multiplied by the tax rate. Taxes are due in the
same year they are incurred. Face value of the tax amount is due by December
31. A discount is given if paid by November 1. The following table summarizes
the assessed value of the real estate, real estate tax rate and actual county
and city real estate, tangible and intangible property taxes for the last three
years.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Real Estate Real Estate Tangible/
Tax Year Assessed Value Tax Rate R.E. Taxes Intan. Taxes Total Taxes
- -------- -------------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
1992 675,000 1.030 6,953 2,075 9,028
1993 950,000 1.020 9,652 1,946 11,598
1994 950,000 .951 9,035 2,565 11,600
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
In 1993, the owners of the subject recorded a deed changing the partnership name
to All American Group Limited Partnership. As a result, the Property Valuation
Administration did a reassessment of the property and increased the assessed
valuation. No ownership changes are anticipated by the partnership that would
result in a serious reassessment by the PVA. Per our conversation with the
Property Valuation Administration, there are no expectations that the assessed
value of the subject will increase in the near future.
ZONING AND OTHER USE RESTRICTIONS
The property is zoned B-2, Highway Business District by the City of Somerset
Zoning Department. This designation permits a variety of commercial uses
including offices, retail stores and services, hotels and motels, and motor
vehicle services. Based on our interpretation of the most recent zoning
ordinance, the building appears to be a legally conforming use.
AREA OVERVIEW
The subject is in the South Central portion of Kentucky in Pulaski County on the
northeastern edge of Lake Cumberland. Somerset, the county seat of Pulaski
County, is located 76 miles south of Lexington, Kentucky; 117 miles northwest of
Knoxville, Tennessee; and 128 miles southeast of Louisville, Kentucky. Major
highways serving Somerset are U.S. Highway 27, Cumberland Parkway, and Kentucky
Routes 80 and 461. Twenty-one trucking companies provide interstate and/or
intrastate service to the area. Main rail service to the area is provided by
the Norfolk Southern Corporation. The Somerset-Pulaski County Airport, two
miles south of Somerset, maintains a 5,500-foot paved runway. Commercial
airline service is available at Bluegrass Airport in Lexington 80 miles north of
Somerset.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 15
<PAGE>
The majority of the Somerset and Pulaski County economy centers around four main
segments: manufacturing, wholesale and retail trade, the service sector and
tourism. The ten largest employers in Somerset are manufacturing firms. The
proximity to Lake Cumberland, Daniel Boone National Forest and approximately ten
other recreational parks and facilities provides a good summer and fall tourist
traffic flow which enhances the service and tourism industry of the area. Lake
Cumberland, with 1,255 miles of shoreline, is the main attraction for outdoor
recreational activity in south central Kentucky. The Daniel Boone National
Forest, which covers 640,000 acres of timberland in eastern Kentucky, also
provides numerous outdoor recreational activities such as hiking, fishing,
hunting and camping. Along with these assets, Pulaski County's central
location, convenient access to interstate highways and growing labor market,
will support moderate growth in the future. All of the previous and following
statistics were obtained from the Somerset Chamber of Commerce and the Kentucky
Cabinet for Economic Development unless otherwise noted.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Population Trends
Historical and Projected Trends
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Actual Actual Projected Annual Compound
1980 1990 1995 CHANGE (80' - 90')
---- ---- ---- ------------------
<S> <C> <C> <C> <C>
Labor Market Area* 178,993 189,773 181,901 .587%
Somerset 10,829 10,733 n/a -.089%
Pulaski County 45,803 49,489 51,648 .778%
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
<FN>
* LABOR MARKET AREA INCLUDES PULASKI COUNTY AND THE ADJOINING COUNTIES
</TABLE>
Employment Distribution for Pulaski County
Trade 28%
Manuf 23%
Services 18%
Government 16%
Other 10%
Const 5%
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 16
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
10 Largest Private/Public Employersh in Somerset
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
COMPANY # OF EMPLOYEES
------- --------------
<S> <C>
Palm Beach Company 985
Tecumseh Products 800
Alumitech 283
Southern Belle Dairy Company, Inc. 250
General Electric Company: Somerset Glass Plant 225
Hartco 175
The Somerset Refinery, Inc. 150
Ready Mix Concrete of Somerset, Inc. 112
Somerset Houseboats: Division of Somerset 90
Somerset Wood Products, Inc. 78
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Unemployment
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Somerset Pulaski Cty Kentucky United States
-------- ----------- -------- -------------
<S> <C> <C> <C> <C>
Annual Avg 1992 n/a 8.5% 6.9% 7.4%
Annual Avg 1993 n/a 7.7% 6.2% 6.8%
September 1994 n/a 6.7% 4.8% 5.6%
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
SOURCE: U.S. BUREAU OF LABOR STATISTICS AND KENTUCKY CABINET FOR ECONOMIC DEV.
</TABLE>
NEIGHBORHOOD ANALYSIS
The immediate neighborhood is located along U.S. Highway 27, generally a north-
south thoroughfare that extends through the state, roughly bound by Turner
Street to the north and Oak Hill Road to the south. Adjacent to the south of
the subject is a small retail center with two tenants. To the west is the
vacant site of which the subject leases in part for truck parking. Beyond that
is Lake Cumberland Regional Hospital. To the north is Captain D's fast food
restaurant which provides an access easement to the subject through the south
side of their parking lot for northbound traffic. To the east, across U.S.
Highway 27, is a mix of uses including a bank and a school. U.S. Highway 27 has
four-lanes divided by a median with turning lanes for northbound and southbound
traffic. Kentucky Route 80 and Cumberland Parkway are accessed from U.S.
Highway 27 about one and one-half miles north of the subject. KY-80 generally
extends in an east-west direction through the southeastern portion of the state
and connects to Interstate Highway 75, which extends in north-south direction
through the state, 32 miles to the east. Cumberland Parkway extends generally
in an east-west direction through the southwestern portion of the state
providing access to Interstate 65, 90 miles west of Somerset. The subject's
commercial neighborhood is characterized by hotels, fast-food restaurants,
family-style restaurants, retail stores, car dealerships and banks. It serves
much of the traffic from KY-80 and Cumberland Parkway and the regional traffic
along U.S. Highway 27. The majority of the existing commercial uses were
constructed from the late 1960s to the present and the neighborhood is
approximately 70 percent developed. The subject is very compatible with the
surrounding neighborhood uses.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 17
<PAGE>
CONCLUSION
Pulaski County and Somerset in particular are moderate growth areas. The
unemployment history of Pulaski County has been consistently above the nation as
a whole but employment is fairly well diversified. This area benefits from the
tourism provided by nearby Lake Cumberland and the other recreational parks and
facilities, its south central location within the state and being the Pulaski
County seat. The subject neighborhood provides many of the necessary services
highway travelers need. Somerset is also in the process of constructing a Civic
Center that will provide recreational activities for residents and meeting and
convention space for conventioneers. The area and neighborhood are considered
desirable and based on a stable history, this characteristic is expected to be
maintained in the future.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 18
<PAGE>
<TABLE>
<CAPTION>
COMPETITION SUMMARY
SUPER 8 MOTEL, SOMERSET, KY
PROXIMITY # OF MARKET SEGMENTATION
----------------------------
PROPERTY TO SUBJECT ROOMS YOC AMENITIES COMMERCIAL MTG/CONV. LEISURE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUBJECT --
Super 8 Motel --- 63 1985 Continental breakfast, 50% 0% 50%
302 South U.S. Hwy 27 recliners in single rooms,
waterbeds and one suite
PRIMARY COMPETITION
1 Somerset Lodge 1/2 mi. south 100 1960-1990 Restaurant/lounge, meeting 25% 0% 75%
725 South U.S. Hwy 27 rooms, outdoor pool,
Somerset, KY waterbeds, refrigerators and
honeymoon suite
2 Holiday Inn Somerset 1/2 mi. south 160 1968 Restaurant, pool, play area and 50% 0% 50%
606 South U.S. Hwy 27 meeting room
Somerset, KY
3 Best Western Parkway Inn 1/2 mi. north 53 1968-1990 Indoor pool, hot tub, guest 50% 0% 50%
101 North U.S. Hwy 27 laundry and continental breakfast
Somerset, KY
SECONDARY COMPETITION
4 Holiday Motel 1/4 mi. north 31 Late 1960s Continental breakfast and cable 75% 0% 25%
- -----------------------------------------------------------------------------------------------------------------------
TOTALS/AVERAGES--PRIMARY COMPETITION 313-104 -- -- 44% 0% 56%
<CAPTION>
PUBLISHED RATES ESTIMATED (1994)
--------------- ----------------
SINGLE DOUBLE OCCUPANCY ADR
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUBJECT -
Super 8 Motel $35.88 $45.88 67% $35.06
302 South U.S. Hwy 27
PRIMARY COMPETITION
1 Somerset Lodge $32.00 $38.00 n/a n/a
725 South U.S. Hwy 27
Somerset, KY
2 Holiday Inn Somerset $44.00 $50.00 n/a n/a
606 South U.S. Hwy 27
Somerset, KY
3 Best Western Parkway Inn $36.00 $42.00 n/a n/a
101 North U.S. Hwy 27
Somerset, KY
SECONDARY COMPETITION
4 Holiday Motel $28.00 $32.00 n/a n/a
- -------------------------------------------------------------------------------
TOTALS/AVERAGES--PRIMARY COMPETITION $36.97 $43.97 n/a n/a
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 19
<PAGE>
MARKET ANALYSIS
OVERVIEW
According to the Somerset Planning Department and local real estate
professionals, there has been no new hotel development in the Somerset area
since the subject was constructed in 1985. Most of the hotel construction took
place in the late 1960s. However, according to a recent article in the Somerset
newspaper and information obtained from the Planning Department, a 55 room Days
Inn will be constructed about one-half mile north of the subject at U.S. Highway
27 and KY-80 in the fall of 1995. The Days Inn will have an indoor heated
swimming pool but no rates have been made public. There will also be an Arby's
fast food restaurant constructed next door to the Days Inn. The Somerset market
is primarily commercial and leisure travelers. The hotels that serve this
market are located along U.S. Highway 27 and are economy hotels of the limited
or full service type. The remaining hotels are small independent operations
that do not compete for the same market as the chain hotels.
MARKET SEGMENTS/COMPETITIVE SUPPLY
We have identified four hotels in our total competitive supply. Of these
hotels, three are positioned in the primary competitive supply, and one is
considered secondary competition. Two of the primary competitors are associated
with established chains and the other two competitors are privately owned
establishments. Details of the competing properties are located on the facing
page. Due to the competing hotel managers' unwillingness to discuss ADR and
occupancy in our competitive survey "n/a" (not available) was noted in the
summary for these items.
The primary segments served in the subject's market are commercial and leisure.
Among the primary competitors and the subject the distribution among these two
segments is approximately 45/55, respectively. The Best Western Parkway Inn, a
limited service hotel about 1/2 mile north of the subject, was completely
renovated, additional rooms were added and an indoor pool installed in 1990.
This hotel has an edge in terms of the commercial segment, mainly the corporate
business traveler, because of its competitive rates, its newer facade and indoor
pool/hot tub. The Holiday Inn is a full service hotel located about 1/2 mile
south of the subject. It serves roughly the same market and has an edge because
of name recognition and amenities but has higher rates. The Somerset Lodge is a
full service hotel, 1/2 mile south of the subject, with economy rates that tend
to attract a higher proportion of the leisure market because of the lack of name
recognition with business travelers. Finally, the Holiday Motel, 1/4 mile north
of the subject, attracts a higher proportion of the commercial market, not the
corporate traveler but the blue collar worker, due to its very low rates.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 20
<PAGE>
AVERAGE DAILY RATE AND OCCUPANCY
The industry surveys, such as the Host Report, are typically only published
twice a year, and therefore, cannot cover the most current state of the hotel
industry. This has not been an issue in past years since declines were
projected and realized. Since the national hotel industry has shown signs of
real recovery, based on the increased activity in sale transactions and the
reported increase in occupancy by many markets, we prefer to compile competitive
surveys within the subject's particular market in projecting future trends.
However, due to the fact that the competing properties are unwilling to divulge
information about ADR and occupancy and the tourist commission does not compile
statistics on ADR and occupancy, we must rely solely on the subject's historical
ADR and occupancy trends and the Host Report.
<TABLE>
<CAPTION>
-----------------------------------
-----------------------------------
Super 8, Somerset, KY
Historical Occupancy and ADR
-----------------------------------
-----------------------------------
Average
Year Occupancy ADR
---- --------- -----
<S> <C> <C>
1992 55.21 34.19
1993 58.90 33.83
1994* 66.66 35.06
-----------------------------------
-----------------------------------
<FN>
* ACTUAL JAN. THROUGH OCT. AND BUDGETED NOV. & DEC.
</TABLE>
The subject has maintained a substantial progression of occupancy growth over
the past years. The above annualized 1994 figure is approximately 8 percentage
points higher than the same period in 1993 and 11 percentage points higher than
1992. This may be due in part to the new management that came to the property
in 1992 and the commercial growth in Somerset. Taking into account the addition
of the Days Inn in the fall countered by the new Civic Center we believe 69
percent stabilized occupancy beginning in fiscal year 1995 (December 1, 1994
through November 30, 1995) and extending over the projection period is
reasonable.
Average daily rate has increased from 1993 to 1994 by about 4 percent. The
current manager has been managing the property for about two years. She
attributes the growing occupancy and ADR figures to the addition of a suite
room, cleaner rooms overall, the 1993 renovation, recliners in all the single
rooms, marketing efforts to local businesses, a verbal group contract with the
largest trucking company and school in Somerset, and the new 3 mile display of
lights called Christmas Island in nearby Burnside that attracts a large amount
of tourism during December. With the construction of the Civic Center nearby,
commercial business should increase. In our opinion this supports an ADR of
$36.50 beginning in fiscal year 1995. We believe an annual 3 percent growth
rate over the projection period is reasonable based on the addition of a Days
Inn to the market, the Korpacz investor survey which indicates investors growth
projections in the 3 to 6 percent range, and the stable condition of the hotel
market in Somerset.
<TABLE>
<CAPTION>
------------------------------------------------------------------
------------------------------------------------------------------
Projected Occupancy and Average Daily Rate
------------------------------------------------------------------
------------------------------------------------------------------
Year Beginning ADR Growth Average Daily
December 1, 1994 Rate Rate Occupancy
---------------- ---- ---- ---------
<S> <C> <C> <C>
FY 1995 3% $36.50 69%
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 21
<PAGE>
HIGHEST AND BEST USE
The uses to which a property can be put affect its value. This is recognized by
the concept of highest and best use, generally understood to mean:
THE REASONABLY PROBABLE AND LEGAL USE OF
VACANT LAND OR AN IMPROVED PROPERTY,
WHICH IS PHYSICALLY POSSIBLE,
APPROPRIATELY SUPPORTED, FINANCIALLY
FEASIBLE AND RESULTS IN THE HIGHEST
VALUE.
The highest and best use of the land as if vacant and available for use may be
different from the highest and best use of the improved property. This is true
when the improvement is not an appropriate use, but makes a contribution to the
total property value in excess of the value of the site. Thus, in arriving at
our opinion of the highest and best use, we first analyzed the property as
though the land were vacant and then analyzed it as improved. In both
instances, the conclusion of highest and best use must be determined by
examining the physically possible, legally permissible, financially feasible and
maximally productive uses of the site.
AS VACANT
PHYSICALLY POSSIBLE - The physical aspects of the site such as size, shape, and
topography impose the first constraints on the possible use of the property.
The site is basically level, and rectangular in shape. The site has good
visibility and all normal utilities are available. No physical characteristics
were observed that would impose constraints on the site's development. Given
the characteristics of the site and the surrounding land uses, possible uses
would include a wide range of commercial and office uses.
LEGALLY PERMISSIBLE - Legal restrictions, as they apply, include the public
restrictions of zoning. The property is zoned B-2, Highway Business District.
Permitted uses include restaurants, retail stores and services, hotels and
motels, certain office uses and motor vehicle services.
FINANCIALLY FEASIBLE AND MAXIMALLY PRODUCTIVE - The site is located off a
highway and is very visible from the highway assuming adequate signage. As
described in the neighborhood section, most surrounding uses are economy motels,
fast-food and family-style restaurants and small shopping centers. The
attractiveness of the site as an interstate stop and the characteristics of the
surrounding uses would support improvement with a commercial use. In our
opinion, the most financially feasible and maximally productive use for the site
would be a commercial use.
CONCLUSION - We believe the highest and best use of the site as though vacant,
as of December 1, 1994, would be a commercial use.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 22
<PAGE>
AS IMPROVED
PHYSICALLY POSSIBLE - The overall property is in good condition and is well-
suited to its current use.
LEGALLY PERMISSIBLE - The existing zoning of the property permits the existing
commercial use. Any change in use would be inconsistent with the zoning
restrictions.
FINANCIALLY FEASIBLE AND MAXIMALLY PRODUCTIVE - We compared the estimated value
of the property as improved to its estimated net value as a vacant site. The
comparable sales we examined in considering land value (shown later) indicate
that the site as vacant is worth less that the property as improved. Since the
current hotel market is adequately supplied and 55 additional rooms are expected
to be added in the near term, it would not be economically feasible to demolish
the existing improvements. Given the layout, interior design and apparent level
of demand for the existing improvements, it is our opinion that the only
financially feasible and maximally productive use of the property is its current
use.
CONCLUSION - We have concluded that the highest and best use of the property, as
improved, as of December 1, 1994, is its current use.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 23
<PAGE>
VALUATION
Three approaches are generally used to estimate value: the cost, sales
comparison and income capitalization approaches. Each approach assumes
valuation of the property at its highest and best use. These approaches are
more fully discussed on the following pages.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 24
<PAGE>
LAND VALUE ADJUSTMENT GRID
SUPER 8 MOTEL, SOMERSET, KY
DECEMBER 1, 1994
<TABLE>
<CAPTION>
SUBJECT SALE NO. 1 SALE NO. 2
--------------------- ------------------------ -----------------
<S> <C> <C> <C>
Location 302 South U.S. Hwy 27 U.S. Hwy 27 & Bourbon Rd U.S. Hwy 27 South
City, State Somerset, KY Somerset, KY Somerset, KY
Size (sq ft) 56,000.00 63,075 112,341
Sale Price ---- $450,000 $380,000
Sales Price per sq ft ---- $7.13 $3.38
--------------------- ------------------------ -----------------
--------------------- ------------------------ -----------------
Adjustments
Property Rights Conveyed Fee Simple Fee Simple = Fee Simple =
Adjusted Unit Sales Price ---- $7.13 $3.38
Financing Terms Market Cash = Cash =
Adjusted Unit Sales Price ---- $7.13 $3.38
Conditions of Sale Normal Normal = Normal =
Adjusted Unit Sales Price ---- $7.13 $3.38
Market Conditions Oct-94 = Jan-94 =
Adjusted Unit Sales Price ---- $7.13 $3.38
--------------------- ------------------------ -----------------
Location/Physical
Adjustments
Location 302 South U.S. Hwy 27 U.S. Hwy 27 & Bourbon Rd - U.S. Hwy 27 South +
Size (sq ft) 56,000 63,075 = 112,341 +
Access/Frontage Interior/Good Corner/Good - Interior/Good +
Zoning/Use B-2 B-2 = Outside City =
Limits - none =
Topography/Shape Level/Rectangular Level/Rectangular = Level/Rectangular =
--------------------- ------------------------ -----------------
Total Location/Physical
Adjustments - +
------------------------ -----------------
------------------------ -----------------
Adjusted Price/Sq. Ft. $5.00 $4.10
------------------------ -----------------
Minimum Adjusted Price: $4.00
Maximum Adjusted Price: $5.00
Mean Adjusted Price: $4.40
Concluded Price/Sq.Ft.: $4.50
Concluded Land Value: $252,000
Rounded: $252,000
<CAPTION>
SALE NO. 3 SALE NO. 4 SALE NO. 5
----------------- ------------------ -----------------------------
<S> <C> <C> <C>
Location 494 S U.S. Hwy 27 U.S. Hwy 27 & Bond U.S. Hwy 27 & Columbia St
City, State Somerset, KY Somerset, KY Somerset, KY
Size (sq ft) 65,166 46,986 89,150
Sale Price $233,500 $170,000 $420,109
Sales Price per sq ft $3.58 $3.62 $4.71
----------------- ------------------ -----------------------------
----------------- ------------------ -----------------------------
Adjustments
Property Rights Conveyed Fee Simple = Fee Simple = Fee Simple =
Adjusted Unit Sales Price $3.58 $3.62 $4.71
Financing Terms Cash = Cash = Cash =
Adjusted Unit Sales Price $3.58 $3.62 $4.71
Conditions of Sale Normal = Normal = Normal =
Adjusted Unit Sales Price $3.58 $3.62 $4.71
Market Conditions May-93 + Apr-93 + Jan-93 +
Adjusted Unit Sales Price $3.76 $3.80 $4.95
----------------- ----------------- -----------------------------
Location/Physical
Adjustments
----------------- ----------------- -----------------------------
Location 494 S U.S. Hwy 27 + U.S. Hwy 27 & Bond + U.S. Hwy 27 & Columbia St =
Size (sq ft) 65,166 = 46,986 = 89,150 +
Access/Frontage Interior/Good = Interior/Good = Corner/Good -
Zoning/Use B-2 = B-2 = B-2 =
Topography/Shape Level/Rectangular = Level/Rectangular = Level/Rectangular =
----------------- ------------------ -----------------------------
Total Location/Physical
Adjustments + + -
----------------- ------------------ -----------------------------
----------------- ------------------ -----------------------------
Adjusted Price/Sq. Ft. $4.00 $4.20 $4.70
----------------- ------------------ -----------------------------
Minimum Adjusted Price:
Maximum Adjusted Price:
Mean Adjusted Price:
Concluded Price/Sq.Ft.:
Concluded Land Value:
Rounded:
</TABLE>
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 25
<PAGE>
COST APPROACH
The cost approach is based upon the principle of substitution which states that
no rational buyer will pay more for a property than the amount for which he can
obtain a comparable site and construct improvements of equal desirability and
utility, assuming no undue delay.
This approach involves the application of several basic steps. First, the value
of the land as if vacant is estimated. Second, the current cost of replacing
the improvements is estimated. Third, an entrepreneurial profit sufficient to
attract a developer to undertake the risk associated with the project is
estimated. Fourth, accrued depreciation is estimated and deducted from the cost
new estimate (inclusive of profit) to arrive at a contributory value of the
improvements. In the fifth step, the land value is added to the contributory
value of the improvements to arrive at a value of the real estate. Finally, we
add amounts for personal property and intangible business value.
SITE VALUATION
In estimating the value of the site as if vacant, the sales comparison approach
is used. In this approach, value is estimated by comparing the subject site to
similar properties that have been sold recently or are currently being offered
on the market for sale. We have consulted local brokers, appraisers and data
bases for recent sales of comparable properties within the subject area.
Principals and/or the broker handling the sale were then contacted to obtain
further information on the properties and transactions. The available market
data was investigated, analyzed and compared to the subject.
In estimating the value of the site, price per square foot was used since local
investors and brokers typically rely upon this method of analysis. The table on
the facing page summarizes the sales and the adjustments made. Following is a
brief description of the adjustments by relevant characteristics and details of
each sale are located in the addenda.
The market sales used ranged in date from January 1993 to October 1994, in size
from 46,986 to 112,341 square feet and have unadjusted sales prices from $3.38
to $7.13 per square foot.
PROPERTY RIGHTS CONVEYED - All sales were reportedly fee simple transfers.
FINANCING TERMS - All sales were reportedly cash transactions or financed at
terms equivalent to cash.
CONDITIONS OF SALE - None of the sales were found to include any abnormal
conditions affecting the final sale price.
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 26
<PAGE>
MARKET CONDITIONS - As mentioned in the neighborhood analysis, Somerset is a
moderate growth area. However, the property along U.S. Highway 27 is the most
sought after because of its high traffic count and good visibility. This has
created a high demand for land along the highway for many commercial uses and
has driven land values up over the last few years. Sales 3, 4 and 5 occurred in
the early part of 1993 and required slight positive adjustments for the improved
market conditions in the last year and a half.
LOCATION - Sale 1 is located on U.S. 27 near the entrance to a major shopping
center. Due to the high traffic and superior commercial location of this sale a
negative adjustment was necessary. Sales 2, 3 and 4 are located further south
on U.S. 27 and are in less dense commercial areas and positive adjustments were
necessary.
SIZE - The larger the size of a property, the smaller the price per unit, and
vice versa, assuming all other variables are constant. Sales 2 and 5 were
larger sites and required positive adjustments.
ACCESS/FRONTAGE - We considered the significance and degree of road frontage,
exposure, traffic and general activity in estimating the appropriate adjustment.
Since the subject is classified as a highway motel it is necessary to have good
exposure to the highway. Sales 1 and 5 are corner lots and are more visible. A
negative adjustment was made to these sales.
ZONING/USE - The zoning classification of a site can limit legally permitted
uses which can directly affect the value of the site. All of the sales are
along U.S. Highway 27 and zoned B-2 except Sale 2 which is outside the city
limits and has no zoning. However, the permitted uses of Sale 2 are regulated
by the city Planning Department and should be similar to the B-2 zoning. Thus
no adjustments were necessary.
SHAPE/TOPOGRAPHY - All sales were basically level with a slight slope and no
adjustments were necessary.
The adjusted sale prices range from $4.00 to $5.00 per square foot, with an
average adjusted price of $4.40 per square foot. We believe the site was most
similar to Sale 5 and gave it considerable weight in our opinion of value.
Based on our analysis, it is our opinion that the market value of the site as if
vacant, as of December 1, 1994, is $4.50 per square foot, or as follows:
<TABLE>
<CAPTION>
<S> <C>
56,000 square feet x $4.50/square foot = $252,000
Rounded: $252,000
</TABLE>
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 27
<PAGE>
COST APPROACH SUMMARY
SUPER 8 MOTEL, SOMERSET, KY
DECEMBER 1, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Estimated Replacement Cost of the Improvements $1,229,200
Less: Physical Deterioration 20% (245,840)
--------
Estimated Replacement Cost less Physical Deterioration $983,360
Less: Functional Obsolescence 0% 0
External Obsolescence 0% 0
Total Depreciated Replacement Cost of Improvements $983,360
Plus: Depreciated Value of Site Improvements $58,000
Land Value 252,000
-------
Total Depreciated Value of Real Estate $1,293,360
Plus: Personal Property 268,000
-------
Value Estimate via the Cost Approach $1,561,360
(NOT INCLUDING INTANGIBLE BUSINESS VALUE) Rounded $1,560,000
To this we must add an allowance for Intangible Business Value. This is
estimated based on the difference between the income and cost approaches as
follows:
Income Capitalization Approach Conclusion $1,850,000
Less: Cost Approach Conclusion $1,560,000
----------
Intangible Business Value $290,000
Total Value Estimate via the Cost Approach $1,850,000
</TABLE>
The following figures are from the HVS Hotel Development Cost Survey. These
costs include pre-opening marketing and operating costs and the initial
franchise fee.They do not include a component for goodwill which is created
through a proven business operation above and beyond the initial costs.
<TABLE>
<CAPTION>
Low High Avg
--- ---- ---
<S> <C> <C> <C>
Intangible Business Value/Room-- (Economy/Standard) $2,864 $8,004 $5,272
# of Rooms 63 63 63
-- -- --
Total Intangible Business Value Range $180,407 $504,242 $332,132
</TABLE>
- -------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 28
<PAGE>
VALUATION OF IMPROVEMENTS
The most accurate method of estimating replacement cost is to obtain bids from
contractors. In lieu of actually obtaining bids, we have estimated the
replacement cost new using MARSHALL VALUATION SERVICE manual published by
Marshall and Swift. A summary of the cost approach conclusions is located on
the facing page. Following is a brief explanation of each component.
ESTIMATE OF BUILDING REPLACEMENT COST
The Marshall Valuation Service calculator method, indicated a base construction
cost of $49.75 per square foot of gross area for a Class D average quality
construction hotel. After refining for HVAC, sprinklers and floor area-
perimeter and then applying current cost and local area multipliers, a base
price of $46.83 per square foot was obtained. We added additional costs for the
entrance canopies and the wall mounted flood lights which totaled $28,500.
We then added an additional amount for soft costs not included in this figure.
These costs include professional fees, property taxes and carrying costs during
construction. The soft costs amounted to 7 percent of the total replacement
cost new of the improvement or $73,105.
ENTREPRENEURIAL PROFIT
Entrepreneurial profit is a necessary factor of production, without which a
project would not be created. The appropriate level of entrepreneurial profit
depends on the riskiness of the subject investment in relation to alternative
investments of similar risks available in the market. It is our opinion that
the appropriate level of entrepreneurial profit would be in the 5 percent to 15
percent range. We have selected 10 percent as an appropriate level for the
subject or $111,745. This results in the following calculation:
<TABLE>
<CAPTION>
<S> <C>
Adjusted Base Cost x Area $1,015,850
+ Additional costs 28,500
+ Soft Costs 73,105
---------
Total Development Costs $1,117,455
Entrepreneurial Profit 111,745
---------
Estimated RCN $1,229,200
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 29
<PAGE>
DEPRECIATION
PHYSICAL DETERIORATION - Physical deterioration encompasses wear and tear, which
is evident during the field inspection, and typical wear associated with a
building of this quality and use. We utilized the effective age-economic life
method which estimates depreciation by dividing the effective age by its
economic life. The actual age of the building is 9 years. Considering the
current condition of the improvements, the effective age of the improvements is
7 years. Based on a useful life of 35 years, we arrived at an estimate of
physical deterioration of 20 percent.
FUNCTIONAL OBSOLESCENCE - Functional obsolescence reflects impairment of
operational capacity or efficiency, or simply the inability of a facility to
perform adequately the function for which it is employed. In our opinion the
property does not suffer from functional obsolescence under the replacement cost
method.
EXTERNAL OBSOLESCENCE - External obsolescence is defined at the diminished
utility of a structure due to negative influences from outside the site. The
potential net income the property generates based on stabilized revenues and
expenses supports the current development costs of a property similar to the
subject less physical depreciation. Based on this analysis, the property does
not suffer from any external obsolescence under the replacement cost method.
SITE IMPROVEMENTS
Site improvements consist primarily of asphalt and concrete paving, concrete
sidewalks and curbs, signage, and minimal landscaping. The replacement cost of
these items totals $80,000 (rounded). The depreciated cost is $58,000
(rounded).
PERSONAL PROPERTY
The cost estimate for furniture, fixtures and equipment was based on an industry
standard for this type of property at $7,100 per room or $447,300. The
depreciated cost of the personal property totals $268,000 (rounded).
INTANGIBLE BUSINESS VALUE
The property requires that certain expenditures be made to ensure the proper
operation and management of the hotel as a "going concern". For a new hotel,
these items include pre-opening marketing and operating costs and the initial
franchise fee. This cost was estimate was based on the difference between the
income and cost approaches. This cost estimate was then checked against
industry standards indicated by HVS for reasonableness. Details of this
analysis is located on cost approach summary at the beginning of the "Valuation
of the Improvements" section.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 30
<PAGE>
<TABLE>
<CAPTION>
IMPROVED SALES ADJUSTMENT GRID
SUPER 8 MOTEL, SOMERSET, KY
DECEMBER 1, 1994
-----------------------------------------------------------------------------------------------------------
SUBJECT SALE NO. 1 SALE NO. 2 SALE NO. 3 SALE NO. 4
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property Name Super 8 Motel Super 8 Motel Super 8 Motel Motel 6 Motel 6
Location 302 South U.S. Hwy 27 2028 North Mulberry 495 Redmar 3969 Nine Mile Rd 7313 Kingsgate Way
City, State Somerset, KY Elizabethtown, KY Radcliff, KY Union Township, OH West Chester, OH
Sale Price ---- 800,000 1,215,000 2,200,000 1,956,240
Sale Price/Room ---- $12,698 $24,300 $20,370 $19,760
--------------------------------------------------------------------------------------------------------
Adjustments
--------------------------------------------------------------------------------------------------------
Property Rights
Conveyed Fee Simple Fee Simple = Fee Simple = Fee Simple = Fee Simple =
Adjusted Unit Sales Price ---- $12,698 $24,300 $20,370 $19,760
Financing Terms Market Market = Market = Market = Favorable -
Adjusted Unit Sales Price ---- $12,698 $24,300 $20,370 $16,796
Conditions of Sale Normal Normal = Normal = Normal = Normal =
Adjusted Unit Sales Price ---- $12,698 $24,300 $20,370 $16,796
Market Conditions Mar-93 + Mar-93 + Jan-92 + Jan-92 +
Adjusted Unit Sales Price ---- $13,968 $26,730 $23,426 $19,315
--------------------------------------------------------------------------------------------------------
Location/Physical
Adjustments
--------------------------------------------------------------------------------------------------------
Location Highway Highway + Highway + Highway - Highway -
Number of Rooms 63 63 = 50 - 108 + 99 +
Age/Condition 1985/Good 1984/Poor + 1989/Good = 1986/Fair + 1976/Fair +
Quality of Construction Average Average = Average = Average = Average =
Amenities Limited Limited = Limited = Limited = Limited =
Occupancy 67% 40% + 62% = 65% = 50% +
--------------------------------------------------------------------------------------------------------
Total Location/Physical
Adjustments + = + +
-----------------------------------------------------------------------------------
Adjusted Price/Room $27,200 $26,700 $26,900 $27,000
-----------------------------------------------------------------------------------
Minimum Adjusted Price: $26,700
Maximum Adjusted Price: $27,200
Mean Adjusted Price: $26,950
Concluded Price/Room $26,700
Concluded Value: $1,682,100
Rounded: $1,680,000
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 31
<PAGE>
SALES COMPARISON APPROACH
The sales comparison approach is based upon the principle of substitution, which
assumes that a prudent buyer will not pay more for a property than it would cost
to purchase an equally desirable property, assuming no costly delay in making
that substitution. The reliability of this approach is dependent upon there
being an adequate volume of comparable sale data. In addition, the comparable
sales must be "arm's length" and there must be no unusual conditions affecting
the price paid. We conducted a search through real estate brokers, appraisers,
and county records in order to determine what transactions had occurred over the
past few years.
We collected data on 4 sales that were considered similar to the property. The
unit of comparison used is price per room, chosen because it is standard for
this type of property and generally gives reliable results. Prior to adjustment
for differences due to market conditions, age/condition, etc., the unadjusted
sales range in price from $12,698 to $24,300 per room.
The table on the facing page summarizes the sales and the adjustments made.
Following is a brief description of the adjustments by relevant characteristics
and details of each sale are located in the Addenda. We attempted to verify the
terms of each sale with the buyer, seller or broker. We assumed normal
conditions unless we were informed otherwise in terms of financing terms and
conditions of sale.
PROPERTY RIGHTS CONVEYED - All sales were reportedly fee simple transfers.
FINANCING TERMS - Sales 1, 2, and 3 were reportedly cash transactions or
financed at terms equivalent to cash. Sale 4 was reported to have favorable
financing mandating a negative adjustment.
CONDITIONS OF SALE - None of the sales were found to include any abnormal
conditions affecting the final sale price.
MARKET CONDITIONS - As discussed in the Market Study section the national hotel
industry has recently been showing signs of recovery. A large number of
individual and institutional investors have entered the market increasing the
number of sales and driving prices upward. The sales occurred between January
1992 and March 1993 during a low period in the hotel industry. Positive
adjustments were necessary.
LOCATION - All of the sales are highway oriented properties. Sales 1 and 2 are
located in small towns in Kentucky northwest of Somerset. Both sales are in
areas not as heavily trafficked as the subject and a
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 32
<PAGE>
positive adjustment was necessary. Sale 3 and 4 are in towns outside of
Cincinnati in developing areas. Negative adjustments were necessary to account
for this factor.
NUMBER OF ROOMS - Typically hotel properties with more rooms sell, per unit, for
less than properties with fewer units. Sale 2 has 50 rooms and required a
slight negative adjustment. Sales 3 and 4 have 108 and 99 rooms, respectively.
Positive adjustments were made.
AGE/CONDITION - Sale 1 was constructed in 1984 but at the time of sale it was
reportedly in poor condition. Sale 3 was constructed in 1986 but was reportedly
in fair condition at the time of sale. Sale 4 was constructed in 1976 but also
was reportedly in fair condition at the time of sale. Positive adjustments to
these sales were necessary. Sale 2 was similar to the subject in terms of age
and condition.
QUALITY OF CONSTRUCTION - All of the sales were similar in terms of quality of
construction. No adjustments were necessary.
AMENITIES - All of the sales were limited service hotels and all offered
relatively similar services. No adjustments were required.
OCCUPANCY - We were unable to verify the occupancy at the time of sale for Sales
1 and 2. Sale 1 was reported to be far below market occupancy around the sale
date. We have estimated an occupancy of 40 percent which required a positive
adjustment. Based on the indicated sale price of sale 2 we projected occupancy
of 62 percent. Sale 4 required a positive adjustment for low occupancy at the
time of sale.
SUMMARY OF THE SALES COMPARISON APPROACH
After adjustments, the sales ranged in value from $26,700 to $27,200 per room.
Based on our analysis, it is our opinion that the market value of the subject
property by the sales comparison approach, as of December 1, 1994 is as follows:
<TABLE>
<CAPTION>
<S> <C>
63 rooms x $26,700 per room = $1,682,100
Rounded: $1,680,000
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 33
<PAGE>
INCOME CAPITALIZATION APPROACH
The Income Capitalization Approach is based on the premise that value is created
by the expectation of future benefits. We estimated the present value of those
benefits to derive an indication of the amount that a prudent, informed
purchaser-investor would pay for the right to receive them as of the valuation
date.
This approach requires an estimation of the net operating income of a property.
The estimated net operating income is then converted to a value indication by
use of the Direct Capitalization Method and/or the Discounted Cash Flow Method.
The direct capitalization method estimates the value of the subject property by
dividing the net income for a typical year by an overall capitalization rate
that is based on an analysis of the relationship between income and sales prices
achieved from recent sales of properties similar to the subject and investor
surveys. The direct capitalization method is most reliable when the income and
expenses maintain a basic level of stability.
The discounted cash flow method estimates the value of the property by
discounting the projected income stream over the holding period and the
estimated reversionary value of the property at the end of the period, to a
present value as of the date of valuation.
ESTIMATE OF PROJECTED REVENUE AND EXPENSES FOR HOLDING PERIOD - The first step
involves projecting the income and expenses for the subject property over a
projected holding period plus an additional year for purposes of estimating a
reversion value. In our analysis, we project the property's income for a period
of 10 years. The income for each of these years is estimated by projecting the
actual occupancy and average daily room rate that will be achieved given
foreseeable market conditions and normal management policies necessary to
establish the market position of the property. Variances in occupancy and room
rate are frequently caused by factors such as: the marketing time necessary to
establish the presence of the subject property through advertising and repeat
business; discounted room rates lower than room rates otherwise supportable to
assist the initial marketing effort; temporary imbalance in local supply and
demand characteristics that may lead to occupancies that are either higher or
lower than those expected on a stabilized basis; and/or the entrance of new,
competitive hotels, or the removal of older economically obsolete properties
from the competitive supply. Expenses in some years of the projection period
can vary from those in the typical year due to such factors as: higher initial
administrative and general expenses because of the establishment of new
ownership, new operating policies and training of new staff; higher marketing
costs than normal to assist the initial marketing effort or meeting the effect
of new competition; and variable property operating and maintenance expenses
dependent on the age of the improvements.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 34
<PAGE>
VALUATION OF THE ESTIMATED INCOME - The projected income stream reflects
foreseeable market conditions that may cause the projected income stream to be
greater than or less than a stabilized income stream. In addition to changes in
market conditions that may impact the occupancy rate, the discounted cash flow
method also considers the impact of inflation and appreciation on the expected
room rates and operating expenses. The reversion value is estimated by
capitalizing the last year of income by an appropriate overall rate to reflect
an assumed sale of the property to another buyer at that time. The resulting
cash flows and reversion value are discounted to an indication of value as of
the date of valuation at a discount rate that reflects the durability, timing
and riskiness of the cash flow stream in light of alternative investments
currently available to investors.
CONCLUSION - The final step in this approach is to reconcile the conclusions of
value reached by the direct capitalization and discounted cash flow methods.
MARKET AND SUBJECT OPERATING TRENDS
Our estimates of future operating results are primarily based on historical
trends of the subject property and statistical data from THE HOST REPORT
published by Arthur Andersen and Smith Travel Research, a publication providing
operating results of full service hotels, limited service hotels and all suite
hotels. The survey breaks these categories down further by various groupings.
We have considered the following categories for comparison of ratios to total
revenues from the limited service section of the Host Report.
* Chain Affiliated
* East South Central
* Highway
* Under 75 rooms
* 1981-1986 construction
We have compared the 1994 projections to THE HOST REPORT data as well as the
property's actual operating history from 1992 to 1993. THE HOST REPORT data and
a schedule of the property's operating history are located on the following
page.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 35
<PAGE>
1993 HOST REPORT -- OPERATING RATIOS
(RATIO TO TOTAL REVENUES)
SUPER 8 MOTEL, SOMERSET, KY
LIMITED - SERVICE
<TABLE>
<CAPTION>
Chain East South 1981-1986
Affiliated Central Highway Under 75rms constr.
---------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------
Occupancy 69.9% 71.0% 66.7% 65.4% 69.7%
Average Daily Rate $50.12 $44.90 $45.16 $43.38 $49.82
-------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
-------------------------------------------------------------------------
Rooms 94.7% 95.4% 94.7% 96.3% 94.5%
Telephone 2.0% 1.7% 1.8% 2.2% 1.6%
Minor Operated Depts. 1.1% 1.1% 0.9% 0.6% 1.0%
Rentals and Other 2.2% 1.8% 2.6% 0.9% 3.0%
---- ---- ---- ---- ----
TOTAL REVENUE 100.0% 100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
-------------------------------------------------------------------------
Rooms 28.6% 28.6% 29.6% 26.6% 29.4%
Telephone 70.4% 95.0% 84.2% 126.5% 65.1%
Other Departmental Exp. 0.7% 0.6% 0.5% 0.2% 0.8%
---- ---- ---- ---- ----
TOTAL DEPT. EXPENSES 29.2% 29.5% 30.1% 28.6% 29.6%
-------------------------------------------------------------------------
DEPARTMENTAL PROFIT
-------------------------------------------------------------------------
Rooms 71.4% 71.4% 70.4% 73.5% 70.6%
Telephone 29.6% 5.0% 15.9% -26.5% 34.9%
Other Departmental Profit 2.6% 2.3% 3.0% 1.3% 3.2%
---- ---- ---- ---- ----
GROSS OPER INCOME 70.8% 70.5% 69.9% 71.4% 70.4%
-------------------------------------------------------------------------
LESS GENERAL OPER EXPENSES
Admin & General 10.0% 10.2% 10.1% 10.0% 9.5%
Marketing 4.7% 4.7% 4.0% 3.1% 4.7%
Franchise Fee 2.3% 2.3% 2.0% 3.6% 1.8%
Heat Light & Power 5.5% 5.7% 6.0% 7.2% 5.0%
Repairs & Maint. 4.8% 5.1% 5.0% 6.0% 4.4%
---- ---- ---- ---- ----
TOTAL OPER EXPENSES 27.4% 28.0% 27.2% 29.8% 25.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
HOUSE PROFIT 43.4% 42.5% 42.7% 41.6% 44.9%
-------------------------------------------------------------------------
LESS OTHER EXPENSES
-------------------------------------------------------------------------
Management Fee 3.8% 3.9% 3.8% 3.6% 4.4%
Property Taxes 4.3% 3.6% 3.9% 3.5% 4.2%
Leases 0.3% 0.3% 0.2% 0.6% 0.2%
Insurance 1.3% 1.1% 1.4% 1.5% 1.3%
-------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 36
<PAGE>
OPERATING RESULTS -- HISTORICAL AND FORECASTED
SUPER 8 MOTEL, SOMERSET, KY
<TABLE>
<CAPTION>
Actual % of Actual % of % Annualized % of %
YEAR 1992 Rev. 1993 Rev. Change 1994* Rev. Change
- ---- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 55.2% 58.9% 6.7% 66.7% 13.2%
Average Daily Rate $34.19 $33.83 -1.1% $35.06 3.6%
# Rooms Occupied 12,731 13,544 6.4% 15,329 13.2%
# Rooms Available 23,058 22,995 -0.3% 22,995 0.0%
------------------------------------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
------------------------------------------------------------------------------------------------------
Rooms 435,314 97.3% 458,145 96.5% 5.2% 537,381 96.8% 17.3%
Telephone 8,677 1.9% 12,804 2.7% 47.6% 15,063 2.7% 17.6%
Other 3,407 0.8% 3,873 0.8% 13.7% 2,844 0.5% -26.6%
------------------------------------------------------------------------------------------------------
TOTAL REVENUE 447,398 100.0% 474,822 100.0% 6.1% 555,288 100.0% 16.9%
------------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
------------------------------------------------------------------------------------------------------
Rooms 101,094 23.2% 108,210 23.6% 7.0% 127,886 23.8% 18.2%
Telephone 11,577 133.4% 11,597 90.6% 0.2% 10,868 72.2% -6.3%
** Other 0 0.0% 0 0.0% 0.0% 0 0.0% 0.0%
------------------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 112,671 25.2% 119,807 25.2% 6.3% 138,754 25.0% 15.8%
------------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
------------------------------------------------------------------------------------------------------
Rooms 334,220 76.8% 349,935 76.4% 4.7% 409,495 76.2% 17.0%
Telephone (2,900) -33.4% 1,207 9.4% 141.6% 4,195 27.8% -247.6%
Other 3,407 100.0% 3,873 100.0% 13.7% 2,844 100.0% -26.6%
-------------------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 334,727 74.8% 355,015 74.8% 6.1% 416,534 75.0% 17.3%
-------------------------------------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
-------------------------------------------------------------------------------------------------------
Admin & General 89,830 20.1% 105,867 22.3% 17.9% 84,118 15.1% -20.5%
Marketing 17,669 3.9% 21,257 4.5% 20.3% 22,216 4.0% 4.5%
Energy Costs 19,434 4.3% 20,364 4.3% 4.8% 22,150 4.0% 8.8%
Repairs & Maint. 20,607 4.6% 37,139 7.8% 80.2% 29,275 5.3% -21.2%
-------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 147,540 33.0% 184,627 38.9% 25.1% 157,759 28.4% -14.6%
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
HOUSE PROFIT 187,187 41.8% 170,388 35.9% -9.0% 258,775 46.6% 51.9%
-------------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
-------------------------------------------------------------------------------------------------------
Management Fee 13,272 3.0% 23,764 5.0% 79.1% 27,629 5.0% 16.3%
Property Taxes 7,787 1.7% 11,444 2.4% 47.0% 11,452 2.1% 0.1%
Insurance 7,908 1.8% 6,459 1.4% -18.3% 7,297 1.3% 13.0%
Leases 7,500 1.7% 1,850 0.4% -75.3% 1,200 0.2% -35.1%
-------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 36,467 8.2% 43,517 9.2% 16.2% 47,578 8.6% 8.5%
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
NET OPERATING INCOME 150,720 33.7% 126,871 26.7% -18.8% 211,197 38.0% 39.9%
-------------------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
-------------------------------------------------------------------------------------------------------
Reserves for Replacement 13,066 2.9% 14,258 3.0% 0.0% 16,578 3.0% 0.0%
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
NET CASH FLOW 137,654 30.8% 112,613 23.7% -18.2% 194,619 35.0% 72.8%
-------------------------------------------------------------------------------------------------------
<FN>
*Annualized 1994 - January through October actual, November through December
budgeted.
** Other expense included in rooms expense or admin and general.
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 37
<PAGE>
INCOME AND FORECAST ASSUMPTIONS
ROOMS DEPARTMENT - We have estimated room revenue using the occupancies and
average daily room rates concluded on page 18 in the market study section of
this report.
TELEPHONE REVENUE - This department is entirely driven by occupancy and guest
dollars. This revenue historically equated to 1.9 to 2.7 percent of total
revenue. Late in the second half of 1993 a $.50 per day surcharge was assessed
to each guest night regardless if the telephone is used. However, there is no
charge for local calls. We believe the annualized 1994 of 2.7 percent is
reasonable for the projection period.
OTHER REVENUE - Other revenues include vending and miscellaneous and have
remained fairly stable over the past three years.
EXPENSES ANALYSIS
In our forecast rooms and telephone expenses are expressed as a percent of their
respective gross revenue. "General Operating and "Other" expenses are expressed
as a percent of total revenue. In each case, we examined the historical ratios
and compared them to those reported in the HOST REPORT. The following only
highlights those expenses that required further discussion. The remaining,
departmental expenses, general operating expenses and other expenses were
considered reasonable and did not warrant further discussion.
ROOMS EXPENSE - Historically rooms expense ranged between 23.2 and 23.8 percent
of room revenue. Included in this expense is a full continental breakfast which
has expanded in the last three years and will cost them over $6,000 in calendar
year 1994. In addition, housekeeping and desk salaries have increased over the
last three years. Considering these factors, the annualized ratio of 23.8
percent for rooms expense is considered reasonable.
TELEPHONE EXPENSE - Historically telephone expense has ranged from 72.2 to 133.4
percent of telephone revenue. This expense has decreased in annualized 1994 in
part because the hotel accountant allocates part of the telephone expense to the
admin and general account. In addition, the $.50 per room per day charge has
decreased the ratio of expenses to revenue. We believe a stabilized telephone
expense ratio of 75 percent is reasonable.
ADMIN. AND GENERAL - Historically administrative costs ranged between 15.1 to
22.3 percent of total revenue. During this period the property incurred large
legal costs due to ownership changes. This trend is not expected to continue
and according to the property accountant all major legal issues have been
resolved as of year end 1993. In addition, part of "other" expense is allocated
to Admin and General. Therefore, we believe the 1994 annualized ratio of 15.1
percent is considered reasonable.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 38
<PAGE>
MARKETING - Historically marketing costs ranged between 3.9 and 4.5 percent of
total revenue. The 1994 annualized ratio is 4 percent of total revenue. Part
of marketing expense is a 1 percent fee for Super 8 affiliation advertising.
Management expects to increase marketing due to the new Days Inn being
constructed this fall. In our opinion 4.3 percent of total revenue is a
reasonable marketing estimate.
MANAGEMENT FEE - Going forward, the properties will be charged a 3 percent
management fee with a 10 percent incentive on cash flow. This equates to an
approximate 3.3 percent management fee. At the request of our client we have
relied upon this assumption. The Host Report indicates a range in management
fee, based on our identified categories, of 3.8 to 4.4 percent. At the request
of our client, we have applied a management fee of 3.3 percent through our
projection period.
PROPERTY TAXES - This expense includes county and city real estate and personal
property taxes. The county assesses each property by the first of the year and
taxes are due by December 31st of that same year. In 1993 the property was
reassessed because of the partnership's name change and the assessed value
increased. Property taxes are not expected to increase significantly in the
future. Thus this expense is projected to increase on average at 3 percent per
year through the projection period.
GROUND LEASE - Approximately 25,000 square feet of the gravel site adjacent to
the subject's west boundary is leased for truck parking. This is a month-to-
month lease at $100 per month lasting until the leased site is sold. If the lot
is sold, there would still be adequate truck parking for the subject. We have
assumed, based on conversations with the manager and real estate broker for the
site, that the site will be leased for a substantial period of time. Thus we
believe a stabilized $1,200 lease expense throughout the projection period is
reasonable.
INSURANCE - The accountant confirmed that property and liability insurance
expense is actually $6,929 for fiscal year July 1, 1994 to June 30, 1995. This
insurance is renegotiated every year so we have used the annualized 1994
insurance figure for stabilized fiscal year 1995. We have projected this
expense to increase on average at 4 percent per year after fiscal year 1995.
RESERVES FOR REPLACEMENT - The management contract requires that the property
maintain a reserve for replacements equal to 3 percent of total revenues. The
property underwent many improvements in the last two years which included
replacing the carpeting in several areas, upgrading the entrance ways, upgrades
to the many of the rooms, new recliners in the single rooms, etc. While there
are still some improvements yet to be made, we believe a 3 percent ratio for
reserves is adequate through the projection period and is in-line with the
industry standards.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 39
<PAGE>
INCOME CAPITALIZATION APPROACH CONCLUSION
DIRECT CAPITALIZATION METHOD
SUPER 8 MOTEL, SOMERSET, KY
DECEMBER 1, 1994
<TABLE>
<CAPTION>
<S> <C>
Stabilized income
Fiscal year ending
November 30, 1995: $218,981
Overall Capitalization Rate: 11.50%
Capitalized Income: $1,904,185
ROUNDED TO: $1,900,000
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 40
<PAGE>
DIRECT CAPITALIZATION METHOD
In order to estimate the value of the property by the Direct Capitalization
Method, the estimated stabilized cash flow must be capitalized with an overall
capitalization rate. This rate provides a rate of return of and on the
investment through the relationship of net operating income to a hotel's sale
price. Of the comparable sales used in this analysis only sale 2 provided an
indication of an overall rate of 12.27 percent. We have also consulted two
investor surveys; Korpacz Investor Survey indicated an average of 12.44 percent
for overall capitalization rates on hotels and CB Commercial National Investor
Survey indicated an average of 11.3 percent for overall capitalization rates.
While the desirability of hotel investment has been low in past years there has
recently been a renewed interest. With market conditions improving investors
see some potential for occupancy and ADR increases and many are purchasing
hotels with the expectation of renovation and reaffiliation. Based upon the
above factors we have chosen an overall rate of 11.5 percent. The conclusion of
this method is on the facing page. The projected stabilized cash flow is on the
following page.
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 41
<PAGE>
PROJECTED STABILIZED OPERATING RESULTS
FISCAL YEAR 1995
(December 1, 1994 through November 30, 1995)
SUPER 8 MOTEL, SOMERSET, KY
<TABLE>
<CAPTION>
% Change
Stabilized % of Actual
YEAR FY 1995 Revenue CY 1994
- ---- ---------------------------------------------
<S> <C> <C> <C>
Occupancy 69.0% 2.3%
Average Daily Rate $36.50 4.1%
Occupied Rooms 15,867 3.5%
Room-nights Available 22,995 0.0%
---------------------------------------------
DEPARTMENTAL REVENUE:
---------------------------------------------
Rooms 579,129 96.8% 7.8%
Telephone 16,153 2.7% 7.2%
Other 2,991 0.5% 5.2%
---------------------------------------------
TOTAL REVENUE 598,274 100.0% 7.7%
---------------------------------------------
DEPARTMENTAL EXPENSES
---------------------------------------------
Rooms 137,833 23.8% 7.8%
Telephone 12,115 75.0% 11.5%
Other 0 0.0% 0.0%
---------------------------------------------
TOTAL DEPT. EXPENSES 149,948 25.1% 8.1%
---------------------------------------------
DEPARTMENTAL PROFIT
---------------------------------------------
Rooms 441,296 76.2% 7.8%
Telephone 4,038 25.0% -3.7%
Other 2,991 100.0% 5.2%
---------------------------------------------
GROSS OPER INCOME 448,326 74.9% 7.6%
---------------------------------------------
LESS GENERAL OPER EXPENSES
---------------------------------------------
Admin & General 90,339 15.1% 7.4%
Marketing 25,726 4.3% 15.8%
Energy 23,931 4.0% 8.0%
Repairs & Maint. 31,709 5.3% 8.3%
---------------------------------------------
TOTAL OPER EXPENSES 171,705 28.7% 8.8%
---------------------------------------------
---------------------------------------------
HOUSE PROFIT 276,621 46.2% 6.9%
---------------------------------------------
LESS OTHER EXPENSES
---------------------------------------------
Management Fee 19,743 3.3% -28.5%
Property Taxes 11,452 1.9% 0.0%
Insurance 7,297 1.2% 0.0%
Leases 1,200 0.2% 0.0%
---------------------------------------------
TOTAL OTHER EXPENSES 39,692 6.6% -16.6%
---------------------------------------------
---------------------------------------------
NET OPERATING INCOME 236,929 39.6% 12.2%
---------------------------------------------
LESS CAPITAL EXPENSES
---------------------------------------------
Reserves for Replacement 17,948 3.0% 8.3%
---------------------------------------------
---------------------------------------------
NET CASH FLOW 218,981 36.6% 12.5%
---------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Arthur Andersen LLP - Real Estate Services Group 42
<PAGE>
PROJECTED CASH FLOW
SUPER 8 MOTEL, SOMERSET, KY
<TABLE>
<CAPTION>
Projected YE Projected YE Projected YE Projected YE
YEAR 11/30/95 % 11/30/96 % 11/30/97 % 11/30/98 %
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 69.0% 69.0% 69.0% 69.0%
Average Daily Rate $36.50 $37.60 $38.72 $39.88
# Rooms Occupied 15,867 15,867 15,867 15,867
Room-Nights Available 22,995 22,995 22,995 22,995
---------------------------------------------------------------------------------------------------
ADR Growth Rate 3.00% 3.00% 3.00%
------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
---------------------------------------------------------------------------------------------------
Rooms 579,129 96.8% 596,503 96.8% 614,398 96.8% 632,830 96.8%
Telephone 16,153 2.7% 16,638 2.7% 17,137 2.7% 17,651 2.7%
Other 2,991 0.5% 3,081 0.5% 3,174 0.5% 3,269 0.5%
---------------------------------------------------------------------------------------------------
TOTAL REVENUE 598,274 100.0% 616,222 100.0% 634,709 100.0% 653,750 100.0%
---------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
---------------------------------------------------------------------------------------------------
Rooms 137,833 23.8% 141,968 23.8% 146,227 23.8% 150,614 23.8%
Telephone 12,115 75.0% 12,478 75.0% 12,853 75.0% 13,238 75.0%
Other 0 0.0% 0 0.0% 0 0.0% 0 0.0%
---------------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 149,948 25.1% 154,446 25.1% 159,080 25.1% 163,852 25.1%
---------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
---------------------------------------------------------------------------------------------------
Rooms 441,296 76.2% 454,535 76.2% 468,171 76.2% 482,216 76.2%
Telephone 4,038 25.0% 4,159 25.0% 4,284 25.0% 4,413 25.0%
Other 2,991 100.0% 3,081 100.0% 3,174 100.0% 3,269 100.0%
---------------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 448,326 74.9% 461,776 74.9% 475,629 74.9% 489,898 74.9%
---------------------------------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
---------------------------------------------------------------------------------------------------
Admin & General 90,339 15.1% 93,050 15.1% 95,841 15.1% 98,716 15.1%
Marketing 25,726 4.3% 26,498 4.3% 27,292 4.3% 28,111 4.3%
Energy Costs 23,931 4.0% 24,649 4.0% 25,388 4.0% 26,150 4.0%
Repairs & Maint. 31,709 5.3% 32,660 5.3% 33,640 5.3% 34,649 5.3%
---------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 171,705 28.7% 176,856 28.7% 182,161 28.7% 187,626 28.7%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
HOUSE PROFIT 276,621 46.2% 284,920 46.2% 293,468 46.2% 302,272 46.2%
---------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
---------------------------------------------------------------------------------------------------
Management Fee 19,743 3.3% 20,335 3.3% 20,945 3.3% 21,574 3.3%
Property Taxes 11,452 1.9% 11,796 1.9% 12,149 1.9% 12,514 1.9%
Insurance 7,297 1.2% 7,589 1.2% 7,892 1.2% 8,208 1.3%
Leases 1,200 0.2% 1,200 0.2% 1,200 0.2% 1,200 0.2%
---------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE 39,692 6.6% 40,920 6.6% 42,187 6.6% 43,496 6.7%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
NET OPERATING INCOME 236,929 39.6% 244,000 39.6% 251,280 39.6% 258,776 39.6%
---------------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
---------------------------------------------------------------------------------------------------
Reserves for Replacement 17,948 3.0% 18,487 3.0% 19,041 3.0% 19,612 3.0%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
NET CASH FLOW 218,981 36.6% 225,514 36.6% 232,239 36.6% 239,163 36.6%
---------------------------------------------------------------------------------------------------
<CAPTION>
Projected YE Projected YE Projected YE Projected YE
YEAR 11/30/99 % 11/30/00 % 11/30/01 % 11/30/02 %
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 69.0% 69.0% 69.0% 69.0%
Average Daily Rate $41.08 $42.31 $43.58 $44.89
# Rooms Occupied 15,867 15,867 15,867 15,867
Room-Nights Available 22,995 22,995 22,995 22,995
---------------------------------------------------------------------------------------------------
ADR Growth Rate 3.00% 3.00% 3.00% 3.00%
---------------------------------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
---------------------------------------------------------------------------------------------------
Rooms 651,815 96.8% 671,369 96.8% 691,510 96.8% 712,256 96.8%
Telephone 18,181 2.7% 18,726 2.7% 19,288 2.7% 19,867 2.7%
Other 3,367 0.5% 3,468 0.5% 3,572 0.5% 3,679 0.5%
---------------------------------------------------------------------------------------------------
TOTAL REVENUE 673,362 100.0% 693,563 100.0% 714,370 100.0% 735,801 100.0%
---------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES -------------------------------------------------------------------------------
Rooms 155,132 23.8% 159,786 23.8% 164,579 23.8% 169,517 23.8%
Telephone 13,636 75.0% 14,045 75.0% 14,466 75.0% 14,900 75.0%
Other 0 0.0% 0 0.0% 0 0.0% 0 00.0%
---------------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 168,768 25.1% 173,831 25.1% 179,045 25.1% 184,417 25.1%
---------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
---------------------------------------------------------------------------------------------------
Rooms 496,683 76.2% 511,583 76.2% 526,931 76.2% 542,739 76.2%
Telephone 4,545 25.0% 4,682 25.0% 4,822 25.0% 4,967 25.0%
Other 3,367 100.0% 3,468 100.0% 3,572 100.0% 3,679 100.0%
---------------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 504,595 74.9% 519,733 74.9% 535,325 74.9% 551,385 74.9%
---------------------------------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
---------------------------------------------------------------------------------------------------
Admin & General 101,678 15.1% 104,728 15.1% 107,870 15.1% 111,106 15.1%
Marketing 28,955 4.3% 29,823 4.3% 30,718 4.3% 31,639 4.3%
Energy Costs 26,934 4.0% 27,743 4.0% 28,575 4.0% 29,432 4.0%
Repairs & Maint. 35,688 5.3% 36,759 5.3% 37,862 5.3% 38,997 5.3%
---------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 193,255 28.7% 199,053 28.7% 205,024 28.7% 211,175 28.7%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
HOUSE PROFIT 311,340 46.2% 320,680 46.2% 330,301 46.2% 340,210 46.2%
---------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
---------------------------------------------------------------------------------------------------
Management Fee 22,221 3.3% 22,888 3.3% 23,574 3.3% 24,281 3.3%
Property Taxes 12,889 1.9% 13,276 1.9% 13,674 1.9% 14,085 1.9%
Insurance 8,536 1.3% 8,878 1.3% 9,233 1.3% 9,602 1.3%
Leases 1,200 0.2% 1,200 0.2% 1,200 0.2% 1,200 0.2%
---------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE 44,847 6.7% 46,242 6.7% 47,682 6.7% 49,168 6.7%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
NET OPERATING INCOME 266,493 39.6% 274,439 39.6% 282,619 39.6% 291,041 39.6%
---------------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
---------------------------------------------------------------------------------------------------
Reserves for Replacement 20,201 3.0% 20,807 3.0% 21,431 3.0% 22,074 3.0%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
NET CASH FLOW 246,292 36.6% 253,632 36.6% 261,188 36.6% 268,967 36.6%
---------------------------------------------------------------------------------------------------
<CAPTION>
Projected YE Projected YE Projected YE
YEAR 11/30/03 % 11/30/04 % 11/30/05 %
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 69.0% 69.0% 69.0%
Average Daily Rate $46.24 $47.62 $49.05
# Rooms Occupied 15,867 15,867 15,867
Room-Nights Available 22,995 22,995 22,995
--------------------------------------------------------------------------
ADR Growth Rate 3.00% 3.00% 3.00%
--------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
--------------------------------------------------------------------------
Rooms 733,623 96.8% 755,632 96.8% 778,301 96.8%
Telephone 20,463 2.7% 21,077 2.7% 21,709 2.7%
Other 3,789 0.5% 3,903 0.5% 4,020 0.5%
--------------------------------------------------------------------------
TOTAL REVENUE 757,875 100.0% 780,612 100.0% 804,030 100.0%
--------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
--------------------------------------------------------------------------
Rooms 174,602 23.8% 179,840 23.8% 185,236 23.8%
Telephone 15,347 75.0% 15,807 75.0% 16,282 75.0%
Other 0 0.0% 0 0.0% 0 0.0%
--------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 189,949 25.1% 195,648 25.1% 201,517 25.1%
--------------------------------------------------------------------------
DEPARTMENTAL PROFIT
--------------------------------------------------------------------------
Rooms 559,021 76.2% 575,792 76.2% 593,065 76.2%
Telephone 5,116 25.0% 5,269 25.0% 5,427 25.0%
Other 3,789 100.0% 3,903 100.0% 4,020 100.0%
--------------------------------------------------------------------------
GROSS OPERATING INCOME 567,926 74.9% 584,964 74.9% 602,513 74.9%
--------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSE
--------------------------------------------------------------------------
Admin & General 114,439 15.1% 117,872 15.1% 121,409 15.1%
Marketing 32,589 4.3% 33,566 4.3% 34,573 4.3%
Energy Costs 30,315 4.0% 31,224 4.0% 32,161 4.0%
Repairs & Maint. 40,167 5.3% 41,372 5.3% 42,614 5.3%
--------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 217,510 28.7% 224,036 28.7% 230,757 28.7%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
HOUSE PROFIT 350,416 46.2% 360,928 46.2% 371,756 46.2%
--------------------------------------------------------------------------
LESS OTHER EXPENSES
--------------------------------------------------------------------------
Management Fee 25,010 3.3% 25,760 3.3% 26,533 3.3%
Property Taxes 14,507 1.9% 14,942 1.9% 15,391 1.9%
Insurance 9,986 1.3% 10,386 1.3% 10,801 1.3%
Leases 1,200 0.2% 1,200 0.2% 1,200 0.1%
--------------------------------------------------------------------------
TOTAL OTHER EXPENSE 50,703 6.7% 52,288 6.7% 53,925 6.7%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
NET OPERATING INCOME 299,712 39.5% 308,640 39.5% 317,831 39.5%
--------------------------------------------------------------------------
LESS CAPITAL EXPENSES
--------------------------------------------------------------------------
Reserves for Replacement 22,736 3.0% 23,418 3.0% 24,121 3.0%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
NET CASH FLOW 276,976 36.5% 285,222 36.5% 293,710 36.5%
--------------------------------------------------------------------------
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 43
<PAGE>
DISCOUNTED CASH FLOW METHOD
The projected cash flow for the property is presented on the facing page. In
order to complete the valuation of the property using the Discounted Cash Flow
Approach, we present our analysis of an appropriate discount rate and
capitalization rate, calculate the reversion value of the property at the end of
the holding period, and present the conclusions of value.
REVERSION CAPITALIZATION RATE - Terminal capitalization rates are typically
higher than "going-in" capitalization rates due to the risk associated with the
passage of time and uncertainty into the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
SUMMARY OF TERMINAL CAPITALIZATION RATES SURVEYS
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Publication Publication Date LOW HIGH AVERAGE
----------- ---------------- --- ---- -------
<S> <C> <C> <C> <C>
Korpacz Investor Survey 2nd Qtr 1994 10.00% 16.00% 12.54%
CB Commercial National Investor Survey 2nd Qtr 1994 10.00% 14.00% 12.00%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
After considering the future risks of operations in a property similar to the
subject such as the future age/condition and the potential for new competition
we have concluded with a capitalization rate of 12 percent. This rate will be
used to capitalize the 11th year income estimate into a reversionary value for
the subject property.
DISCOUNT RATE - Discount rates vary according to investor requirements, investor
motivations, property characteristics, and market conditions. For this reason
we reviewed various interest rates as follows:
T-Notes - 10 year 8.20%
Corporate Bonds - High Quality 8.72%
Corporate Bonds - Medium Quality 9.12%
Conventional Fixed Rate Mortgage 9.32%
Prime Rate 8.50%
Source: Wall Street Journal - December 1, 1994
While interest rates have decreased overall in the last few years before 1994,
the trend has been edging upwards again. Investors in real estate recognize
that real estate is a risky investment and are demanding higher risk premiums.
According to the Korpacz Investor Survey, some investors are shifting away from
the economy/limited service market due to the lack of existing quality assets.
These investors believe the most economical route and one in which they can
achieve a greater return is new development. However, the chain-affiliated
properties are still the most popular and with REITs entering the investor pool
demand is still significant. Consequently, the required rate of return for real
estate is still high. The following national organizations periodically survey
real estate investors for discount rate information.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 44
<PAGE>
INCOME CAPITALIZATION APPROACH CONCLUSION
DISCOUNTED CASH FLOW METHOD
SUPER 8 MOTEL, SOMERSET, KY
DECEMBER 1, 1994
Discount Rate: 15.00%
Terminal Capitalization Rate: 12.00%
Sales cost: 3.00%
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Fiscal Year (December 1 through November 30) 1995 1996 1997 1998 1999 2000
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income $218,981 $225,514 $232,239 $239,163 $246,292 $253,632
+ Reversion
Total $218,981 $225,514 $232,239 $239,163 $246,292 $253,632
x Discount Factor 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323
------ ------ ------ ------ ------ ------
PV of Cash Flow & Reversion $190,418 $170,521 $152,701 $136,742 $122,451 $109,652
-------------------------------------------------------------------------------
<CAPTION>
Fiscal Year (December 1 through November 30) 2001 2002 2003 2004 2005
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income $261,188 $268,967 $276,976 $285,222 $293,710
+ Reversion 2,374,159
---------
Total $261,188 $268,967 $276,976 $2,659,380
x Discount Factor 0.3759 0.3269 0.2843 0.2472
------ ------ ------ ------
PV of Cash Flow & Reversion $98,190 $87,926 $78,734 $657,358
------------------------------------------------------------------
</TABLE>
Total Present Value: $1,804,694
Rounded to: $1,800,000
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 45
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
SUMMARY OF DISCOUNT RATE SURVEYS
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Discount Rates
- --------------------------------------------------------------------------------------------------------------------------
Publication Publication Date Low High Average
----------- ---------------- --- ---- -------
<S> <C> <C> <C> <C>
Korpacz Investor Survey 2nd Qtr 1994 11.00% 20.00% 15.58%
CB Commercial National Investor Survey 2nd Qtr 1994 8.00% 17.00% 12.90%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The subject has maintained a relatively good cash flow as a percentage of total
revenue and has shown growth in occupancy over the past three years. While
occupancy is strong and the national hotel industry overall is showing signs of
recovery there is still a fair level of riskiness associated with hotel
investment. For these reasons, we have chosen a discount rate of 15 percent.
REVERSION VALUE - The reversion value at the end of the 10th full year of the
holding period is based on the 11th year cash flow capitalized using a terminal
capitalization rate of 12 percent. We have deducted an amount equal to 3
percent of the total reversion value to represent the costs of sale upon the
reversion.
The discounted cash flow calculation is presented on the facing page. As shown,
the fee simple value indicated by the discounted cash flow analysis is
$1,800,000.
CONCLUSION OF THE INCOME CAPITALIZATION APPROACH
Buyers and sellers of this type of property place heavy emphasis on the direct
capitalization method, which considers how the property is performing at this
moment in time under the current market conditions. This method is also a good
indication of value when the property is at a stabilized level. The discounted
cash flow method is a good indication of value because it takes into account
volatility in the market in future years. Accordingly, placing equal emphasis
on both methods we estimate the value by the income capitalization approach, as
of December 1, 1994, at $1,850,000.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 46
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
The results of the three approaches to value are as follows:
Cost Approach $1,850,000
Sales Comparison Approach $1,680,000
Income Capitalization Approach
DIRECT CAPITALIZATION $1,900,000
DISCOUNTED CASH FLOW $1,800,000
The three approaches to value are utilized whenever possible in order to provide
a check whereby all factors are considered in each approach. Inherent in each
approach is an interpretation of market conditions as they affect the subject
property. If only one approach is used, a factor may be overlooked or
misinterpreted. The quality and the quantity of the data in each approach has
been considered, along with the relevancy of each to the subject.
The cost approach relies on the proposition that the market value of the
property is no more than the cost of producing a substitute with the same
utility as the subject. Our estimate under the cost approach assumed fee simple
interest. The approach is reasonably accurate in establishing replacement cost,
but less so in establishing physical deterioration and functional and external
obsolescence, especially for older buildings. The cost approach conclusion
weighs heavily on the income approach conclusion since the intangible business
value is based on the difference between the cost approach not including this
component and the income capitalization approach. The resulting intangible
business value was compared to the HVS Industry Standard Survey. The cost
approach was used as a check to the reasonableness of the income capitalization
approach.
The sales comparison approach reflects the behavior of buyers and sellers
transferring property. Buyers and sellers of hotels compare properties that
have sold and those that are offered for sale in the marketplace so they pay no
more than the least amount that a prudent seller would accept. This approach
relies heavily in the availability of sale data and the willingness of buyers
and/or sellers to reveal details of the transactions. Since the buyers and/or
sellers were not willing to divulge many facts we were unable to fully verify
pertinent details of the sales including the buyer and seller motivations.
Therefore, this approach was given little or no consideration in our final value
conclusion.
The income capitalization approach is generally regarded as the most reliable
technique for estimating the value of an income producing property. This
approach primarily emphasizes the economic productivity of the asset. It is
based on the premise that value is created by the expectation of future
benefits. We estimated the present value of those benefits to derive an
indication of the amount that a prudent, informed
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 47
<PAGE>
purchaser-investor would pay for the right to receive them as of the valuation
date. In this case we have given equal consideration to the direct
capitalization method and the discounted cash flow method.
Based on the three approaches to value, with most weight placed on the income
capitalization approach, the market value of the fee simple interest in the
subject property on a going-concern basis, as of December 1, 1994, was:
ONE MILLION EIGHT HUNDRED FIFTY THOUSAND DOLLARS
$1,850,000
The allocation for real property, personal property and business value is as
follows:
Real Property: $1,292,000
Personal Property: $268,000
Business Value/Going Concern: $290,000
Total: $1,850,000
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 48
<PAGE>
ADDENDA
_Definitions
_Site Plan
_Legal Description
_Land Sales
_Improved Sales
_Property Photographs
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 49
<PAGE>
DEFINITIONS
(Except as noted, all definitions are as cited in THE APPRAISAL OF REAL ESTATE,
Tenth Edition, Chicago: Appraisal Institute, 1992.)
HIGHEST AND BEST USE: The reasonably probable and legal use of vacant
land or an improved property, which is physically
possible, appropriately supported, financially
feasible, and results in the highest value.
MARKET VALUE: The most probable price, as of a specified date,
in cash, or in terms equivalent to cash, or in
other precisely revealed terms, for which the
specified property rights should sell after
reasonable exposure in a competitive market under
all conditions requisite to fair sale, with the
buyer and seller each acting prudently,
knowledgeably, and for self-interest, and assuming
that neither is under undue duress.
USE VALUE: The value a specific property has for a specific
use. Use value focuses on the value the real
estate contributes to the enterprise of which it
is a part, without regard to the property's
highest and best use or the monetary amount that
might be realized upon its sale.
GOING-CONCERN VALUE: The value of a proven property operation. It
includes the incremental value associated with the
business concern, which is distinct from the value
of the real estate only.
REPLACEMENT COST NEW: The estimated cost to construct, at current prices
as of the effective appraisal date, a building
with utility equivalent to the building being
appraised, using modern materials and current
standards, design, and layout.
REPRODUCTION COST NEW: The estimated cost to construct, at current prices
as of the effective appraisal date, an exact
duplicate or replica of the building being
appraised, using the same materials, construction
standards, design, layout, and quality of
workmanship, and embodying all the deficiencies,
superadequacies, and obsolescence of the subject
building.
ACCRUED DEPRECIATION: The difference between the reproduction or
replacement cost of the improvements on the
effective date of the appraisal and the market
value of the improvements on the same date.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 50
<PAGE>
PHYSICAL DETERIORATION: A reduction in utility resulting from an
impairment of physical condition.
FUNCTIONAL OBSOLESCENCE: An impairment of the functional capacity of a
property or building according to market tastes
and standards.
EXTERNAL OBSOLESCENCE: The diminished utility of a structure due to
negative influences emanating from outside the
building.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 51
<PAGE>
[GRAPH: SITE PLAN OF THE SUPER 8 SOMERSET, KY MOTEL]
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 52
<PAGE>
A certain lot or parcel of land located on U.S. 27 in Somerset, Kentucky, said
lot being a portion of Lot 21 as recorded in plat of Lake Cumberland Trade Park
in Plat Book 17, Pages 7 and 8, in the Pulaski County Court Clerk's Office,
Kentucky, and being more fully described as follows:
BEGINNING at a railroad spike driven in the blacktop surface of the common
entrance shared with Lot 22 (Captain D's) of said Lake Cumberland Trade Park,
and from this point running with the west right-of-way line of U.S. 27 South 5
degrees 14 minutes West 200.0 feet to an iron pin in said right-of-way line,
and at the corner of Lots 20 and 21; thence with the line of said Lots 20 and
21 North 84 degrees 46 minutes West 280.0 feet to an iron pin; thence leaving
said line and severing Lot 21, North 5 degrees 14 minutes East 200.0 feet to
an iron pin in the line of lots 21 and 22 of said Lake Cumberland Trade Park;
thence with the line of said Lots 21 and 22 South 84 degrees 46 minutes East
280.0 feet to the beginning, and containing 1.29 acres. The above description
prepared from a physical survey by J. H. Sturgill, L. S. #470, on January 26,
1985.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 53
<PAGE>
LAND SALE 1
IDENTIFICATION
Address: U.S. Highway 27 and Bourbon Road
City, County, State: Somerset, Pulaski, Kentucky
TRANSACTION DATA
Grantor: Adamis Diamond Corporation, Inc.
Grantee: Bob Evans Farms, Inc.
Deed: Book 556, Page 615
Date of Sale: October 24, 1994
Sale Price: $450,000
Price / Square Foot: $7.13
Financing: Cash or Equivalent to Cash
PHYSICAL DATA
Land Area: 63,075 square feet
Utilities: All available
Zoning: B-2, Highway Business District
CONFIRMATION: Recorder of Deeds and J.W. Graybeel - Local
Appraiser
REMARKS: The land is currently under construction with
a Bob Evan's Restaurant. Across the street
from shopping center which produces a high
traffic count.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 54
<PAGE>
LAND SALE 2
IDENTIFICATION
Address: U.S. Highway 27 South
City, County, State: Pulaski County, Kentucky
TRANSACTION DATA
Grantor: Sherman, Dalbert and Helen M.
Grantee: Aldi Inc.
Deed: Book 543, Page 315
Date of Sale: January 4, 1994
Sale Price: $380,000
Price / Square Foot: $3.38
Financing: Cash or Equivalent to Cash
PHYSICAL DATA
Land Area: 112,341 square feet
Utilities: All available
Zoning: Outside City Limits - No Zoning
CONFIRMATION: Recorder of Deeds and J.W. Graybeel - Local
Appraiser
REMARKS: An Aldi food store is currently constructed
on this property.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 55
<PAGE>
LAND SALE 3
IDENTIFICATION
Address: 494 South U.S. Highway 27
City, County, State: Somerset, Pulaski, Kentucky
TRANSACTION DATA
Grantor: Horton, Paul W. and Lucille
Grantee: Taylor, Stewart
Deed: Book 532, Page 21
Date of Sale: May 4, 1993
Sale Price: $233,500
Price Per Acre: $3.58
Financing: Cash or Equivalent to Cash
PHYSICAL DATA
Land Area: 65,166 square feet
Utilities: All available
Zoning: B-2, Highway Business District
CONFIRMATION: Recorder of Deeds and J.W. Graybeel - Local
Appraiser
REMARKS: An Advance Auto store is currently
constructed on this property
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 56
<PAGE>
LAND SALE 4
IDENTIFICATION
Address: U.S. Highway 27 and Bond Street
City, County, State: Somerset, Pulaski, Kentucky
TRANSACTION DATA
Grantor: Noe, James and Lois
Grantee: Autozone, Inc.
Deed: Book 531, Page 270
Date of Sale: April 19, 1993
Sale Price: $170,000
Price Per Acre: $3.62
Financing: Cash or Equivalent to Cash
PHYSICAL DATA
Land Area: 46,986 square feet
Utilities: All available
Zoning: B-2, Highway Business District
CONFIRMATION: Recorder of Deeds and J.W. Graybeel - Local
Appraiser
REMARKS: This property is on Lots 2 and 10 of the
Jasper Subdivision. An Autozone is currently
constructed on this property.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 57
<PAGE>
LAND SALE 5
IDENTIFICATION
Address: U.S. Highway 27 and Columbia Street
City, County, State: Somerset, Pulaski, Kentucky
TRANSACTION DATA
Grantor: Sam Cummins Cheverolet-Buick-Pontiac-
Oldsmobile, Inc.
Grantee: MALCO, Inc.
Deed: Book 528, Page 106
Date of Sale: January 21, 1993
Sale Price: $420,108.80
Price / Square Foot: $4.71
Financing: Cash or Equivalent to Cash
PHYSICAL DATA
Land Area: 89,150 square feet
Utilities: All available
Zoning: B-2, Highway Business District
CONFIRMATION: Recorder of Deeds and J.W. Graybeel - Local
Appraiser
REMARKS: The sale involved a like kind exchange. The
grantee exchanged his land having a reported
value of $360,000 and assumed a note payable
to Jeff Treado for $60,108.80. The sale is
assumed to be at market value. Currently a
Chevy Dealership is being constructed on the
property.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 58
<PAGE>
IMPROVED SALE 1--SUPER 8
Property Address: 2028 North Mulberry St.
Elizabethtown, KY
TRANSACTION DATA
Date of Sale: March 8, 1993
Grantor: N/A
Grantee: Girish Patel
Property Rights Transferred: Fee Simple
Sale Price: $800,000
Cash Equivalent Sales Price: $800,000
Sales Price/Room: $12,698
Personal Property Included
in Sales Price: Yes
Financing/Terms of Sale: Cash
PHYSICAL FEATURES:
Year Completed: 1984
Number of Units: 63
Property Description: Two story, wood frame construction, budget
motel
CONFIRMATION: Girish Patel, would confirm some terms of
sale.
REMARKS Rates include continental breakfast. The
property was reportedly in poor condition
at the time of sale.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 59
<PAGE>
IMPROVED SALE 2--SUPER 8
Property Address: 495 Redmar
Radcliff, KY
TRANSACTION DATA
Date of Sale: March 4, 1993
Grantor: N/A
Grantee: Dial Huss & Associates
Property Rights Transferred: Fee Simple
Sale Price: $1,215,000
Cash Equivalent Sales Price: $1,215,000
Sales Price/Room: $24,300
Personal Property Included
in Sales Price: Yes
Financing/Terms of Sale: Cash or Cash Equivalent
PHYSICAL FEATURES:
Year Completed: 1989
Number of Units: 50
Property Description: Two story, wood frame construction, budget
motel
CONFIRMATION Dial Huss & Associates, would confirm some
terms of sale.
REMARKS Single occupancy rates are $34 and double
occupancy is between $36 and $39. This
includes a continental breakfast.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 60
<PAGE>
IMPROVED SALE 3--MOTEL 6
Property Address: 3969 Nine Mile Rd
Cincinnati, OH
Property Identification Number: Clermont County 41-32-16E-148
TRANSACTION DATA
Date of Sale: January, 1992
Grantor: Cincinnati SE Motel
Grantee: Motel 6 Operating Ltd
Property Rights Transferred: Fee Simple
Sale Price: $2,200,000
Cash Equivalent Sales Price: $2,200,000
Sales Price/Room: $20,370
Personal Property Included
in Sales Price: Yes
Financing/Terms of Sale: Cash or Cash Equivalent
PHYSICAL FEATURES
Year Completed: 1986
Number of Units: 108
Site Area: 3.57 acres
Property Description: Single story, wood frame budget motel with
air conditioning and a pool. Located on 3.57
acres
CONFIRMATION Kevin Handey - Corporate Motel 6, would
confirm some terms of sale.
REMARKS This was a renovated Knights Inn converted to
a Motel 6 at a cost of $3,603 per room. The
buyer anticipated a 65% occupancy and a $29
ADR. It is located at the intersection of I-
275 and Ohio Pike in eastern Cincinnati.
Single room rates range from $25 to $28;
double rates from $31 to $35 per night.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 61
<PAGE>
IMPROVED SALE 4--MOTEL 6
Property Address: 7313 Kingsgate Way
West Chester (Cincinnati), OH
Property Identification Number: M5620-172-000-006
TRANSACTION DATA
Date of Sale: January, 1992
Grantor: USW Cardinal II, Inc.
Grantee: Letom Properties Two, Inc.
Property Rights Transferred: Fee Simple
Sale Price: $1,956,240
Cash Equivalent Sales Price: $1,622,200
Sales Price/Room: $16,386
Personal Property Included
in Sales Price: Yes
Financing/Terms of Sale: Financing was reported to be favorable
PHYSICAL FEATURES:
Year Completed: 1976
Number of Units: 99
Property Description: Single story, wood frame budget motel.
Located on 4.8 acres
CONFIRMATION Kevin Handey - Corporate Motel 6, would
confirm some terms of sale.
REMARKS This was a former Knights Inn purchased
along with the Columbus East Knights Inn,
and 100% financed along with renovation
costs. The finance rate was reported to be
favorable. Estimated ADR was $40 with an
occupancy of 50%. Single room rates are $32
to $50; double rates are $43 to $79 per
night. The motel is currently a HoJo Inn.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 62
<PAGE>
PROPERTY PHOTOGRAPHS
THE MAIN ENTRANCE
TYPICAL GUEST ROOM
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 63
<PAGE>
CAPITAL PROJECTS WORKSHEET
MISSION BAY - SUPER 8
JULY 20, 1995
<TABLE>
<CAPTION>
ASSUMPTIONS
STATE SALES TAX 7.8% $314,428 $10,000 $13,377
FREIGHT 8.0%
PURCHASING FEE 5.5%
GUEST ROOM COST TAX & FREIGHT FEE INSTALLATION UNIT COST # UNITS TOTAL ON ORDER/COMP 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carpet (40 yd) $353 $56 $19 $250 $678 50 $33,901
Carpet pad $40 $6 $2 $49 50 $2,425
Vinyl $115 $18 $6 $300 $439 40 $17,578
Drapes $93 $15 $5 $120 $233 60 $13,966
Shears $38 $6 $2 $46 0 $0
Blackouts $42 $7 $2 $51 0 $0
Drapery rod $60 $9 $3 $73 0 $0
Double Bedspread $80 $13 $4 $97 66 $6,402
[cad 170]$6,402
Queen Bedspread $85 $13 $5 $103 20 $2,061 $2,061
King Bedspread $90 $14 $5 $109 5 $546 $546
Double bed set $157 $25 $9 $190 100 $19,036
Queen bed set $180 $28 $10 $218 0 $0
King bed set $222 $35 $12 $269 5 $1,346
Door lock - Ving mechanical $185 $29 $10 $224 117 $26,245
Door lock - Ving Electronic $220 $35 $12 $267 0 $0
Television w/remote $300 $47 $17 $364 80 $29,100
Television w/o remote $320 $50 $18 $388 0 $0
Air conditioner $600 $95 $33 $728 36 $26,190 $4,368
Case goods
Double head board (2) $136 $21 $7 $165 40 $6,596
Queen head board (2) $136 $21 $7 $165 0 $0
King head board $106 $17 $6 $129 5 $643
Double/Queen night stand (1) $108 $17 $6 $131 40 $5,238
King nightstand $93 $15 $5 $113 5 $564
Double/Queen wall lamp (1) $52 $8 $3 $63 20 $1,261
King wall lamp (2) $104 $16 $6 $126 5 $631
Dresser $217 $34 $12 $263 25 $6,578
Desk $173 $27 $10 $210 25 $5,244
Desk Chair $110 $17 $6 $133 100 $13,338
Art $75 $12 $4 $91 20 $1,819
Mirror $62 $10 $3 $75 20 $1,504
Lounge chair $200 $32 $11 $243 20 $4,850
Desk Lamp $34 $5 $2 $41 20 $825
Floor lamp $60 $9 $3 $73 20 $1,455
Guest Bath
Vinyl $25 $4 $1 $30 0 $0
Vanity $250 $39 $14 $303 20 $6,063
Tub $200 $32 $11 $243 20 $4,850
Public Area
Carpet (yard) High end $50 $8 $3 incl $61 0 $0
Carpet (yard) Low end $37 $6 $2 incl $45 200 $8,973
Vinyl (yard) $12 $2 $1 incl $15 100 $1,455
Systems - Major Maintenance
Install Double Entrance Doors $2,000 $2,000
Rework Front Desk Work Station $2,000 $2,000
25 Mini Refrigerators $3,750 $3,750
Paint Exterior $7,000 $7,000
Replace Water Heater $7,500 $7,500
Replace Roof $15,000 $15,000
Parking lot resurface $8,000 $8,000
Property Management System $10,000 $10,000 $10,000
Parking lot restriping $3,500 $3,500
Repaint Trim $5,000 $5,000
</TABLE>
*Hotel needs one additional Water Heater during demand periods
<PAGE>
EXHIBIT 10.9
<PAGE>
AN APPRAISAL OF THE SUPER 8 MOTEL IN
SAN DIEGO, CALIFORNIA
FOR
HOST FUNDING, INC.
AS OF DECEMBER 1, 1994
Copyright 1994, Arthur Andersen LLP, 33 West Monroe Street, Chicago, Illinois
60603, U.S.A.
All rights reserved.
<PAGE>
December 27, 1994
Mr. John Phillips
President
Host Funding, Inc.
7825 Fay Avenue, Suite 250
LaJolla, California 92037
312-507-5993
Re: Super 8 Motel, San Diego, California
Dear Mr. Phillips:
In accordance with your request, we have performed a complete self-contained
narrative appraisal of the Super 8 Motel located in San Diego, California. It
is a limited service hotel with 117 rooms situated on 46,609 square feet of
land.
The purpose of this appraisal is to estimate the market value of the fee simple
interest in the property on a going-concern basis, as of December 1, 1994. It
is our understanding that the report is to be used by a rating agency for
securitization purposes. A copy of this report may be distributed to Mr.
Stephen D. Burchett of GHG Hospitality, and may be included, or referred to, in
a Securities and Exchange Commission Filing. This report can only be used for
the purposes stated and only by our client and the listed third parties.
The accompanying report, of which this letter is a part, describes the building
improvements and methods of appraisal, and contains pertinent data considered in
reaching our value conclusions. The opinion of value is subject to the attached
certification and statement of general assumptions and limiting conditions.
Based on our analysis, the market value of the fee simple interest in the
subject property on a going-concern basis, as of December 1, 1994, was:
TWO MILLION EIGHT HUNDRED TEN THOUSAND DOLLARS
$2,810,000
Our appraisal of the property, including basic assumptions and limited
conditions, is detailed in the attached report.
Very truly yours,
<PAGE>
TABLE OF CONTENTS
LETTER OF TRANSMITTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY OF SALIENT FACTS AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . 3
CERTIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
STATEMENT OF GENERAL ASSUMPTIONS AND LIMITING CONDITIONS . . . . . . . . . . . 6
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Property Appraised. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Property Rights Appraised . . . . . . . . . . . . . . . . . . . . . . . . 8
Purpose and Function of the Appraisal . . . . . . . . . . . . . . . . . . 8
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Ownership History . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Date of Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Scope of the Appraisal. . . . . . . . . . . . . . . . . . . . . . . . . .10
DESCRIPTION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Site Description. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Improvement Description . . . . . . . . . . . . . . . . . . . . . . . . .11
Property Taxes and Assessments. . . . . . . . . . . . . . . . . . . . . .12
Zoning and Other Use Restrictions . . . . . . . . . . . . . . . . . . . .13
Area Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Neighborhood Analysis . . . . . . . . . . . . . . . . . . . . . . . . . .15
MARKET ANALYSIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Market Segments/Competitive Supply. . . . . . . . . . . . . . . . . . . .17
Average Daily Rate and Occupancy. . . . . . . . . . . . . . . . . . . . .18
HIGHEST AND BEST USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
COST APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Site Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Valuation of Improvements . . . . . . . . . . . . . . . . . . . . . . . .27
SALES COMPARISON APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . .30
Summary of the Sales Comparison Approach. . . . . . . . . . . . . . . . .31
INCOME CAPITALIZATION APPROACH . . . . . . . . . . . . . . . . . . . . . ..32
Market and Subject Operating Trends . . . . . . . . . . . . . . . . . . .33
Income and Forecast Assumption. . . . . . . . . . . . . . . . . . . . . .35
Expenses Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Direct Capitalization Method. . . . . . . . . . . . . . . . . . . . . . .37
Discounted Cash Flow Method . . . . . . . . . . . . . . . . . . . . . . .39
Conclusion of the Income Capitalization Approach. . . . . . . . . . . . .40
RECONCILIATION AND FINAL VALUE ESTIMATE . . . . . . . . . . . . . . . . . . .41
ADDENDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
Property Name: Super 8 Motel
Location: 4540 Mission Bay Drive
San Diego, California
Owner of Record: Mission Bay Super 8 Limited
Real Estate Tax Identification Code: 424-133-17
Date of Valuation: December 1, 1994
Purpose and Function of the Appraisal: Estimate the market value of the fee
simple interest on a going-concern basis
for securitization purposes
Interest Appraised: Fee simple on a going concern basis
Land Area: 46,609 square feet or 1.07 acres
Building Description: A 117 room, three-story, limited service
motel containing approximately 45,000
square feet. Wood frame with stucco
exterior and a mansard-style roof.
Year Completed/Renovated: 1987
Amenities: Continental breakfast, cable, pool
Highest and Best Use:
AS VACANT: Hold for future commercial development
AS IMPROVED: Current Use
Year of Stabilization: Fiscal Year 1997 (DECEMBER 1, 1996 -
NOVEMBER 30, 1997)
OCCUPANCY: 65% (AS OF FISCAL YEAR 1997)
AVERAGE DAILY RATE: $43.00 (AS OF FISCAL YEAR 1995)
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Indications of Value
COST APPROACH $2,810,000
SALES COMPARISON APPROACH $2,810,000
INCOME CAPITALIZATION APPROACH
Direct Capitalization Method: $3,010,000(1)
Discounted Cash Flow Method: $2,870,000
Final Value Opinion: $2,810,000
Unit Value Conclusion
PER ROOM: $24,000 (rounded)
PER SQUARE FOOT: $62.50 (rounded)
Allocation of Value: Real Property: $2,360,000
Personal Property: $450,000
Business Value/Going Concern: $0
----------
Total: $2,810,000
- -----------------------------
<FN>
1 Since the property is not expected to be stabilized until Fiscal Year 1997,
the direct capitalization approach does not take into account the lower
occupancy in Fiscal Year 1995 and 1996
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 4
<PAGE>
CERTIFICATION
We certify that, to the best of our knowledge and belief,
the statements of fact contained in this report are true and correct;
the reported analyses, opinions, and conclusions are limited only by
the accompanying limiting conditions and assumptions, and are our
personal, unbiased professional analyses, opinions, and conclusions;
we have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved;
our compensation is not contingent on an action or event resulting
from the analyses, opinions or conclusions in, or the use of, this
report;
our analyses, opinions, and conclusions were developed, and this
report has been prepared, in conformity with the requirements of the
Uniform Standards of Professional Appraisal Practice;
as of the date of this report, William J. Carter, MAI has completed
the requirements of the continuing education program of the Appraisal
Institute;
a personal inspection of the property that is the subject of this
report was made by Kimberly L. Sass on July 29, 1994 and an exterior
inspection was made on November 17, 1994;
William J. Carter, MAI did not inspect the property that is the
subject of this report;
William J. Carter, MAI is a general certified real estate appraiser in
the State of California
no one provided significant professional assistance to the persons
signing this report; and that
we certify that the use of this report is subject to the requirements
of the Appraisal Institute relating to review by its duly authorized
representatives.
-----------------------------------------------------
William J. Carter, MAI
Participating Principal - Real Estate Services
Review Appraiser
California General Certified R.E.Appraiser - AG025197
-----------------------------------------------------
Kimberly L. Sass
Manager - Real Estate Services
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 5
<PAGE>
STATEMENT OF GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal report is subject to the following general assumptions and
limiting conditions:
1. No investigation has been made of, and no responsibility is assumed
for, the legal description or for legal matters including title or
encumbrances. Title to the property is assumed to be good and
marketable unless otherwise stated. The property is further assumed
to be free and clear of liens, easements, encroachments and other
encumbrances unless otherwise stated, and all improvements are assumed
to lie within property boundaries.
2. Information furnished by others, upon which all or portions of this
report are based, is believed to be reliable, but has not been
verified in all cases. No warranty is given as to the accuracy of
such information.
3. It is assumed that all required licenses, certificates of occupancy,
consents, or other legislative or administrative authority from any
local, state, or national government or private entity or organization
have been, or can readily be obtained, or renewed for any use on which
the value estimates provided in this report are based.
4. Full compliance with all applicable federal, state and local zoning,
use, occupancy, environmental, and similar laws and regulations is
assumed, unless otherwise stated.
5. No responsibility is taken for changes in market conditions and no
obligation is assumed to revise this report to reflect events or
conditions which occur subsequent to the appraisal date hereof.
6. Responsible ownership and competent property management are assumed.
7. The allocation, if any, in this report of the total valuation among
components of the property applies only to the program of utilization
stated in this report. The separate values for any components may not
be applicable for any other purpose and must not be used in
conjunction with any other appraisal.
8. Areas and dimensions of the property were obtained from sources
believed to be reliable. Maps or sketches, if included in this
report, are only to assist the reader in visualizing the property and
no responsibility is assumed for their accuracy. No independent
surveys were conducted.
9. It is assumed that there are no hidden or unapparent conditions of the
property, subsoil, or structures that affect value. No responsibility
is assumed for such conditions or for arranging for engineering
studies that may be required to discover them.
10. No soil analysis or geological studies were ordered or made in
conjunction with this report, nor was an investigation made of any
water, oil, gas, coal, or other subsurface mineral and use rights or
conditions.
11. Neither Arthur Andersen LLP nor any individuals signing or associated
with this report shall be required by reason of this report to give
further consultation, to provide testimony or appear in court or other
legal proceedings, unless specific arrangements therefor have been
made.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 6
<PAGE>
12. This appraisal has been made in conformance with, and is subject to,
the requirements of the Code of Professional Ethics and Standards of
Professional Conduct of the Appraisal Institute and the Uniform
Standards of Professional Appraisal Practice.
13. This report has been made only for the purpose stated and shall not be
used for any other purpose. Neither this report nor any portions
thereof (including without limitation any conclusions as to value, the
identity of Arthur Andersen LLP or any individuals signing or
associated with this report, or the professional associations or
organizations with which they are affiliated) shall be disseminated to
third parties by any means without the prior written consent and
approval of Arthur Andersen LLP.
14. We have not been engaged nor are qualified to detect the existence of
hazardous material which may or may not be present on or near the
property. The presence of potentially hazardous substances such as
asbestos, urea-formaldehyde foam insulation, industrial wastes, etc.
may affect the value of the property. The value estimate herein is
predicated on the assumption that there is no such material on, in, or
near the property that would cause a loss in value. No responsibility
is assumed for any such conditions or for any expertise or engineering
knowledge required to discover them. The client should retain an
expert in this field if further information is desired.
15. The date of value to which the conclusions and opinions expressed in
this report apply is set forth in the opinion letter at the front of
this report. Our value opinion is based on the purchasing power of
the United States' dollar as of this date.
16. The Americans with Disabilities Act (ADA) became effective January 26,
1992. We have not made a specific compliance survey and analysis of
this property to determine whether or not it is in conformity with the
various detailed requirements of the ADA. It is possible that a
compliance survey of the property, together with a detailed analysis
of the requirements of the ADA, could reveal that the property is not
in compliance with one or more of the requirements of the Act. If so,
this fact could have a negative effect upon the value of the property.
Since we have no direct evidence relating to this issue, we did not
consider possible noncompliance with the requirements of the ADA in
estimating the value of the property.
17. Arthur Andersen LLP's maximum liability relating to services rendered
under this letter (regardless of form of action, whether in contract,
negligence or otherwise), shall be limited to the fees paid to Arthur
Andersen LLP for its services under this agreement. In no event shall
Arthur Andersen LLP be liable for consequential, special, incidental
or punitive loss, damage or expense (including without limitation,
lost profits, opportunity costs, etc.) even if it has been advised of
their possible existence.
18. Client shall indemnify and hold Arthur Andersen LLP and its personnel
from and against any claims, liabilities, costs and expenses
(including, without limitation, attorney's fees and the time of Arthur
Andersen LLP personnel involved but excluding consequential, special
incidental or punitive damages) brought against, paid or incurred by
Arthur Andersen LLP at any time and in any way arising out of a breach
by client of its obligations under this agreement.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 7
<PAGE>
INTRODUCTION
PROPERTY APPRAISED
The Super 8 Motel is a limited service motel with 117 rooms located at 4540
Mission Bay Drive in San Diego, California. The improvements were completed in
1987, contain approximately 42,000 square feet and occupy approximately 46,609
square feet of land. A copy of the legal description is located in the Addenda.
PROPERTY RIGHTS APPRAISED
Since the property is appraised as a going-concern, we assume all property
rights which can be owned are included in our estimate of market value. The
property rights included are as follows:
1. RIGHTS IN REAL ESTATE
- LAND, SITE IMPROVEMENTS AND BUILDING IMPROVEMENTS;
2. RIGHTS IN TANGIBLE PERSONAL PROPERTY
- FURNITURE, FIXTURES AND EQUIPMENT;
3. RIGHTS TO INTANGIBLE PERSONAL PROPERTY (BUSINESS-RELATED ASSETS)
- MANAGEMENT CONTRACTS, FRANCHISE AGREEMENTS AND GOODWILL
Any separate indications that are developed as an allocation of total value on a
going-concern basis are not meant to reflect the intrinsic value of each
component if sold on a liquidation basis. Rather, they should be interpreted as
the approximate contributory value to overall property value as a going-concern.
PURPOSE AND FUNCTION OF THE APPRAISAL
This report estimates the market value of the fee simple interest in the
property on a going-concern basis, as of December 1, 1994. It is our
understanding that this information will be used for securitization purposes.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 8
<PAGE>
DEFINITIONS
Our appraisal conclusions are subject to the definition of value below and the
Statement of General Assumptions and Limiting Conditions that follows the
Certification. Market value, as used herein, is defined as:
THE MOST PROBABLE PRICE, AS OF A SPECIFIED DATE, IN CASH, OR
IN TERMS EQUIVALENT TO CASH, OR IN OTHER PRECISELY REVEALED
TERMS, FOR WHICH THE SPECIFIED PROPERTY RIGHTS SHOULD SELL
AFTER REASONABLE EXPOSURE IN A COMPETITIVE MARKET UNDER ALL
CONDITIONS REQUISITE TO FAIR SALE, WITH THE BUYER AND SELLER
EACH ACTING PRUDENTLY, KNOWLEDGEABLY AND FOR SELF-INTEREST,
AND ASSUMING THAT NEITHER IS UNDER UNDUE DURESS.
Except as noted, this definitions and other definitions of appraisal terminology
in this report are taken from THE APPRAISAL OF REAL ESTATE, Tenth Edition,
Appraisal Institute.
Going-concern value, as used herein, is defined as:
THE VALUE CREATED BY A PROVEN PROPERTY OPERATION; CONSIDERED
AS A SEPARATE ENTITY TO BE VALUED WITH A SPECIFIC BUSINESS
ESTABLISHMENT.
This definition of appraisal terminology is taken from THE DICTIONARY OF REAL
ESTATE APPRAISAL, Third Edition, Appraisal Institute.
OWNERSHIP HISTORY
From the date of opening, until December 8, 1989 the property was owned by
Motels of America Series IX, a California Limited Partnership and managed by
Motels of America Corporation. Since December 8, 1989, the property has been
owned by Mission Bay Super 8 Limited, a California Limited Partnership and
managed by Grosvenor Hospitality Group, Inc.
DATE OF VALUE
The property was inspected by Kimberly L. Sass on July 29, 1994 and an exterior
inspection was made on November 17, 1994 and the effective date of our value
opinion is December 1, 1994. William J. Carter MAI did not inspect the subject
property.
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<PAGE>
SCOPE OF THE APPRAISAL
This is a complete, self-contained, narrative appraisal which has been prepared
in accordance with the Uniform Standards of Professional Appraisal Practice and
the Code of Professional Ethics of the Appraisal Institute.
We have assumed that the operating information provided by our client accurately
reflects the historical operating performance of the subject.
In the course of our investigation, we consulted county and city offices for
information about zoning and growth trends, we contacted the county assessor's
office for tax and assessment data, examined the market area and inspected the
property to evaluate its condition, functional qualities, and market appeal. We
also consulted local real estate offices and data bases for comparable sales and
offerings, comparable rentals and operating expense information. We inspected
those sales and offerings considered to be within or similar to the subject
market and otherwise comparable and confirmed them with the seller, buyer,
broker or a participating attorney. Finally, we collated and applied the
resulting information in the valuation process.
MARKETING TIME
Marketing time is the "REASONABLE AMOUNT OF TIME IT MIGHT TAKE TO SELL AN
INTEREST IN REAL PROPERTY AT ITS ESTIMATED MARKET VALUE DURING THE PERIOD
IMMEDIATELY AFTER THE EFFECTIVE DATE OF THE APPRAISAL." The hotel industry has
shown good improvement in the last year and a half with many buyers in the
market. Some of the most sought after properties are chain affiliated limited
service properties with good cash flows. Since the subject is a Super 8, has a
good cash flow history and is a highway motel, we believe a marketing time of 8
to 12 months is considered reasonable. This estimate is supported by Second
Quarter 1994 Korpacz and CB Commercial Investor Surveys.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 10
<PAGE>
DESCRIPTION AND ANALYSIS
SITE DESCRIPTION
Location: 4540 Mission Bay Drive
San Diego, California
Shape: Rectangular
Frontage: Mission Bay Drive -- 350 feet
Size: 46,609 square feet
Access/Visibility: Fair/Fair
Topography: Basically level
Apparent Soil and Subsoil Conditions: None observed
Flood Plain: Flood zoned C for minimal flooding
Utilities: All available
IMPROVEMENT DESCRIPTION
The following summary is based on our physical inspection, information obtained
from an old appraisal and a review of floor plans provided by building
management.
Date of Construction: 1987
Area & Room Mix
GROSS AREA: 42,000 square feet (estimated)
ROOM MIX: King (handicapped) 5
Queen Single 44
Queen Sofa 28
Double 40
---
Total 117
Meeting Space: None
Elevators: None
Security: Corridor entrances remained locked 24
hours daily, closed circuit cameras
w/front desk monitor; panic button
system at front desk linked to security
data; on site night security Friday and
Saturday.
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<PAGE>
Fire Protection: Smoke alarms, fire extinguishers, alarm
pulls, emergency lighting, fully
sprinklered, off site fire protection
monitoring system by Honeywell
General Construction Features: Wood frame, stucco exterior, mansard-
style roof
Interior Features: Carpeting, ceramic tile, linoleum tile,
florescent lighting in the common areas
and incandescent lighting in the guest
rooms; individual thru-wall heat pumps
Common Areas: Small lobby with sitting area, managers
office, small enclosed area set up for 1
washer/dryer, mechanical room adjacent
to the pool, maintenance room.
Site Improvements: Asphalt and concrete paving, concrete
sidewalks, small pool surrounded by a
three sided brick wall, moderate
landscaping, self illuminating, two-
sided, free standing ground sign, 2 self
illuminating building signs.
Condition: Exterior and roof in average condition
The asphalt portion of the parking area
has recently been resurfaced. The
common areas have recently been upgraded
with new carpeting, paint, tile in the
stairwells. A majority of the guest
rooms have recently been upgraded with
new carpeting, curtains, beds,
bedspreads as well as much of the
furniture. Overall the improvements are
in fair to good condition.
PROPERTY TAXES AND ASSESSMENTS
The property is assessed by the San Diego County Assessor. Upon the sale,
expansion, or new construction of a property, real estate in the State of
California is assessed at 100 percent of market value. When the market value is
established it can only be increased by 2 percent per year at the most unless
there is a sale transaction, expansion or new construction. The real estate tax
rate cannot exceed 1.25 percent of a property's assessed value.
The tax year begins July 1st and property taxes are due in two installments,
December 10th and April 10th. The following table summarizes the assessed
value, overall tax rate and actual county and city real estate and personal
property taxes for the last three years.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Land & Building Personal Property Total Overall
Tax Year Assessed Value Assessed Value Assessed Value Tax Rate(2) Total Taxes
-------- -------------- -------------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1991 3,563,535 n/a $3,563,535 1.06743 38,038.34
1992 3,639,530 539,173 $4,178,703 1.12227 46,916.34
1993 3,707,501 235,000 $3,942,501 1.12163 44,220.36
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
- -----------------------------
<FN>
(2) Real and personal property are taxed at the same rate.
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 12
<PAGE>
[GRAPH]-REGIONAL MAP WITH AN ARROW POINTING TO THE LOCATION OF THE MOTEL
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 13
<PAGE>
[GRAPH]-REGIONAL MAP WITH AN ARROW POINTING TO THE LOCATION OF THE MOTEL
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 14
<PAGE>
ZONING AND OTHER USE RESTRICTIONS
The property is zoned C-1, according to the San Diego Planning Department. This
designation does not specifically allow for the use of hotels and motels but
does allow for those uses permitted by the CA (Area Shopping Center) zone.
These include the use of hotels, motels, and time share projects. Based on our
interpretation of the most recent zoning ordinance, the building appears to be a
legally conforming use.
AREA OVERVIEW
The property is in San Diego, San Diego County. The County is bordered by
Orange and Riverside Counties the Pacific Ocean and Mexico. Interstate 5 is the
primary north-south thoroughfare in San Diego connecting it to all of Northern
California and south to the Mexico border. Other Interstates include 8, 15 and
805 which provide easy access to all points of San Diego.
The increase in population since 1990 has been small, however favorable compared
to other areas of California which have experienced declines. The slight
increase in population has been due to natural increase while the level of in-
migration has declined since 1990. If not for foreign in-migration, San Diego's
net migration would have been negative. While domestic in-migration is expected
to increase slightly the growth trend outlined in the following table is
expected to continue through 1994 and 1995.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
POPULATION TRENDS
HISTORICAL AND PROJECTED TRENDS
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Actual Actual Actual Annual Compound
1990 1992 1993 Change
---- ---- ---- ------
<S> <C> <C> <C> <C>
San Diego 1,110,549 1,149,600 1,171,600 1.80%
San Diego County 2,498,016 2,602,200 2,648,600 1.89%
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
[GRAPH]-EMPLOYMENT DISTRIBUTION
Services 29% Fire 6%
Trade 23% Const 5%
Gov't 19% Trans/Util 4%
Manuf 13% Agr 1%
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<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
-------------------------------------------------------------
10 LARGEST PRIVATE/PUBLIC EMPLOYERS - SAN DIEGO COUNTY
-------------------------------------------------------------
-------------------------------------------------------------
COMPANY # OF EMPLOYEES
------- --------------
<S> <C>
City of San Diego 10,000+
County of San Diego 10,000+
San Diego Unified School District 10,000+
Sharp Healthcare 10,000+
United States Government/Civilian 10,000+
University of California San Diego 10,000+
Pacific Bell, A Pacific Telesis Company 5,000 - 9,999
Rohr Industries, Inc. 5,000 - 9,999
San Diego Community College District 5,000 - 9,999
Scripps Institutions of Medicine & Science 5,000 - 9,999
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------
----------------------------------------------------------------------
UNEMPLOYMENT
----------------------------------------------------------------------
----------------------------------------------------------------------
Annual Average San Diego San Diego City California United States
-------------- --------- -------------- ---------- -------------
<S> <C> <C> <C> <C>
1990 4.4% n/a 5.6% 5.5%
1991 6.1% n/a 7.5% 6.7%
1992 7.4% 7.4% 9.1% 7.4%
1993
July 1994
-----------------------------------------------------------------------
-----------------------------------------------------------------------
SOURCE: U.S. BUREAU OF LABOR STATISTICS
</TABLE>
Manufacturing and defense are the top two segments of the San Diego economy
based on total dollars generated. A large part of the manufacturing revenues
are related to the defense industry. Therefore, for the most part, the defense
industry has been the primary employer in San Diego. While the city has
diversified over the years and is now home to prominent research facilities and
well-known health care centers it still is home to one of the largest military
complexes in the world. The livelihood of more than 1/5th of San Diego's
population is tied to defense spending. Defense expenditures have been fairly
level since 1989 with small increases and decreases. However, in 1993 San Diego
showed an increase in defense related revenues which was largely due to an
increase in the value of procurement contracts awarded by the Department of
Defense.
There have also been many setbacks in the defense industry in San Diego. As of
December 31, 1993 the San Diego Naval Training Center (NTC), Recruit Training
Command, was closed. The remaining NTC operations are slated for closure by
1999. San Diego's Miramar Naval Air Station was realigned and many pilots were
relocated to other bases in California and Nevada. Between 1990 and 1993
General Dynamics, formerly San Diego's largest private employer, decreased its
staff from 17,500 employees to 2,200 employees. In addition the Space Systems
division of General Dynamics was sold to Martin Marietta in 1993, who will move
most of the division to Denver, Colorado.
In order to counter the effects of the defense cuts at the federal level the
City applied for and was awarded two significant grants. These grants will be
used to assist defense-related firms in converting their technologies to more
competitive applications and retrain workers to compete in the growing high-tech
job
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 16
<PAGE>
market. In addition, San Diego was designated as one of the few ports where
military operations will be consolidated. While the number of Navy personnel
decreased from 1992 to 1993, a small net increase is expected as personnel are
reassigned to San Diego because of other base closures across the country.
Other key factors regarding the San Diego economy are tourism and the trend of
retail sales. Tourism and retail sales along with other economic indicators
have declined dramatically in terms of growth compared to years prior to 1990.
While San Diego's economy has experienced a decline in real gross national
product (GNP) since 1990, the decline has been decreasing to a slight decrease
in 1992 and 1993 of 0.4 percent and 0.1 percent, respectively. The GNP is
projected to grow 1 percent in 1994. San Diego is expected to continue to lag
the rest of the nation's economic growth, however, it should continue to
outperform California as a whole.
San Diego benefits primarily from its proximity to Mexico and secondary to its
proximity to the Los Angeles metropolitan area. Its location adjacent to the
Mexico border provides an extended labor force and retail opportunities. San
Diego has one of California's three major port complexes and is the gateway to
the Pacific Rim Trade. While reductions in defense spending had a ripple affect
through the regions defense related industries San Diego's status as a major
port and the awarded grants will be instrumental in reversing the negative
impact. Unemployment is expected to decline at a slow pace in the near future
but will most likely continue to be higher than the national average. Slow
growth is expected in the next few years.
NEIGHBORHOOD ANALYSIS
The subject is located approximately six miles north of downtown San Diego. The
immediate neighborhood is roughly bound by Mission Bay to the south, Ingraham
Street to the west, northbound entrance to I-5 to the north and Interstate 5 to
the east. Adjacent to the south is the Mission Bay Memorial Annex. To the
east, across Mission Bay Drive is the Sleepy Time Motel and Mission Bay Memorial
Hospital. To the north and west is a Ford Dealership. Mission Bay Drive is a
north/south, four-lane, two-way road extending from the west side of I-5 for
approximately one mile and connecting back to the Interstate. On northbound
Mission Bay Drive the property is only accessible by making a U-turn at Magnolia
Avenue approximately 1/8th mile north of the subject. This commercial
neighborhood is virtually 100 percent developed and is characterized by the
Mission Bay Hospital, car dealerships and repair shops and motels. It serves
highway traffic, visitors to Mission Bay/Pacific Beach, and the local
population. Extending to the west are both commercial and middle-income
residential uses. The subject is very compatible with the surrounding
neighborhood uses.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 17
<PAGE>
CONCLUSION
San Diego and the Mission Bay area have experienced a decline in growth since
1990 to record low levels. While growth has been decreasing the current state
of the economy should remain stable due to San Diego's proximity to the Mexico
border and the positive offsetting trends relating to the defense industry
specific to San Diego. The subject neighborhood provides all the necessary
services travelers may need and the nearby Mission Bay Park area generates
additional traffic. The area and neighborhood are considered desirable. The
slow growth and in some areas negative trends appears to have leveled off.
While slow growth is expected to continue through 1994 and 1995 the desirability
of the area is expected to be maintained in the future.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 18
<PAGE>
COMPETITION SUMMARY
SUPER 8 MISSION BAY MOTEL, SAN DIEGO, CA
<TABLE>
<CAPTION>
PROXIMITY # OF
PROPERTY TO SUBJECT ROOMS YOC AMENITIES
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUBJECT -- SUPER 8 MISSION BAY -- 117 1987 Pool; courtesy shuttle
4540 Mission Bay Drive free VCR/Movies; cable
PRIMARY COMPETITION
1 Comfort Inn 1/4 mile North 86 Heated pool & spa, Elevator
4610 DeSoto Street Coin laundry, Contl breakfast
24-hour rest., free movies
2 Days Inn 1 mile South 101 1984 Outdoor pool, spa, cable,
2575 Clairmont Drive Cont'l breakfast, newspaper
- -----------------------------------------------------------------------------------------
TOTALS/AVERAGES
PRIMARY COMPETITION 187/94 -- --
SECODARY COMPETITION
1 Friendship Inn 1/4 mile South 40 1940 Basic cable
4345 Mission Bay Drive
2 Sleepy Time Directly 66 n/a Small heated pool,
4545 Mission Bay Drive Across the St. cable
3 Trade Winds 1/3 mile South 16 50s ---
4305 Mission Bay Drive
- ------------------------------------------------------------------------------------------
TOTALS/AVERAGES--
SECONDARY COMPETITION 122/41 --- ---
</TABLE>
<TABLE>
<CAPTION>
MARKET SEGMENTATION PUBLISHED RATES ESTIMATED
---------------------------------- ------------------------------- --------------------
PROPERTY COMMERCIAL MTG/CONV. LEISURE SINGLE DOUBLE OTHER OCCUPANCY ADR
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUBJECT -- SUPER 8 MISSION BAY 15% 0% 85% $55.00 IS $63.00 IS n/a 53% $41.00
4540 Mission Bay Drive $50.00 OS $58.00 OS n/a
PRIMARY COMPETITION
1 Comfort Inn 10% 0% 90% n/a $69.00 IS $79.00 WE 75% $55.00
4610 DeSoto Street n/a $59.00 OS n/a (estimated)
2 Days Inn 8% 5% 87% $64.00 IS $69.00 IS n/a 65% $46.00
2575 Clairmont Drive $46.00 OS $49.00 OS n/a
- ------------------------------------------------------------------------------------------------------------------------------------
TOTALS/AVERAGE--
PRIMARY COMPETITION 9% 2% 89% --- --- --- 70% $50.50
SECODARY COMPETITION
1 Friendship Inn 0% 0% 100% $31.00 $46.00 n/a n/a n/a
4345 Mission Bay Drive
2 Sleepy Time 0% 0% 100% $43.60 IS $48.70 IS n/a 60% $35.00
4545 Mission Bay Drive $37.05 OS $42.60 OS n/a
3 Trade Winds 10% 0% 90% $31.00 $34.00 $37.00 60% n/a
4305 Mission Bay Drive
- ------------------------------------------------------------------------------------------------------------------------------------
TOTALS/AVERAGES--
SECONDARY COMPETITIONS 3% 0% 97% --- --- --- 60% $35.00
<FN>
** "IS" REPRESENTS IN SEASON, "OS" REPRESENTS OUT OF SEASON, AND "WE" REPRESENTS
WEEKEND**
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 19
<PAGE>
LAND VALUE ADJUSTMENT GRID
SUPER 8 MISSION BAY MOTEL, SAN DIEGO, CA
DECEMBER 1, 1994
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
SUBJECT SALE NO. 1 SALE NO. 2
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Location 4540 Mission Bay Dr Camino de la Reina N of Damen, W of I-5
City, State San Diego, CA San Diego, CA San Diego, CA
Size (sq ft) 46,609 84,119 72,745
Sale Price 2,235,000 2,175,000
Sales Price per sq ft $26.57 $29.90
----------------------------------------------------------------------------------------
Adjustments
Property Rights Conveyed Fee Simple = Fee Simple =
Adjusted Unit Sales Price $26.57 $29.90
Financing Terms Market terms = Market terms =
Adjusted Unit Sales Price $26.57 $29.90
Conditions of Sale Normal = Normal =
Adjusted Unit Sales Price $26.57 $29.90
Market Conditions Jun-91 - May-90 -
Adjusted Unit Sales Price $21.26 $22.42
------------------------------------------------------------------------------------------
Location/Physical Adjustments
Location Mission Bay Area Univ. Heights Area + Pacific Beach =
Size (sq ft) 46,609 84,119 + 72,745 +
Access/Frontage Interior/Good Interior/Good = Interior/Good =
Zoning/Use C-1 MV-M - M-1 =
Topography/Shape Level/Rectagular Level/Rectangular = Level/Rectangular =
------------------------------------------------------------------------------------------
Total Location/Physical Adjustments + +
--------------------------------------------------------------
Adjusted Price/Sq. Ft. $26.60 $25.80
--------------------------------------------------------------
<CAPTION>
SALE NO. 3 SALE NO. 4 LISTING
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Location 3880 Greenwood St. Hotel Circle S. Hotel Circle S
City, State San Diego, CA San Diego, CA San Diego, C
Size (sq ft) 109,336 348,480 348,48
Sale Price 2,838,000 8,363,520 6,500,00
Sales Price per sq ft $25.96 $24.00 $18.65
------------------------------------------------------------------------------------------
Adjustments
Property Rights Conveyed Fee Simple = Fee Simple = Fee Simple =
Adjusted Unit Sales Price $25.96 $24.00 $18.65
Financing Terms Market terms = Cash = n/a =
Adjusted Unit Sales Price $25.96 $24.00 $18.65
Conditions of Sale Normal = Normal = Normal =
Adjusted Unit Sales Price $25.96 $24.00 $18.65
Market Conditions Nov-89 - Oct-88 - Current Listing -
Adjusted Unit Sales Price $19.47 $16.80 $16.79
------------------------------------------------------------------------------------------
Location/Physical Adjustments
------------------------------------------------------------------------------------------
Location Sports Arena Area + Hotel Circle S. + Hotel Circle S +
Size (sq ft) 109,336 + 348,480 + 348,480 +
Access/Frontage Interior/Fair-Poor + Interior/Good = Interior/Good =
Zoning/Use MV-B = MV-CV = MV-Cv =
Topography/Shape Level/Rectagular = Level/Rectagular = Level/Rectagular =
------------------------------------------------------------------------------------------
Total Location/Physical Adjustments + + +
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Adjusted Price/Sq. Ft. $26.30 $26.00 $26.00
------------------------------------------------------------------------------------------
</TABLE>
Minimum Adjusted Price: $25.80
Maximum Adjusted Price: $26.60
Mean Adjusted Price: $26.23
Concluded Price/Sq.Ft.: $26.00
Concluded Land Value: $1,211,834
Rounded: $1,212,000
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 20
<PAGE>
MARKET ANALYSIS
OVERVIEW
A report from the San Diego Convention and Visitors Bureau indicates that
approximately 2,500 hotel rooms were constructed per year between 1984 and 1989.
Growth in rooms continued through 1993 but at a much slower rate. A majority of
the hotels constructed were full service resort type properties. San Diego
County divides its hotel markets into 12 areas. The subject is located within
the Mission Bay/Pacific Beach market. This market includes all of Mission
Beach, Mission Bay and Pacific Beach. It is bordered on the south by Interstate
8, to the east by Interstate 5 and to the north by La Jolla. Of the rooms
constructed since 1989 only 81 were within the Mission Bay/Pacific Beach market.
This was from the construction of the Ocean Park Inn in 1991 and the expansion
of the San Diego Princess with eleven rooms in 1992. According to the San Diego
Planning Department no hotels are in the proposal stage for development.
Estimated annual growth in hotel rooms over the last five years in the San Diego
Metropolitan area is shown in the following chart.
NEWLY CONSTRUCTED HOTEL ROOMS
[CHART]
SOURCE: NORTHERN KY CHAMBER OF COMMERCE
MARKET SEGMENTS/COMPETITIVE SUPPLY
We have identified five hotels in our total competitive supply. Of these
hotels, two are positioned in the primary competitive supply, and three are
considered secondary competition. The primary competitors are associated with
established chains and the secondary competitors are not associated with
established chains. Details of the competing properties are located on the
facing page.
The primary segments served in the subject's market area are leisure and
commercial. Among the primary competitors and the subject the distribution
among these two segments is approximately 90/10. The Comfort Inn, located
approximately 1/8 mile north of the subject at the northeast corner of Mission
Bay Drive and Garnet Avenue, was formerly a Travelodge. Since the change in
franchise this property has been
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 21
<PAGE>
marketing strongly and working towards increasing occupancy while at least
maintaining their average daily rate. This property has an edge in terms of
amenities and the Comfort Inn affiliation. It is also more visible because of
its location on a hill. The Days Inn is located one-mile south of the subject
on Clairmon Drive. This property also has a stronger chain-affiliation and is
at least somewhat visible from the highway. The Days Inn is also located in
closer proximity to the Visitor/Information Center and access to the Mission Bay
area.
The properties identified as secondary competition are considered so mainly
because of their close proximity to the Super 8. These properties are not
affiliated with a chain, cater virtually 100 percent to the leisure segment and
strictly cater to price oriented guests. These properties are not as desirable
from the exterior and do not maintain the level of quality of the chain
affiliated motels. However, demand for this type of property is expected to
continue.
AVERAGE DAILY RATE AND OCCUPANCY
The industry surveys, such as the Host Report, are typically only published once
or twice a year, and therefore, cannot cover the most current state of the hotel
industry. This has not been an issue in past years since declines were
projected and realized. Since the national hotel industry has shown signs of
real recovery, based on the increased activity in sale transactions and the
reported increase in occupancy by many markets, we cannot rely solely on these
surveys in projecting future trends.
Occupancy at the competitive properties overall is basically in-line with
nationwide trends, however, the average daily rate has lagged. Statistics
relating to the Mission Bay/Pacific Beach market include full service and resort
hotels as well as limited service motels. While the performance of the full
service properties has declined in the last three years it has not declined to
the extent of the limited service properties in this market. Statistics
relating to hotels with rates ranging between $35.01 and $55.00 encompasses the
entire metropolitan area, including downtown San Diego. The slight increase in
performance in 1992 was primarily due to three major sporting events and three
large conventions that did not occur in 1993.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Historical ADR and Occupancy
Mission Bay/Pacific Beach Market and San Diego Metropolitan Area
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
MISSION BAY/PACIFIC BEACH ADRS RANGING BETWEEN $35.01 TO $55.00
------------------------- -------------------------------------
YEAR OCCUPANCY ADR OCCUPANCY ADR
---- --------- --- --------- ---
<S> <C> <C> <C> <C>
1990 71.3% $ 97.20
1991 70.7% $ 98.35 63.6% $51.38
1992 67.9% $ 102.82 59.2% $55.29
1993 67.8% $ 100.24 59.2% $57.41
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
Sources: PKF Consulting, Trends in the Hotel Industry
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 22
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------
----------------------------------------------------------------------
Nationwide and Pacific Region
Limited Service Properties
---------------------------------------------------------------------
---------------------------------------------------------------------
Nationwide Pacific Region
--------------------------------------------------------------------
Year End ADR Occupancy ADR Occupancy
-------- ---- --------- ---- ----------
<S> <C> <C> <C> <C>
1990 $42.57 63.4% $70.21 66.6%
1991 $43.91 62.6% $70.85 64.0%
1992 $44.45 61.7% $71.39 63.3%
1993 $45.51 63.4% $71.63 62.9%
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
Source: ICVA, Smith Travel, AA Host Report
-----------------------------------------
-----------------------------------------
Super 8 Mission Bay
San Diego, CA
HISTORICAL OCCUPANCY AND ADR
-----------------------------------------
-----------------------------------------
<TABLE>
<CAPTION>
AVERAGE
YEAR OCCUPANCY ADR
---- --------- ----
<S> <C> <C>
1991 67.47 42.08
1992 65.13 42.25
1993 52.84 41.92
1994* 52.97 40.81
-----------------------------------------
-----------------------------------------
<FN>
* JANUARY THROUGH JUNE ONLY
</TABLE>
Since 1991 performance at the subject has decreased in terms of average
occupancy. This is due to the general economic conditions of San Diego and the
nation overall. It is also due to the decline in the condition of the property.
The property was allowed to decline to a point that virtually everything needed
to be replaced in 1993. While it appears occupancy is decreasing in 1994 this
is not the case. The above 1994 figure is approximately 1 percent higher than
the same period in 1993 and this does not include July through September which
is peak season. As of fiscal year end November 30, 1995 we believe the Super 8
will reach 58 percent occupancy. As of fiscal year end 1997 we project a
stabilized occupancy of 65 percent.
Average daily rate has declined in the last four years. The hotel is currently
concentrating on occupancy over average daily rate. On a daily basis
consideration is given to discounting the room rate on a reservation by
reservation basis until the hotel reaches an occupancy of approximately 70
percent. At this point the full rate is typically charged. This policy has
resulted in a slightly lower average daily rate for the first six months of 1994
compared to the first six months of 1993. Policies similar to this are also
ongoing at the primary competing properties. The hotel has also been
advertising package deals such as Sea World Packages and dinner cruise packages.
With these packages a full daily rate is charged but there is something free
included. While the attraction is a cost to the hotel it is typically at a
discount when purchased in bulk. The major improvements made to the interior of
the hotel, the package deals and the concentration on becoming highly occupied
should have a positive impact on the average daily rate at fiscal year end
November 1995 projected at $43.00. This rate is projected to grow at 3 percent
per year over the projection period. This growth rate, which is at the lower
end of industry standards, is considered reasonable since we are projecting
focus on occupancy.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 23
<PAGE>
In summary, there has been a decline in hotel performance in the market and the
subject specifically over the last three years. This decline appears to have
reached a bottom point but is not expected to immediately move in an upward
direction. The hotels that focus on their position in the market will perform
above those that are just reactive to economic conditions. Focus on maintaining
and increasing market share while maintaining the condition of the property
should ensure the beginning of an upward trend for the subject property. This
is further supported since there are no plans for additions to supply in the
near future.
<TABLE>
<CAPTION>
--------------------------------------------------------------
--------------------------------------------------------------
Projected Occupancy and Average Daily Rate
--------------------------------------------------------------
--------------------------------------------------------------
Year Beginning ADR Growth Average Daily
December 1, 1994 Rate Rate Occupancy
---------------- ---- ---- ---------
<S> <C> <C> <C>
FY 1995 n/a $43.00 58%
FY 1996 3% $44.29 62%
FY 1997 3% $45.62 65%
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 24
<PAGE>
HIGHEST AND BEST USE
The uses to which a property can be put affect its value. This is recognized by
the concept of highest and best use, generally understood to mean:
THE REASONABLY PROBABLE AND LEGAL USE OF VACANT
LAND OR AN IMPROVED PROPERTY, WHICH IS PHYSICALLY
POSSIBLE, APPROPRIATELY SUPPORTED, FINANCIALLY
FEASIBLE AND RESULTS IN THE HIGHEST VALUE.
The highest and best use of the land as if vacant and available for use may be
different from the highest and best use of the improved property. This is true
when the improvement is not an appropriate use, but makes a contribution to the
total property value in excess of the value of the site. Thus, in arriving at
our opinion of the highest and best use, we first analyzed the property as
though the land were vacant and then analyzed it as improved. In both
instances, the conclusion of highest and best use must be determined by
examining the physically possible, legally permissible, financially feasible and
maximally productive uses of the site.
AS VACANT
PHYSICALLY POSSIBLE - The physical aspects of the site such as size, shape, and
topography impose the first constraints on the possible use of the property.
The site is basically level and rectangular in shape. The site has fair
visibility and all normal utilities are available. No physical characteristics
were observed that would impose constraints on the site's development. Given
the characteristics of the site and the surrounding land uses, possible uses
would include a wide range of commercial and office uses.
LEGALLY PERMISSIBLE - Legal restrictions, as they apply, include the public
restrictions of zoning. The property is zoned C-1. Permitted uses include
restaurants, retail stores and services. C-1 also includes all uses permitted
in zoning classification CA which includes hotels, motels, and time share
projects.
FINANCIALLY FEASIBLE AND MAXIMALLY PRODUCTIVE - The site is located off a major
interstate but is not visible from the highway unless a large highway sign is
allowed. As described in the neighborhood section, most surrounding uses
include limited service motels, auto dealerships and repair shops and a few food
establishments. The neighborhood is virtually 100 percent developed and no
comparable vacant sites are available. Due to the sites location off I-5, its
proximity to Mission Bay and the characteristics of the surrounding uses would
support improvement with a commercial use. However, since market rates are
insufficient to provide an adequate return on development costs, the cautious
attitude concerning the future of the local economy and the current negative
stigma attached to new development, it is our opinion that at this time
development is not feasible. The most financially feasible and maximally
productive use for the site would be to hold for future commercial development.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 25
<PAGE>
CONCLUSION - We believe the highest and best use of the site as though vacant,
as of December 1, 1994, would be to hold for future commercial development.
AS IMPROVED
PHYSICALLY POSSIBLE - The overall property is in good condition and is well-
suited to its current use.
LEGALLY PERMISSIBLE - The existing zoning of the property permits the existing
commercial use.
FINANCIALLY FEASIBLE AND MAXIMALLY PRODUCTIVE - We compared the estimated value
of the property as improved to its estimated net value as a vacant site. The
comparable sales we examined in considering land value (shown later) indicate
that the site as vacant is worth less that the property as improved. Even
though the current hotel market is adequately supplied it would not be
economically feasible to demolish the existing improvements. Given the layout,
interior design and apparent level of demand for the existing improvements, it
is our opinion that the only financially feasible and maximally productive use
of the property is its current use.
CONCLUSION - We have concluded that the highest and best use of the property, as
improved, as of December 1, 1994, is its current use.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 26
<PAGE>
VALUATION
Three approaches are generally used to estimate value: the cost, sales
comparison and income capitalization approaches. Each approach assumes
valuation of the property at its highest and best use. These approaches are
more fully discussed on the following pages.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 27
<PAGE>
LAND VAULE ADJUSTMENT GRID
SUPER 8 MISSION BAY MOTEL, SAN DIEGO CA
DECEMBER 1, 1994
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
SUBJECT SALE NO. 1 SALE NO. 2
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Location 4540 Mission Bay Dr. Camino de la Reina N of Damen, W of I-5
City, State San Diego, Ca San Diego, CA San Diego, CA
Size (sqft) 46,609 84,119 72,745
Sale Price 2,235,000 2,175,000
Sales Price per Sq ft 26.57 29.90
---------------------------------------------------------------------------------------------
Adjustments
Property Rights Conveyed Fee Simple = Fee Simple =
Adjusted Unit Sales Price $26.57 $29.90
Financing Terms Market terms = Market terms =
Adjusted Unit Sales Price $26.57 $29.90
Conditions of Sale Normal = Normal =
Adjusted Unit Sales Price $29.57 $29.90
Market Conditions Jun-91 - May 90 -
Adjusted Unit Sales Price $21.26 $22.42
----------------------------------------------------------------------------------------------
LOCATION/PHYSICAL ADJUSTMENTS
----------------------------------------------------------------------------------------------
Location Mission Bay Area Univ. Heights + Pacific Beach =
Size (sq ft) 46,609 84,119 + 72,745 +
Access/Frontage Interior/Good Interior/Good = Interior/Good =
Zoning/Use C-1 MV-M - M-1 =
Topography/Shape Level/Rectagular Level/Rectangular = Level/Rectangular =
----------------------------------------------------------------------------------------------
Total Location/Physical Adjustments + +
-------------------------------------------------------
Adjusted Price/Sq. Ft. $26.60 25.80
-------------------------------------------------------
Minimum Adjusted Price: $25.80
Maximum Adjusted Price: $26.60
Mean Adjusted Price: $26.23
Concluded Price/Sq. Ft.: 26.00
Concluded Land Value: $1,211,834
Rounded: $1,212,000
<CAPTION>
--------------------------------------------------------------------------------------------
SALE NO. 3 SALE NO. 4 LISTING
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Location 3880 Greenwood St. Hotel Circle S. Hotel Circle S.
City, State San Diego, CA San Diego, CA San Diego, CA
Size (sqft) 109,336 348,480 348,480
Sale Price 2,838,000 8,383,520 6,500,000
Sales Price per Sq ft $25.96 $24 $18.65
--------------------------------------------------------------------------------------------
Adjustments
--------------------------------------------------------------------------------------------
Property Rights Conveyed Fee Simple = Fee Simple = Fee Simple =
Adjusted Unit Sales Price $25.96 $24.00 $18.65
Financing Terms Market terms = Cash = n/a =
Adjusted Unit Sales Price $25.96 $24.00 $18.65
Conditions of Sale Normal = Normal = Normal =
Adjusted Unit Sales Price $25.96 $24.00 $18.65
Market Conditions Nov-89 - Oct-88 - Current Listing -
Adjusted Unit Sales Price $19.47 $16.80 $16.79
--------------------------------------------------------------------------------------------
LOCATION/PHYSICAL ADJUSTMENTS
--------------------------------------------------------------------------------------------
Location Sports Arena Area + Hotel Circle S. + Hotel Circle S +
Size (sq ft) 109,336 + 348,480 + 348,480 +
Access/Frontage Interior/Fair-Poor + Interior/Good = Interior/Good =
Zoning/Use MV-B = MV-CV = MV-CV =
Topography/Shape Level/Rectagular = Level/Rectagular = Level/Rectagular =
--------------------------------------------------------------------------------------------
Total Location/Physical Adjustments + + +
--------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 28
<PAGE>
COST APPROACH
The cost approach is based upon the principle of substitution which states that
no rational buyer will pay more for a property than the amount for which he can
obtain a comparable site and construct improvements of equal desirability and
utility, assuming no undue delay.
This approach involves the application of several basic steps. First, the value
of the land as if vacant is estimated. Second, the current cost of replacing
the improvements is estimated. Third, an entrepreneurial profit sufficient to
attract a developer to undertake the risk associated with the project is
estimated. Fourth, accrued depreciation is estimated and deducted from the cost
new estimate (inclusive of profit) to arrive at a contributory value of the
improvements. In the fifth step, the land value is added to the contributory
value of the improvements to arrive at a value of the real estate. Finally, we
add amounts for personal property and intangible business value.
SITE VALUATION
In estimating the value of the site as if vacant, the sales comparison approach
is used. In this approach, value is estimated by comparing the subject site to
similar properties that have been sold recently or are currently being offered
on the market for sale. We have consulted local brokers, appraisers and data
bases for recent sales of comparable properties within the subject area.
Principals and/or the broker handling the sale were then contacted to obtain
further information on the properties and transactions. The available market
data was investigated, analyzed and compared to the subject.
In estimating the value of the site, price per square foot was used since local
investors and brokers typically rely upon this method of analysis. The table on
the facing page summarizes the sales and the adjustments made. Following is a
brief description of the adjustments by relevant characteristics and details of
each sale have been maintained in our files.
The market sales used ranged in date from a current listing to October 1988, in
size from 72,745 to 348,480 square feet and have unadjusted sales prices from
$18.65 to $29.90 per square foot.
PROPERTY RIGHTS CONVEYED - All sales were reportedly fee simple transfers.
FINANCING TERMS - All sales were reportedly cash transactions or financed at
terms equivalent to cash.
CONDITIONS OF SALE - None of the sales were found to include any abnormal
conditions affecting the final sale price.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 29
<PAGE>
MARKET CONDITIONS - As discussed in previous sections of this report, San Diego
County has experienced a slow economic growth and in many areas declines in
economic indicators. Sales 1 through 4 occurred between 1988 and 1992 which was
a superior economic period compared to current conditions. Therefore all four
sales required negative adjustments. This is further supported by comparing
sale 4 to the current listing which involve the same site. The current listing
also required a negative adjustment. A property for sale is typically listed
above market to leave room for negotiation. This site has been on the market
for 4 years and was decreased substantially in 1992. Even though the listing
price was decreased it is our opinion it is still above market.
LOCATION - Sales 1 is located off Interstate 8 in the University Heights area.
This location is further removed from the coast and is less densely developed.
Sale 3 is located in the Sports Arena area. While generally this a desirable
location because of its proximity to the sports arena, downtown and the coast
this particular site is not on a main thoroughfare but is hidden on a secondary
street. Sale 3 and the current listing are located off Interstate 8 in an area
known as Hotel Circle. This area has declined in desirability over the years
and is inferior to the subject in terms of its distance from the coast and
Mission Bay. Sales 1, 3, 4 and the current listing required various levels of
positive adjustments.
SIZE - The larger the size of a property, the smaller the price per unit, and
vice versa, assuming all other variables are constant. All of the sales were
larger than the subject and therefore positive adjustments were necessary.
ACCESS/FRONTAGE - We considered the significance and degree of road frontage,
exposure, traffic and general activity in estimating the appropriate adjustment.
While the subject does not have visibility from the highway it is located on a
heavily traveled thoroughfare. Sales 1, 2, 3 and the current listing are
similar to the subject in terms of access/frontage. Sale 3 is considered
inferior since it is located on a secondary one-way street. A positive
adjustment was necessary.
ZONING/USE - The zoning classification of a site can limit legally permitted
uses which can directly affect the value of the site. Sales 2, 3, 4 and the
current listing were relatively similar in terms of permissible uses. No
adjustments were necessary. Sale 2 is was zoned M-1 which permits uses allowed
in all commercial zoning classifications. The zoning classification of the
property in sale 1 allows a slightly wider range of uses. A negative adjustment
was required.
SHAPE/TOPOGRAPHY - All of the sales were relatively similar in terms of
shape/topography. No adjustments were necessary.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 30
<PAGE>
The adjusted sale prices range from $25.80 to $26.60 per square foot, with an
average adjusted price of $26.23 per square foot. Based on our analysis, it is
our opinion that the market value of the site as if vacant, as of December 1,
1994, is $26.00 per square foot, or as follows:
46,609 square feet x $26.00/square foot= $1,211,834
Rounded: $1,212,000
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 31
<PAGE>
COST APPROACH SUMMARY
SUPER 8 MISSION BAY MOTEL, SAN DIEGO, CA
DECEMBER 1, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Estimated Replacement Cost of the Improvements $2,719,679
Less: Physical Deterioration 20% (543,936)
--------
Estimated Replacement Cost less Physical Deterioration $2,175,743
Less: Functional Obsolescence 20% (435,149)
External Obsolescence 30% (652,723)
-------
Total Depreciated Replacement Cost of Improvements $1,087,871
Plus: Depreciated Value of Site Improvements $65,000
Land Value 1,212,000
---------
Total Depreciated Value of Real Estate $2,364,871
Plus: Personal Property 457,000
-------
Value Estimate via the Cost Approach $2,821,871
Rounded $2,820,000
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 32
<PAGE>
VALUATION OF IMPROVEMENTS
The most accurate method of estimating replacement cost is to obtain bids from
contractors. In lieu of actually obtaining bids, we have estimated the
replacement cost new using MARSHALL VALUATION SERVICE manual published by
Marshall and Swift. A summary of the cost approach conclusions is located on
the facing page. Following is a brief explanation of each component.
ESTIMATE OF BUILDING REPLACEMENT COST
The Marshall Valuation Service calculator method, indicated a base construction
cost of $49.75 per square foot of gross area for a Class D average quality
construction hotel. After refining for HVAC and floor area-perimeter and then
applying current cost and local area multipliers, a base price of $54.11 per
square foot was obtained. We added an additional cost for the closed circuit
television security system which totaled $16,555.
We then added an additional amount for soft costs not included in this figure.
These costs include professional fees, property taxes and carrying costs during
construction. The soft costs amounted to 8 percent of the total replacement
cost new of the improvement or $183,143.
ENTREPRENEURIAL PROFIT
Entrepreneurial profit is a necessary factor of production, without which a
project would not be created. The appropriate level of entrepreneurial profit
depends on the riskiness of the subject investment in relation to alternative
investments of similar risks available in the market. It is our opinion that
the appropriate level of entrepreneurial profit would be in the 5 percent to 15
percent range. We have selected 10 percent as an appropriate level for the
subject or $247,244. This results in the following calculation:
<TABLE>
<CAPTION>
<S> <C>
Adjusted Base Cost x Area $2,272,737
+ Additional costs 16,555
+ Soft Costs 183,143
---------
Total Development Costs $2,472,435
Entrepreneurial Profit 247,244
---------
Estimated RCN $2,719,679
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 33
<PAGE>
DEPRECIATION
PHYSICAL DETERIORATION - Physical deterioration encompasses wear and tear, which
is evident during the field inspection, and typical wear associated with a
building of this quality and use. We utilized the effective age-economic life
method which estimates depreciation by dividing the effective age by its
economic life. The actual age of the building is 7 years. We also considered
the effective age of the improvements to be 7 years. Based on a useful life of
35 years, we arrived at an estimate of physical deterioration of 20 percent.
FUNCTIONAL OBSOLESCENCE - Functional obsolescence reflects impairment of
operational capacity or efficiency, or simply the inability of a facility to
perform adequately the function for which it is employed. While the property
continues to function as a hotel there are several items that could improve its
performance. Visibility is impaired by the lack of adequate signage. The
property is barely visible until it is passed. Visibility from the highway
would be ideal, or at least after exiting the highway. A tall highway sign
would be necessary, however, the city is opposed to signs above a certain level.
At this point this problem is incurable unless the city changes its viewpoint.
The lobby entrance is difficult to identify. Since parking is allowed up to all
points of the building including the lobby the property is difficult to access.
A more prominent entrance could attract more walk-ins. Finally the pool and
pool area is abnormally small. It would be costly to increase the size of the
pool and this would decrease the amount of available parking. However,
management did indicate that they do lose some business because of this factor.
Based on this analysis, the functional obsolescence was estimated at 20 percent
or $435,149. All of this obsolescence is potentially curable. However, other
than alteration of the lobby area it is highly unlikely that the changes would
be made.
EXTERNAL OBSOLESCENCE - External obsolescence is defined at the diminished
utility of a structure due to negative influences from outside the site. The
potential net income the property generates based on stabilized revenues and
expenses does not support the current development costs of a property similar to
the subject less physical depreciation and functional obsolescence. Based on
this analysis, the external obsolescence was estimated at 30 percent or
$652,723.
SITE IMPROVEMENTS
Site improvements consist primarily of asphalt and concrete paving, concrete
sidewalks, signage, a small pool surrounded by a three-sided brick wall and
moderate landscaping. The replacement cost of these items totals $103,000
(rounded). The depreciated cost is $65,000 (rounded).
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 34
<PAGE>
PERSONAL PROPERTY
The furniture and fixtures have undergone a major update in the last year
however at an effort to keep costs down quality was maintained but the degree of
furniture, etc., in the rooms was kept to a minimum. The cost estimate for
furniture, fixtures and equipment was based on the average industry standard for
this type of property at $7,100 per room or $830,700. The depreciated cost of
the personal property totals $457,000 (rounded).
INTANGIBLE BUSINESS VALUE
The property requires that certain expenditures be made to ensure the proper
operation and management of the hotel as a going concern. For a new hotel,
these items include pre-opening marketing and operating costs and the initial
franchise fee. This cost is can be estimated based on the difference between
the income capitalization and cost approaches. While the properties affiliation
with a chain should provide some level of business value the decline in the
local economy and the decline in the hotel due to external and internal factors
has diminished the business value component of the going concern to zero. This
is further supported by the existence of external obsolescence as discussed
earlier.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 35
<PAGE>
IMPROVED SALES ADJUSTMENT GRID
SUPER 8 MISSION BAY MOTEL, SAN DIEGO, CA
DECEMBER 1, 1994
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
SUBJECT SALE NO. 1 SALE NO. 2 SALE NO. 3
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Property Name Super 8 Motel Best Western Kings Inn Econolodge
Location 4540 Mission Bay Dr 4450 Otay Valley Rd 1333 Hotel Circle S. 3880 Greenwood St.
City, State San Diego, CA Chula Vista, CA San Diego, CA San Diego, CA
Sale Price ---- 2,250,000 3,100,000 2,300,000
Sale Price/Room ---- $18,443 $22,143 $15,333
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Adjustments
Property Rights Conveyed Fee Simple = Fee Simple = Fee Simple =
Adjusted Unit Sales Price $18,443 $22,143 $15,333
Financing Terms Cash = Cash = Market =
Adjusted Unit Sales Price $18,443 $22,143 $15,333
Conditions of Sale Normal = Normal = Normal =
Adjusted Unit Sales Price $18,443 $22,143 $15,333
Market Conditions Jul-94 = Mar-94 = Dec-93 =
Adjusted Unit Sales Price $18,443 $22,143 $15,333
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Location/Physical Adjustments
Location Highway Chula Vista + Hotel Circle + Sports Arena Area
Number of Rooms 117 122 = 140 + 150 +
Age/Condition 1987/Good Good = 1959/87/Avg + 1987/Avg +
Quality of Construction Average Average = Average = Average =
Amenities Limited Limited = Limited - Limited +
Occupancy 53% n/a + 27% + 51% =
--------------------------------------------------------------------------------------------------------
Total Location/Physical Adjustments + + +
--------------------------------------------------------------------------------------------------------
Adjusted Price/Room $24,000 $25,500 $23,000
--------------------------------------------------------------------------------------------------------
Minimum Adjusted Price: $23,000
Maximum Adjusted Price: $25,500
Mean Adjusted Price: $24,067
Concluded Price/Room $24,000
Concluded Value: $2,808,000
Rounded: $2,810,000
<CAPTION>
------------------------------------------------------------------------------------------------------
SALE NO. 4 SALE NO. 5
--------------------------------------------------------
<S> <C> <C>
--------------------------------------------------------
Property Name Good Nite Inn Day's Inn
Location 4545 Waring Rd. 1449 9th Avenue
San Diego, CA San Diego, CA
Sale Price 2,000,000 1,200,000
Sale Price/Room $21,505 $25,000
-------------------------------------------------------
Adjustments
Property Rights Conveyed Fee Simple = Fee Simple =
Adjusted Unit Sales Price $21,505 $25,000
Financing Terms Market = Market =
Adjusted Unit Sales Price $21,505 $25,000
Conditions of Sale Normal = Normal =
Adjusted Unit Sales Price $21,505 $25,000
Market Conditions Dec-93 = Apr-92 -
Adjusted Unit Sales Price $21,505 $22,500
-------------------------------------------------------
Location/Physical Adjustments
Location Highway + Downtown -
Number of Rooms 93 - 48 -
Age/Condition 1970/Avg + 1970/Fair +
Quality of Construction Average = Average =
Amenities Limited - Limited =
Occupancy n/a = n/a =
-------------------------------------------------------
Total Location/Physical Adjustments + +
-------------------------------------------------------
Adjusted Price/Room $23,700 $23,600
-------------------------------------------------------
Minimum Adjusted Price:
Maximum Adjusted Price:
Mean Adjusted Price:
Concluded Price/Room
Concluded Value:
Rounded:
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 36
<PAGE>
SALES COMPARISON APPROACH
The sales comparison approach is based upon the principle of substitution, which
assumes that a prudent buyer will not pay more for a property than it would cost
to purchase an equally desirable property, assuming no costly delay in making
that substitution. The reliability of this approach is dependent upon there
being an adequate volume of comparable sale data. In addition, the comparable
sales must be arm's length and there must be no unusual conditions affecting the
price paid. We conducted a search through real estate brokers, appraisers, and
county records in order to determine what transactions had occurred over the
past few years.
We collected data on 5 sales that were considered similar to the property. The
unit of comparison used is price per room, chosen because it is standard for
this type of property and generally gives reliable results. Prior to adjustment
for differences due to market conditions, age/condition, etc., the unadjusted
sales range in price from $15,333 to $25,000 per room.
The table on the facing page summarizes the sales and the adjustments made.
Following is a brief description of the adjustments by relevant characteristics
and details of each sale are located in the Addenda. We attempted to verify the
terms of each sale with the buyer, seller or broker. We assumed normal
conditions unless we were informed otherwise in terms of financing terms and
conditions of sale.
PROPERTY RIGHTS CONVEYED - All sales were reportedly fee simple transfers and
all included personal property.
FINANCING TERMS - All sales were reportedly cash transactions or financed at
terms equivalent to cash.
CONDITIONS OF SALE - None of the sales were found to include any abnormal
conditions affecting the final sale price. Sale 1 was in Chapter 11 at the time
of sale, however this did not appear to negatively impact the property.
Typically this would indicate a greatly distressed sale price. However, many
investors in the San Diego market are purchasing properties based primarily on
projected future performance opposed to focusing on historical performance. In
addition, sale 1 was reported to have an average occupancy of 60 percent and an
average daily rate in the high $30s which is closely in-line with current market
performance.
MARKET CONDITIONS - The sales occurred between December 1993 and July 1994. As
discussed in previous sections the national hotel industry has recently been
showing signs of recovery.
LOCATION - All of the sales are located in San Diego County. Sale 1 is located
approximately 20 miles south of the subject on the south side of San Diego
County, in Chula Vista along Interstate 805. This is a
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 37
<PAGE>
less dense area and is considered an inferior location compared to the subject.
Sale 2 is located on Hotel Circle which has experienced a decline in
desirability relative to the subject. Sale 3 is located in the Sports Arena
area on a secondary thoroughfare that is difficult to access and is not visible
from a major street. Sale 4 is located approximately 10 miles southeast of the
subject off of Interstate 8. This property is located in a less dense area and
although it is off the highway it has limited visibility and access due to the
surrounding rolling terrain. Sales 1, 2, 3 and 4 all were considered inferior
to the subject and required positive adjustments.
NUMBER OF ROOMS - Typically hotel properties with more rooms sell, per unit, for
less than properties with fewer units. Sales 2 and 3 have 140 and 150 rooms,
respectively. Positive adjustments were made. Sale 4 has 93 rooms and
required a negative adjustment.
AGE/CONDITION - Sale 2 was constructed in 1959 but was remodeled in 1987 and
sale 4 was constructed in 1970. These two sales required positive adjustments.
Sale 3 was constructed in 1987, similar to the subject, but it was not
maintained at a similar level. A positive adjustment was made.
QUALITY OF CONSTRUCTION - All of the sales were similar in terms of quality of
construction. No adjustments were necessary.
AMENITIES - All of the sales were limited service hotels and all offered
relatively similar services. No adjustments were required.
OCCUPANCY - We were unable to verify the occupancy at the time of sale for sales
4 and 5. Sale 2 was far below market occupancy at the time of sale and
therefore a positive adjustment was necessary.
SUMMARY OF THE SALES COMPARISON APPROACH
After adjustments, the sales ranged in value from $23,000 to $25,500 per room.
Based on our analysis, it is our opinion that the market value of the subject
property by the sales comparison approach, as of December 1, 1994 is as follows:
117 rooms x $24,000 per room = $2,808,000
Rounded: $2,810,000
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 38
<PAGE>
INCOME CAPITALIZATION APPROACH
The Income Capitalization Approach is based on the premise that value is created
by the expectation of future benefits. We estimated the present value of those
benefits to derive an indication of the amount that a prudent, informed
purchaser-investor would pay for the right to receive them as of the valuation
date.
This approach requires an estimation of the net operating income of a property.
The estimated net operating income is then converted to a value indication by
use of the Direct Capitalization Method and/or the Discounted Cash Flow Method.
The direct capitalization method estimates the value of the subject property by
dividing the net income for a typical year by an overall capitalization rate
that is based on an analysis of the relationship between income and sales prices
achieved from recent sales of properties similar to the subject and investor
surveys. The direct capitalization method is most reliable when the income and
expenses maintain a basic level of stability.
The discounted cash flow method estimates the value of the property by
discounting the projected income stream over the holding period and the
estimated reversionary value of the property at the end of the period, to a
present value as of the date of valuation.
ESTIMATE OF PROJECTED REVENUE AND EXPENSES FOR HOLDING PERIOD - The first step
involves projecting the income and expenses for the subject property over a
projected holding period plus an additional year for purposes of estimating a
reversion value. In our analysis, we project the property's income for a period
of 10 years. The income for each of these years is estimated by projecting the
actual occupancy and average daily room rate that will be achieved given
foreseeable market conditions and normal management policies necessary to
establish the market position of the property. Variances in occupancy and room
rate are frequently caused by factors such as: the marketing time necessary to
establish the presence of the subject property through advertising and repeat
business; discounted room rates lower than room rates otherwise supportable to
assist the initial marketing effort; temporary imbalance in local supply and
demand characteristics that may lead to occupancies that are either higher or
lower than those expected on a stabilized basis; and/or the entrance of new,
competitive hotels, or the removal of older economically obsolete properties
from the competitive supply. Expenses in some years of the projection period
can vary from those in the typical year due to such factors as: higher initial
administrative and general expenses because of the establishment of new
ownership, new operating policies and training of new staff; higher marketing
costs than normal to assist the initial marketing effort or meeting the effect
of new competition; and variable property operating and maintenance expenses
dependent on the age of the improvements.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 39
<PAGE>
VALUATION OF THE ESTIMATED INCOME - . The projected income stream reflects
foreseeable market conditions that may cause the projected income stream to be
greater than or less than a stabilized income stream. In addition to changes in
market conditions that may impact the occupancy rate, the discounted cash flow
method also considers the impact of inflation and appreciation on the expected
room rates and operating expenses. The reversion value is estimated by
capitalizing the last year of income by an appropriate overall rate to reflect
an assumed sale of the property to another buyer at that time. The resulting
cash flows and reversion value are discounted to an indication of value as of
the date of valuation at a discount rate that reflects the durability, timing
and riskiness of the cash flow stream in light of alternative investments
currently available to investors.
CONCLUSION - The final step in this approach is to reconcile the conclusions of
value reached by the direct capitalization and discounted cash flow methods.
MARKET AND SUBJECT OPERATING TRENDS
Our estimates of future operating results are primarily based on historical
trends of the subject property and statistical data from THE HOST REPORT
published by Arthur Andersen and Smith Travel Research, a publication providing
operating results of full service hotels, limited service hotels and all suite
hotels. The survey breaks these categories down further by various groupings.
We have considered the following categories for comparison of ratios to total
revenues from the limited service section of the Host Report.
* Chain Affiliated
* Pacific
* 75-125 rooms
* Post 1986 construction
We have compared the 1994 budget to THE HOST REPORT data as well as the
property's actual operating history from 1991 to 1993. THE HOST REPORT data and
a schedule of the property's operating history are located on the following
page.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 40
<PAGE>
1993 HOST REPORT -- OPERATING RATIOS
SUPER 8 MISSION BAY MOTEL, SAN DIEGO, CA
LIMITED SERVICE
<TABLE>
<CAPTION>
Chain 75-125 Post 1986
Affiliated Pacific Rooms constr.
---------- ------- ----- -------
<S> <C> <C> <C> <C>
---------------------------------------------------------------
Occupancy 69.9% 64.7% 69.6% 73.9%
Average Daily Rate $50.12 $60.64 $48.63 $52.20
---------------------------------------------------------------
DEPARTMENTAL REVENUE:
---------------------------------------------------------------
Rooms 94.7% 93.8% 94.8% 95.4%
Telephone 2.0% 2.3% 2.0% 2.6%
Minor Operated Depts. 1.1% 1.0% 0.9% 1.4%
Rentals and Other 2.2% 2.9% 2.3% 0.7%
---- ---- ---- ----
TOTAL REVENUE 100.0% 100.0% 100.0% 100.0%
---------------------------------------------------------------
DEPARTMENTAL EXPENSES
---------------------------------------------------------------
Rooms 28.6% 30.6% 28.7% 26.1%
Telephone 70.4% 79.4% 75.3% 71.7%
Other Departmental Exp. 0.7% 1.3% 0.7% 0.6%
---- ---- ---- ----
TOTAL DEPT. EXPENSES 29.2% 31.8% 29.4% 27.3%
DEPARTMENTAL PROFIT
---------------------------------------------------------------
Rooms 71.4% 69.5% 71.3% 73.9%
Telephone 29.6% 20.6% 24.7% 28.4%
Other Departmental Profit 2.6% 2.6% 2.5% 1.4%
---- ---- ---- ----
GROSS OPER INCOME 70.8% 68.2% 70.6% 72.7%
---------------------------------------------------------------
LESS GENERAL OPER EXPENSES
---------------------------------------------------------------
Admin & General 10.0% 10.3% 10.0% 10.3%
Marketing 4.7% 5.1% 4.7% 5.4%
Franchise Fee 2.3% 2.2% 2.4% 2.6%
Heat Light & Power 5.5% 4.9% 5.6% 5.2%
Repairs & Maint. 4.8% 5.5% 4.9% 4.9%
---- ---- ---- ----
TOTAL OPER EXPENSES 27.4% 28.0% 27.6% 28.5%
---------------------------------------------------------------
---------------------------------------------------------------
HOUSE PROFIT 43.4% 40.2% 43.0% 44.2%
---------------------------------------------------------------
LESS OTHER EXPENSES
---------------------------------------------------------------
Management Fee 3.8% 3.7% 3.9% 3.2%
Property Taxes 4.3% 3.9% 4.1% 4.2%
Leases 0.3% 0.3% 0.3% 0.4%
Insurance 1.3% 1.5% 1.3% 1.1%
---------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 41
<PAGE>
OPERATING RESULTS -- HISTORICAL AND FORECASTED
SUPER 8 MISSION BAY MOTEL, SAN DIEGO, CA
<TABLE>
<CAPTION>
Actual % Of Actual % Of % Actual % Of % Budget % Of %
YEAR 1991 Rev. 1992 Rev. Change 1993 Rev. Change 1994 Rev. Change
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------
Occupancy 67.50% 65.20% -3.4% 52.50% -19.50% 55.90% 6.5%
Average Daily Rate $42.66 $43.04 0.9% $42.84 -0.5% $42.73 -0.3%
# Rooms Occupied 28,830 27,914 -3.2% 22,413 -19.7% 23,880 6.5%
# Rooms Available 42,705 42,822 0.3% 42,705 -0.3% 42,705 0.0%
---------------------------------------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
---------------------------------------------------------------------------------------------------------
Rooms 1,229,791 95.0% 1,201,412 95.1% -2.3% 960,165 94.0% -20.1% 1,020,466 95.0% 6.3%
Telephone 41,471 3.2% 29,964 2.4% -27.7% 27,648 2.7% -7.7% 34,185 3.2% 23.6%
Other 22,987 1.8% 31,741 2.5% 38.1% 33,971 3.3% 7.0% 19,743 1.8% -41.9%
---------------------------------------------------------------------------------------------------------
TOTAL REVENUE 1,294,249 100.0% 1,263,117 100.0% -2.4% 1,021,784 100.0% -19.1% 1,074,394 100.0% 5.1%
---------------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
---------------------------------------------------------------------------------------------------------
Rooms 272,280 22.1% 279,489 23.3% 2.6% 286,954 29.9% 2.7% 284,637 27.9% -0.8%
Telephone 18,430 44.4% 18,098 60.4% -1.8% 14,673 53.1% -18.9% 17,092 50.0% 16.5%
Other 12,507 54.4% 13,729 43.3% 9.8% 29,039 85.5% 111.5% 12,000 60.8% -58.7%
---------------------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 303,217 23.4% 311,316 24.6% 2.7% 330,666 32.4% 6.2% 313,729 29.2% -5.1%
---------------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
---------------------------------------------------------------------------------------------------------
Rooms 957,511 77.9% 921,923 76.7% -3.7% 673,211 70.1% -27.0% 735,829 72.1% 9.3%
Telephone 23,041 55.6% 11,866 39.6% -48.5% 12,975 46.9% 9.3% 17,093 50.0% 31.7%
Other 10,480 45.6% 18,012 56.7% 71.9% 4,932 14.5% -72.6% 7,743 39.2% 57.0%
---------------------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 991,032 76.6% 951,801 75.4% -4.0% 691,118 67.6% -27.4% 760,665 70.8% 10.1%
---------------------------------------------------------------------------------------------------------
LESS GENERAL
OPERATING EXPENSES
---------------------------------------------------------------------------------------------------------
Admin & General 169,191 13.1% 150,769 11.9% -10.9% 94,575 9.3% -37.3% 102,091 9.5% 7.9%
Sales/Marketing 100,336 7.8% 79,325 6.3% -20.9% 98,953 9.7% 24.7% 130,136 12.1% 31.5%
Energy Costs 62,837 4.9% 66,806 5.3% 6.3% 59,405 5.8% -11.1% 60,241 5.6% 1.4%
Security 5,456 0.4% 1,666 0.1% -69.5% 880 0.1% -47.2% 7,471 0.7% 749.0%
Guest Transportation 3,521 0.3% 6,447 0.5% 83.1% 4,492 0.4% -30.3% 5,389 0.5% 20.0%
Repairs & Maint. 40,708 3.1% 37,536 3.0% -7.8% 59,714 5.8% 59.1% 67,356 6.3% 12.8%
---------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 382,049 29.5% 342,549 27.1% -10.3% 318,019 31.1% -7.2% 372,684 34.7% 17.2%
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
HOUSE PROFIT 608,983 47.1% 609,252 48.2% 0.0% 373,099 36.5% -38.8% 387,981 36.1% 4.0%
---------------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
---------------------------------------------------------------------------------------------------------
Management Fee 77,248 6.0% 75,459 6.0% -2.3% 61,148 6.0% -19.0% 64,464 6.0% 5.4%
Property Taxes 40,353 3.1% 44,940 3.6% 11.4% 46,637 4.6% 3.8% 49,388 4.6% 5.9%
Leases 888 0.1% 370 0.0% 0.0% 4,465 0.4% 0.0% 7,320 0.7% 0.0%
Insurance 27,952 2.2% 21,599 1.7% -22.7% 25,876 2.5% 19.8% 27,144 2.5% 4.9%
---------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 146,441 11.3% 142,368 11.3% -2.9% 138,126 13.5% -3.1% 148,316 13.8% 6.9%
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
NET OPERATING INCOME 462,542 35.7% 466,884 37.0% 0.9% 234,973 18.6% -98.7% 239,665 19.0% 2.0%
---------------------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
---------------------------------------------------------------------------------------------------------
Reserves for Replacement 0 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0%
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
NET CASH FLOW 462,542 35.7% 466,884 37.0% 0.9% 234,973 23.0% -49.7% 239,665 22.3% 2.0%
---------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 42
<PAGE>
INCOME AND FORECAST ASSUMPTIONS
ROOMS DEPARTMENT - We have estimated room revenue using the occupancies and
average daily room rates concluded in the market study section of this report.
TELEPHONE REVENUE - This department is entirely driven by occupancy and guest
dollars. This revenue historically equated to 2.4 to 3.2 percent of total
revenue. We believe the budgeted ratio of 3.2 percent is somewhat aggressive
since the last two years were 2.4 and 2.7 percent of total revenue. The 1994
budget projected higher revenues from use of the fax service but this has not
materialized. Since the hotel caters primarily to the leisure segment we
believe the fax service will not create a major increase in telephone revenues.
However, we do anticipate an increase over 1993. Therefore, our projection
estimates telephone revenue at 3.0 percent.
OTHER REVENUE - Other revenues include vending, pizza commission, video rental,
and income from attraction ticket sales. 1994 budgeted other revenues are
projected to decrease from the 1993 levels, however, expenses are decreasing
also so this change on a net basis is not significant. Therefore, our
stabilized projection estimates other revenues at 2.0 percent.
EXPENSES ANALYSIS
In our forecast rooms and telephone expenses are expressed as a percent of their
respective gross revenue. "General Operating and "Other" expenses are expressed
as a percent of total revenue. In each case, we examined the historical ratios
and compared them to those reported in the HOST REPORT. The following only
highlights those expenses that required further discussion. The remaining,
departmental expenses, general operating expenses and other expenses were
considered reasonable and did not warrant further discussion.
ADMIN. AND GENERAL - Historically administrative costs ranged between 9.3 to
13.1 percent of total revenue. Over the years the current property management
has been bringing this expense under control. The 1994 budget indicates 9.5
percent of revenues for this expense. However, the year to date operating
statement indicates that this expense is over 3 percentage points below budget.
Therefore, based on historical performance and primarily the most recent 6
months, in our opinion, 9 percent of total revenues is reasonable for this
expense.
SALES AND MARKETING - Historically sales and marketing costs ranged between 6.3
and 9.7 percent. The budgeted 1994 expenses is projected at 12.1 percent of
total revenues. This expense includes the franchise fee of 6 percent. It also
includes marketing costs that are distributed among all Grosvenor managed
properties for group advertisement. This marketing expense associated with the
franchise fee marketing charge is an excess expense that is not common in the
market and with other management companies. In
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 43
<PAGE>
addition the current year-to-date expenses incurred are far below the budgeted
expense. Based on these factors we have projected sales and marketing at 9
percent of total revenues.
SECURITY - Historically this expense has ranged between 0.1 and 0.4 percent and
is projected at 0.7 percent. This increase is due primarily to the on-site
security service that has been added in 1994 on Friday and Saturday night.
While this is considered a reasonable and necessary expense, the budgeted cost
is higher than the actual year-to-date cost. In addition, property management,
indicated that the budget was slightly overstated in this category. Therefore,
we believe 0.5 percent of total revenues is reasonable for this expense.
REPAIRS AND MAINTENANCE - Historically the repairs and maintenance expense has
ranged between 3.0 and 5.8 percent. The 1994 budget projects 6.3 percent.
Since the property underwent major improvements in 1993 we believe the 1994
budget is somewhat high. Our projection estimates repairs and maintenance at
5 percent of total revenues.
REAL ESTATE TAXES - Real estate taxes are due in two installments: December and
April. The 1993 taxes due as of December 1993 and April 1994 were $44,220.
(This represents a reduction in taxes from the previous tax year.) We estimated
1994 taxes payable by December 1994 and April 1995 based on a 2 percent growth
rate. This growth rate was also applied through the projection period.
MANAGEMENT FEE - The current contract terms are for a 6 percent management fee.
Since we are to assume that the contract with Grosvenor Hospitality will be
terminated we have conducted additional research into this expense. The Host
Report indicates a range in management fee, based on our identified categories,
of 3.2 to 3.9 percent. In addition, we have contacted various management
companies which indicated between 3 and 3.5 percent. In our opinion, 3 percent
of total revenues for management fee in this market is considered reasonable.
LEASES - Historically the expense for this category has ranged between 0.0 and
0.4 percent. This years budget includes the expense for a new guest
transportation van. Therefore, the budgeted expense of 0.7 percent of revenue
is considered reasonable.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 44
<PAGE>
INCOME CAPITALIZATION APPROACH CONCLUSION
DIRECT CAPITALIZATION METHOD
SUPER 8 MISSION BAY MOTEL, SAN DIEGO, CA
DECEMBER 1, 1994
<TABLE>
<CAPTION>
<S> <C>
Stabilized income
Fiscal year ending
November 30, 1997 $374,350
Overall Capitalization Rate: 11.50%
Capitalized Income: $3,255,221
Discounted @ 4% to FY95 $3,009,635
ROUNDED $3,010,000
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 45
<PAGE>
DIRECT CAPITALIZATION METHOD
The projected stabilized cash flow is on the following page. In order to
estimate the value of the property by the Direct Capitalization Method, the
estimated stabilized cash flow must be capitalized with an overall
capitalization rate. This rate provides a rate of return of and on the
investment through the relationship of net operating income to a hotel's sale
price. Income information from the comparable sales is difficult to obtain and
properties in this market typically sell based on what the buyer thinks they can
do with the property. Therefore we have consulted local brokers at CB
Commercial and Grubb & Ellis and a hospitality investor survey published CB
Commercial and Korpacz. Both local brokers indicated an overall capitalization
rate ranging between 10 and 12 percent. The Korpacz Investor Survey indicated
an average of 12.44 percent for overall capitalization rates and the CB
Commercial Investor Survey indicated an average of 11.3 percent for the same
category. While the desirability of hotel investment has been low in past years
there has been a renewed interest. With market conditions improving investors
see some potential for occupancy and ADR increases and many are purchasing
hotels with the expectation of renovation and reaffiliation. Based upon the
above factors we have chosen an overall rate of 11.5 percent.
Since the subject is not projected to stabilize until fiscal year 1997 the
indicated value needs to be adjusted. The resulting value as December 1, 1996
is based on the fiscal year 1997 cash flow. This stabilized years projected
cash flow was discounted at 4 percent, an estimate of the overall rate of
inflation, for two years to give an indication of value as of December 1, 1994.
The conclusion of this method is on the facing page.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 46
<PAGE>
PROJECTED STABILIZED OPERATING RESULTS
FISCAL YEAR 1997
(DECEMBER 1, 1996 THROUGH NOVEMBER 30, 1997)
SUPER 8 MISSION BAY MOTEL, SAN DIEGO, CA
<TABLE>
<CAPTION>
%
Stabilized of Total
YEAR FY 1997 Revenue
---- ----------------------------------
<S> <C> <C>
Occupancy 65.0%
Average Daily Rate $45.62
Occupied Rooms 27,758
Room-nights Available 42,705
----------------------------------
DEPARTMENTAL REVENUE:
----------------------------------
Rooms 1,266,295 95.0%
Telephone 39,988 3.0%
Other 26,659 2.0%
----------------------------------
TOTAL REVENUE 1,332,942 100.0%
----------------------------------
DEPARTMENTAL EXPENSES
----------------------------------
Rooms 359,628 28.4%
Telephone 18,595 46.5%
Other 19,994 75.0%
----------------------------------
TOTAL DEPT. EXPENSES 398,217 29.9%
----------------------------------
DEPARTMENTAL PROFIT
----------------------------------
Rooms 906,667 71.6%
Telephone 21,394 53.5%
Other 6,665 25.0%
----------------------------------
GROSS OPER INCOME 934,726 70.1%
----------------------------------
LESS GENERAL OPER EXPENSES
----------------------------------
Admin & General 119,965 9.0%
Sales/Marketing 119,965 9.0%
Heat Light & Power 73,312 5.5%
Security 6,665 0.5%
Guest Transportation 6,665 0.5%
Repairs & Maint. 66,647 5.0%
----------------------------------
TOTAL OPER EXPENSES 393,218 29.5%
----------------------------------
----------------------------------
HOUSE PROFIT 541,508 40.6%
----------------------------------
LESS OTHER EXPENSES
----------------------------------
Management Fee 39,988 3.0%
Property Taxes 46,926 3.5%
Leases 9,331 0.7%
Insurance 30,924 2.3%
----------------------------------
TOTAL OTHER EXPENSES 127,169 9.5%
----------------------------------
----------------------------------
NET OPERATING INCOME 414,339 31.1%
----------------------------------
LESS CAPITAL EXPENSES
----------------------------------
Reserves for Replacement 39,988 3.0%
----------------------------------
----------------------------------
NET CASH FLOW 374,350 28.1%
----------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 47
<PAGE>
PROJECTED CASH FLOW
SUPER 8 MISSION BAY MOTEL, SAN DIEGO, CA
<TABLE>
<CAPTION>
Projected YE Projected YE Projected YE Projected YE
YEAR 11/30/95 % 11/30/96 % 11/30/97 % 11/30/98 %
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 58.0% 62.0% 65.0% 65.0%
Average Daily Rate $43.00 $44.29 $45.62 $46.99
# Rooms Occupied 24,769 26,477 27,758 27,758
Room-Nights Available 42,705 42,705 42,705 42,705
------------------------------------------------------------------------------------------------
ADR Growth Rate 3.00% 3.00% 3.00%
-----------------------------------------------------------------------
DEPARTMENTAL REVENUE:
------------------------------------------------------------------------------------------------
Rooms 1,065,063 95.0% 1,172,671 95.0% 1,266,295 95.0% 1,304,284 95.0%
Telephone 33,634 3.0% 37,032 3.0% 39,988 3.0% 41,188 3.0%
Other 22,422 2.0% 24,688 2.0% 26,659 2.0% 27,459 2.0%
------------------------------------------------------------------------------------------------
TOTAL REVENUE 1,121,119 100.0% 1,234,390 100.0% 1,332,942 100.0% 1,372,931 100.0%
------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
------------------------------------------------------------------------------------------------
Rooms 302,478 28.4% 333,038 28.4% 359,628 28.4% 370,417 28.4%
Telephone 15,640 46.5% 17,220 46.5% 18,595 46.5% 19,152 46.5%
Other 16,817 75.0% 18,516 75.0% 19,994 75.0% 20,594 75.0%
------------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 334,934 29.9% 368,774 29.9% 398,217 29.9% 410,163 29.9%
------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
------------------------------------------------------------------------------------------------
Rooms 762,585 68.0% 839,632 68.0% 906,667 68.0% 933,867 68.0%
Telephone 17,994 1.6% 19,812 1.6% 21,394 1.6% 22,036 1.6%
Other 5,606 0.5% 6,172 0.5% 6,665 0.5% 6,865 0.5%
------------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 786,184 70.1% 865,616 70.1% 934,726 70.1% 962,768 70.1%
------------------------------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
------------------------------------------------------------------------------------------------
Admin & General 100,901 9.0% 111,095 9.0% 119,965 9.0% 123,564 9.0%
Sales/Marketing 100,901 9.0% 111,095 9.0% 119,965 9.0% 123,564 9.0%
Energy Costs 61,662 5.5% 67,891 5.5% 73,312 5.5% 75,511 5.5%
Security 5,606 0.5% 6,172 0.5% 6,665 0.5% 6,865 0.5%
Guest Tranportation 5,606 0.5% 6,172 0.5% 6,665 0.5% 6,865 0.5%
Repairs & Maint. 56,056 5.0% 61,720 5.0% 66,647 5.0% 68,647 5.0%
------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 330,730 29.5% 364,145 29.5% 393,218 29.5% 405,015 29.5%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
HOUSE PROFIT 455,454 40.6% 501,471 40.6% 541,508 40.6% 557,753 40.6%
------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
------------------------------------------------------------------------------------------------
Management Fee 33,634 3.0% 37,032 3.0% 39,988 3.0% 41,188 3.0%
Property Taxes 45,100 4.0% 46,002 3.7% 46,922 3.5% 47,860 3.5%
Leases 7,848 0.7% 8,641 0.7% 9,331 0.7% 9,611 0.7%
Insurance 29,149 2.6% 30,024 2.4% 30,924 2.3% 31,852 2.3%
------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE 115,730 10.3% 121,698 9.9% 127,165 9.5% 130,511 9.5%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
NET OPERATING INCOME 339,724 30.3% 379,773 30.8% 414,343 31.1% 427,242 31.1%
------------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
------------------------------------------------------------------------------------------------
Reserves for Replacement 33,634 3.0% 37,032 3.0% 39,988 3.0% 41,188 3.0%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
NET CASH FLOW 306,090 27.3% 342,741 27.8% 374,354 28.1% 386,054 28.1%
------------------------------------------------------------------------------------------------
<CAPTION>
Projected YE Projected YE Projected YE Projected YE
YEAR 11/30/99 % 11/30/00 % 11/30/01 % 11/30/02 %
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy 65.0% 65.0% 65.0% 65.0%
Average Daily Rate $48.40 $49.85 $51.34 $52.88
# Rooms Occupied 27,758 27,758 27,758 27,758
Room-Nights Available 42,705 42,705 42,705 42,705
------------------------------------------------------------------------------------------------
ADR Growth Rate 3.00% 3.00% 3.00% 3.00%
------------------------------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
------------------------------------------------------------------------------------------------
Rooms 1,343,413 95.0% 1,383,715 95.0% 1,425,226 95.0% 1,467,983 95.0%
Telephone 42,424 3.0% 43,696 3.0% 45,007 3.0% 46,357 3.0%
Other 28,282 2.0% 29,131 2.0% 30,005 2.0% 30,905 2.0%
------------------------------------------------------------------------------------------------
TOTAL REVENUE 1,414,119 100.0% 1,456,542 100.0% 1,500,238 100.0% 1,545,246 100.0%
------------------------------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
------------------------------------------------------------------------------------------------
Rooms 381,529 28.4% 392,975 28.4% 404,764 28.4% 416,907 28.4%
Telephone 19,727 46.5% 20,319 46.5% 20,928 46.5% 21,556 46.5%
Other 21,212 75.0% 21,848 75.0% 22,504 75.0% 23,179 75.0%
------------------------------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 422,468 29.9% 435,142 29.9% 448,196 29.9% 461,642 29.9%
------------------------------------------------------------------------------------------------
DEPARTMENTAL PROFIT
------------------------------------------------------------------------------------------------
Rooms 961,883 68.0% 990,740 68.0% 1,020,462 68.0% 1,051,076 68.0%
Telephone 22,697 1.6% 23,378 1.6% 24,079 1.6% 24,801 1.6%
Other 7,071 0.5% 7,283 0.5% 7,501 0.5% 7,726 0.5%
------------------------------------------------------------------------------------------------
GROSS OPERATING INCOME 991,651 70.1% 1,021,400 70.1% 1,052,042 70.1% 1,083,603 70.1%
------------------------------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
------------------------------------------------------------------------------------------------
Admin & General 127,271 9.0% 131,089 9.0% 135,021 9.0% 139,072 9.0%
Sales/Marketing 127,271 9.0% 131,089 9.0% 135,021 9.0% 139,072 9.0%
Energy Costs 77,777 5.5% 80,110 5.5% 82,513 5.5% 84,989 5.5%
Security 7,071 0.5% 7,283 0.5% 7,501 0.5% 7,726 0.5%
Guest Tranportation 7,071 0.5% 7,283 0.5% 7,501 0.5% 7,726 0.5%
Repairs & Maint. 70,706 5.0% 72,827 5.0% 75,012 5.0% 77,262 5.0%
------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 417,165 29.5% 429,680 29.5% 442,570 29.5% 455,847 29.5%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
HOUSE PROFIT 574,486 40.6% 591,720 40.6% 609,472 40.6% 627,756 40.6%
------------------------------------------------------------------------------------------------
LESS OTHER EXPENSES
------------------------------------------------------------------------------------------------
Management Fee 42,424 3.0% 43,696 3.0% 45,007 3.0% 46,357 3.0%
Property Taxes 48,818 3.5% 49,794 3.4% 50,790 3.4% 51,806 3.4%
Leases 9,899 0.7% 10,196 0.7% 10,502 0.7% 10,817 0.7%
Insurance 32,808 2.3% 33,792 2.3% 34,806 2.3% 35,850 2.3%
------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE 133,948 9.5% 137,478 9.4% 141,104 9.4% 144,830 9.4%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
NET OPERATING INCOME 440,538 31.2% 454,242 31.2% 468,368 31.2% 482,927 31.3%
------------------------------------------------------------------------------------------------
LESS CAPITAL EXPENSES
------------------------------------------------------------------------------------------------
Reserves for Replacement 42,424 3.0% 43,696 3.0% 45,007 3.0% 46,357 3.0%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
NET CASH FLOW 398,114 28.2% 410,546 28.2% 423,360 28.2% 436,569 28.3%
------------------------------------------------------------------------------------------------
<CAPTION>
Projected YE Projected YE Projected YE
YEAR 11/30/03 % 11/30/04 % 11/30/05 %
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 65.0% 65.0% 65.0%
Average Daily Rate $54.47 $56.11 $57.79
# Rooms Occupied 27,758 27,758 27,758
Room-Nights Available 42,705 42,705 42,705
------------------------------------------------------------------------
ADR Growth Rate 3.00% 3.00% 3.00%
------------------------------------------------------------------------
DEPARTMENTAL REVENUE:
------------------------------------------------------------------------
Rooms 1,512,023 95.0% 1,557,383 95.0% 1,604,105 95.0%
Telephone 47,748 3.0% 49,181 3.0% 50,656 3.0%
Other 31,832 2.0% 32,787 2.0% 33,771 2.0%
------------------------------------------------------------------------
TOTAL REVENUE 1,591,603 100.0% 1,639,351 100.0% 1,688,532 100.0%
------------------------------------------------------------------------
DEPARTMENTAL EXPENSES
------------------------------------------------------------------------
Rooms 429,414 28.4% 442,297 28.4% 455,566 28.4%
Telephone 22,203 46.5% 22,869 46.5% 23,555 46.5%
Other 23,874 75.0% 24,590 75.0% 25,328 75.0%
------------------------------------------------------------------------
TOTAL DEPT. EXPENSES 475,491 29.9% 489,756 29.9% 504,449 29.9%
------------------------------------------------------------------------
DEPARTMENTAL PROFIT
------------------------------------------------------------------------
Rooms 1,082,608 68.0% 1,115,087 68.0% 1,148,539 68.0%
Telephone 25,545 1.6% 26,312 1.6% 27,101 1.6%
Other 7,958 0.5% 8,197 0.5% 8,443 0.5%
------------------------------------------------------------------------
GROSS OPERATING INCOME 1,116,112 70.1% 1,149,595 70.1% 1,184,083 70.1%
------------------------------------------------------------------------
LESS GENERAL OPERATING EXPENSES
------------------------------------------------------------------------
Admin & General 143,244 9.0% 147,542 9.0% 151,968 9.0%
Sales/Marketing 143,244 9.0% 147,542 9.0% 151,968 9.0%
Energy Costs 87,538 5.5% 90,164 5.5% 92,869 5.5%
Security 7,958 0.5% 8,197 0.5% 8,443 0.5%
Guest Tranportation 7,958 0.5% 8,197 0.5% 8,443 0.5%
Repairs & Maint. 79,580 5.0% 81,968 5.0% 84,427 5.0%
------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 469,523 29.5% 483,609 29.5% 498,117 29.5%
------------------------------------------------------------------------
------------------------------------------------------------------------
HOUSE PROFIT 646,589 40.6% 665,986 40.6% 685,966 40.6%
------------------------------------------------------------------------
LESS OTHER EXPENSES
------------------------------------------------------------------------
Management Fee 47,748 3.0% 49,181 3.0% 50,656 3.0%
Property Taxes 52,842 3.3% 53,899 3.3% 54,977 3.3%
Leases 11,141 0.7% 11,475 0.7% 11,820 0.7%
Insurance 36,925 2.3% 38,033 2.3% 39,174 2.3%
------------------------------------------------------------------------
TOTAL OTHER EXPENSE 148,656 9.3% 152,588 9.3% 156,626 9.3%
------------------------------------------------------------------------
------------------------------------------------------------------------
NET OPERTING INCOME 497,932 31.3% 513,399 31.3% 529,340 31.3%
------------------------------------------------------------------------
LESS CAPITAL EXPENSES
------------------------------------------------------------------------
Reserves for Replacement 47,748 3.0% 49,181 3.0% 50,656 3.0%
------------------------------------------------------------------------
------------------------------------------------------------------------
NET CASH FLOW 450,184 28.3% 464,218 28.3% 478,684 28.3%
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 48
</TABLE>
<PAGE>
DISCOUNTED CASH FLOW METHOD
The projected cash flow for the property is presented on the facing page. In
order to complete the valuation of the property using the Discounted Cash Flow
Approach, we present our analysis of an appropriate discount rate and
capitalization rate, calculate the reversion value of the property at the end of
the holding period, and present the conclusions of value.
REVERSION CAPITALIZATION RATE - Terminal capitalization rates are typically
higher than "going-in" capitalization rates due to the risk associated with the
passage of time and uncertainty into the future.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Summary Of Terminal Capitalization Rates Surveys
--------------------------------------------------------------------------------
PUBLICATION PUBLICATION DATE LOW HIGH AVERAGE
----------- ---------------- --- ---- -------
<S> <C> <C> <C> <C>
Korpacz Investor Survey 2nd Qtr 1994 10.00% 16.00% 12.54%
CB Commercial National Investor Survey 2nd Qtr 1994 10.00% 14.00% 12.00%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
We considered the future risks of operations in a property similar to the
subject, such as the property's age/condition and the uncertainty of the long
term state of the defense industry in San Diego. Based on these factors, we
have concluded with a terminal capitalization rate of 12 percent. This rate
will be used to capitalize the 11th year income estimate into a reversionary
value for the subject property.
DISCOUNT RATE - Discount rates vary according to investor requirements, investor
motivations, property characteristics, and market conditions. For this reason
we reviewed various interest rates as follows:
T-Notes - 10 year 8.20%
Corporate Bonds - High Quality 8.72%
Corporate Bonds - Medium Quality 9.12%
Conventional Fixed Rate Mortgage 9.32%
Prime Rate 8.50%
Source: Wall Street Journal - December 1, 1994
While interest rates have decreased overall in the last few years before 1994,
the trend has been edging upwards again. Investors in real estate recognize
that real estate is a risky investment and are demanding higher risk premiums.
According to the Korpacz Investor Survey, some investors are shifting away from
the economy/limited service market due to the lack of existing quality assets.
These investors believe the most economical route and one in which they can
achieve a greater return is new development. However, the chain-affiliated
properties are still the most popular and with REITs entering the investor pool
demand is still significant. Consequently, the required rate of return for real
estate is still high. The following national organizations periodically survey
real estate investors for discount rate information.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 49
<PAGE>
INCOME CAPITALIZATION APPROACH CONCLUSION
DISCOUNTED CASH FLOW METHOD
SUPER 8 MISSION BAY MOTEL, SAN DIEGO, CA
DECEMBER 1, 1994
Discount Rate: 15.00%
Terminal Capitalization Rate: 12.00%
Sales cost 3.00%
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Fiscal Year (December 1 through November 30) 1995 1996 1997 1998 1999 2000
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income $306,090 $342,741 $374,354 $386,054 $398,114 $410,546
__ Reversion
Total $306,090 $342,741 $374,354 $326,054 $398,114 $410,546
x Discount Factor 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323
------ ------ ------ ------ ------ ------
PV of Cash Flow & Reversion $266,166 $259,162 $246,144 $220,726 $197,933 $177,490
---------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------
Fiscal Year (December 1 through November 30) 2001 2002 2003 2004 2005
------------------------------------------------------------------------
Income $423,360 $436,569 $450,184 $464,218 $478,684
__ Reversion 3,869,360
---------
Total $423,360 $436,569 $450,184 $4,333,579
x Discount Factor 0.3759 0.3269 0.2843 0.2472
------ ------ ------ ------
PV of Cash Flow & Reversion $159,157 $142,715 $127,970 $1,071,193
------------------------------------------------------------------------
Total Present Value $2,868,660
Rounded to $2,870,000
</TABLE>
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 50
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Summary Of Doscount Rate Surveys
-----------------------------------------------------------------------------------------------
Discount Rates
-----------------------------------------------------------------------------------------------
PUBLICATION PUBLICATION DATE LOW HIGH AVERAGE
----------- ---------------- --- ---- -------
<S> <C> <C> <C> <C>
Korpacz Investor Survey 2nd Qtr 1994 11.00% 20.00% 15.58%
CB Commercial National Investor Survey 2nd Qtr 1994 8.00% 17.00% 12.90%
-----------------------------------------------------------------------------------------------
</TABLE>
The subject has experienced a decline in cash flow over the last few years,
primarily due to the decline in occupancy and average daily rate. While this is
due in part to the trends of the local economy, neglect of the property
physically and economically was also a factor. Within the last year major
improvements were made in the common areas and the guest rooms. In addition,
the first six months of 1994 have shown an increase in occupancy over the first
six months in 1993. While occupancy is starting to increase and the national
hotel industry overall is showing signs of a slow recovery there is still a fair
level of riskiness associated with hotel investment. Based on the above factors
we have chosen a discount rate of 15.0 percent.
REVERSION VALUE - The reversion value at the end of the 10th full year of the
holding period is based on the 11th year cash flow capitalized using a terminal
capitalization rate of 12 percent. We have deducted an amount equal to 3
percent of the total reversion value to represent the costs of sale upon the
reversion.
The discounted cash flow calculation is presented on the facing page. As shown,
the fee simple value indicated by the discounted cash flow analysis is
$2,870,000.
CONCLUSION OF THE INCOME CAPITALIZATION APPROACH
With anticipated changes in market conditions, typically buyers and sellers of
this type of property place primary emphasis on the discounted cash flow method
compared to the direct capitalization method, since the DCF method considers the
long-term performance of the property. In this case, since the property is not
projected to reach stabilization until fiscal year 1997, the direct
capitalization method, in this case, does not account for the lower occupancy in
fiscal years 1995 and 1996. Accordingly, we estimate the value by the income
capitalization approach, as of December 1, 1994, to be $2,870,000.
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 51
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
The results of the three approaches to value are as follows:
<TABLE>
<CAPTION>
<S> <C>
Cost Approach $2,810,000
Sales Comparison Approach $2,810,000
Income Capitalization Approach
DIRECT CAPITALIZATION $3,010,000
DISCOUNTED CASH FLOW $2,870,000
</TABLE>
The three approaches to value are utilized whenever possible in order to provide
a check whereby all factors are considered in each approach. Inherent in each
approach is an interpretation of market conditions as they affect the subject
property. The quality and the quantity of the data in each approach has been
considered, along with the relevancy of each to the subject.
The cost approach relies on the proposition that the market value of the
property is no more than the cost of producing a substitute with the same
utility as the subject. Our estimate under the cost approach assumed fee simple
interest on a going concern basis. This approach is reasonably accurate in
establishing replacement cost, but less so in establishing physical
deterioration and functional and external obsolescence, especially for older
buildings. In addition, this approach relies on results in the cash flow
projection in the income capitalization approach in estimating external
obsolescence. The estimate of external obsolescence is primarily based on the
difference between expected income to cover and exceed costs and the actual
income of the subject property. Intangible business value was also estimated
based on the income capitalization approach results. Little consideration was
given to this approach because of the several components that obstruct the
independence of the results.
The sales comparison approach reflects the behavior of buyers and sellers
transferring property. Buyers and sellers of hotels compare properties that
have sold and those that are offered for sale in the marketplace so they pay no
more than the least amount that a prudent seller would accept. This approach
relies heavily on the availability of sale data and the willingness of buyers
and/or sellers to reveal details of the transactions. In this case, there have
been several recent transactions of transient hotels with similar amenities in
the San Diego market. Buyers in this market appear to be purchasing properties
based on expected growth in occupancy and average daily rate and the ability to
improve the property rather than historical or current performance. The
resulting price per room of $24,000 via the sales comparison approach is
considered very reasonable for the subject property type and market. Therefore,
this approach was given the greatest consideration.
The income capitalization approach is generally regarded as the most reliable
technique for estimating the value of an income producing property. This
approach primarily emphasizes the economic productivity of
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 52
<PAGE>
the asset. It is based on the premise that value is created by the expectation
of future benefits. Since the subject is not expected to reach stabilization
until fiscal year 1997 the direct capitalization method does not take into
consideration the lower occupancy in fiscal years 1995 and 1996. The subject
property experienced a decline in performance in the last three years due to the
external forces in the economy as well as the neglect as to the condition of the
property's guest rooms and common areas. While major renovations in the guest
rooms and common areas were just completed at the end of 1993 and the beginning
of 1994, the actual effects of these improvements cannot yet be quantified.
While we expect the renovations to improve the performance of the subject, our
concluded projections are primarily based on industry standards and a recovery
of the hotel industry. Therefore, the income capitalization approach conclusion
is less supportable when compared to the results of the sales comparison
approach
Since the Sales Comparison Approach conclusion is based on actual recent
transactions in the subject market primary weight was placed on this approach.
We estimate that the market value of the real property, as of December 1, 1994,
was:
TWO MILLION EIGHT HUNDRED TEN THOUSAND DOLLARS
$2,810,000
The allocation of the real property, personal property and business value is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Real Property: $2,360,000
Personal Property: 450,000
Business Value: 0
----------
Total: $2,810,000
</TABLE>
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 53
<PAGE>
ADDENDA
- Definitions
- Site Plan
- Legal Description
- Land Sales
- Improved Sales
- Property Photographs
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 54
<PAGE>
DEFINITIONS
(Except as noted, all definitions are as cited in THE APPRAISAL OF REAL ESTATE,
Tenth Edition, Chicago: Appraisal Institute, 1992.)
HIGHEST AND BEST USE: The reasonably probable and legal use of vacant
land or an improved property, which is physically
possible, appropriately supported, financially
feasible, and results in the highest value.
MARKET VALUE: The most probable price, as of a specified date,
in cash, or in terms equivalent to cash, or in
other precisely revealed terms, for which the
specified property rights should sell after
reasonable exposure in a competitive market under
all conditions requisite to fair sale, with the
buyer and seller each acting prudently,
knowledgeably, and for self-interest, and assuming
that neither is under undue duress.
USE VALUE: The value a specific property has for a specific
use. Use value focuses on the value the real
estate contributes to the enterprise of which it
is a part, without regard to the property's
highest and best use or the monetary amount that
might be realized upon its sale.
GOING-CONCERN VALUE: The value of a proven property operation. It
includes the incremental value associated with the
business concern, which is distinct from the value
of the real estate only.
REPLACEMENT COST NEW: The estimated cost to construct, at current prices
as of the effective appraisal date, a building
with utility equivalent to the building being
appraised, using modern materials and current
standards, design, and layout.
REPRODUCTION COST NEW: The estimated cost to construct, at current prices
as of the effective appraisal date, an exact
duplicate or replica of the building being
appraised, using the same materials, construction
standards, design, layout, and quality of
workmanship, and embodying all the deficiencies,
superadequacies, and obsolescence of the subject
building.
ACCRUED DEPRECIATION: The difference between the reproduction or
replacement cost of the improvements on the
effective date of the appraisal and the market
value of the improvements on the same date.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 55
<PAGE>
PHYSICAL DETERIORATION: A reduction in utility resulting from an
impairment of physical condition.
FUNCTIONAL OBSOLESCENCE: An impairment of the functional capacity of a
property or building according to market tastes
and standards.
EXTERNAL OBSOLESCENCE: The diminished utility of a structure due to
negative influences emanating from outside the
building.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 56
<PAGE>
Graph Description: Site Plan Of
The Super 8
Mission Bay Motel
- --------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 57
<PAGE>
LEGAL DESCRIPTION
The land referred to herein is situated in the State of California, County of
San Diego, City of San Diego, and is described as follows:
Lots 8, 9, 10, 11, 12 and 13 in Block 32 of Mission Bay Park Tract in the
City of San Diego, County of San Diego, State of California, according to
map thereof no 1120, filed in the Office of the County Recorder of San
Diego County, February 11, 1908.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 58
<PAGE>
LAND SALE 1
IDENTIFICATION
Address: Camino de la Reina at Camino del
Arroyo
City, State: San Diego, California
TRANSACTION DATA
Grantor: Santa Maria Auto Center Properties
Grantee: G.S.G. Associates
Sale Date: June 12, 1991
Sale Price: $2,235,000
Price/Square Foot. $26.57
Financing: $1,250,000 cash, seller carry
balance
PHYSICAL DATA
Land Area: +/-1.93 acres or 84.119 square
feet
Zoning: MV-M
CONFIRMATION: Hospitality Valuation Services
REMARKS: This site is being developed with a
103-unit condominium complex
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 59
<PAGE>
LAND SALE 2
IDENTIFICATION
Address: North of Damon Avenue, west of I-5,
Pacific Beach
City State: San Diego, California
TRANSACTION DATA
Grantor: Western Lumber Company
Grantee: Tweedy San Juan Investors
Sale Date: May, 1990
Sale Price: $2,175,000
Price/Square Foot. $29.90
Financing: $250,000 down; 1 st trust deed
seller $1,925,000:
interim financing
PHYSICAL DATA
Land Area: +/-1.67 acres, or 72.745 square
feet
Zoning: M-1
CONFIRMATION: Hospitality Valuation Services
REMARKS: Mark Binder of Tweedy San Juan
Investors
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 60
<PAGE>
LAND SALE 3
IDENTIFICATION
Address: 3880 Greenwood Street
City, State: San Diego, California
TRANSACTION DATA
Grantor: Conrad Prebys
Grantee: San Diego Consort Hotel Group
Limited
Sale Date: November, 1989
Sale Price: $2,838,000
Price/Square Foot. $25.96
Financing: Seller indicated market terms
PHYSICAL DATA
Land Area: +/-2.51 acres, or 109,336 square
feet
Zoning: MV-B
CONFIRMATION: Hospitality Valuation Services
REMARKS: The intended use of the site was to
construct a 200-unit hotel. The
site has a generally level
topography and all utilities are to
the site.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 61
<PAGE>
LAND SALE 4
IDENTIFICATION
Address: Hotel Circle South west of Mission
Valley Inn
City, State: San Diego, California
TRANSACTION DATA
Grantor: Atlas Hotels, Inc.
Grantee: Marriott Corporation
Sale Date: October, 1988
Sale Price: $8,363,520
Price/Square Foot. $24.00
Financing: Buyer cannot remember unusual terms
PHYSICAL DATA
Land Area: +/- 8.0 acres, or 348,480 square
feet of net useable space
Zoning: MV-CV
CONFIRMATION
REMARKS: This represents a sale form Atlas
Hotels, Inc.to Marriott Corporation
for the purpose of constructing a
Marriott Courtyard hotel and a
Residence Inn by Mariott. This
construction never came to fruition
and the site remains vacant and is
currently on the market.
Discussions with the current broker
of the site indicate that the
listing price for the site, which
was listed for $8,500,000, or
$24.39 per square foot in 1992, has
been reduced to a current listing
of $6,500,000, or $18.65 per square
foot. The site has a generally
level topography with a steep grade
at the rear.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 62
<PAGE>
LISTING
IDENTIFICATION
Address: Hotel Circle South
City, State: San Diego, California
Asking Price: $6,500,000 square feet
Price/Square Foot. $18.65
PHYSICAL DATA
Land Area: 8 acres or 348,380 square feet
Zoning: MV-CV
CONFIRMATION: Bill Rodewald - ILIFF Thorn
REMARKS: The site is located east of the
Ramada Inn, west of the Office Inn
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 63
<PAGE>
IMPROVED SALE 1 -- BEST WESTERN - OTAY VALLEY INN
Property Address: 4450 Otay Valley Road
Chula Vista, CA
TRANSACTION DATA
Date of Sale: July, 1994
Grantor: Southwest Motel Equity
Grantee: Pacifica Hotel Group
Property Rights Transferred: Fee Simple as a going concern
Sale Price: $2,250,000
Cash Equivalent Sales Price: $2,250,000
Sales Price/Room: $18,443
Personal Property Included in Sales Price: Yes
Financing/Terms of Sale: The buyer purchased the note on the
property. It was in Chapter 11 at
the time of sale. No additional
information was available
PHYSICAL FEATURES:
Year Completed: 1987
Number of Units: 124
Property Description: Pool, spa, continental breakfast
and cable
CONFIRMATION: Ian-Gardner Smith, Southwest Motel
Equity
REMARKS: The property reportedly was
performing at approximately 60
percent occupancy at the time of
sale. The average daily rate was
reported as being in the high $30s.
Although the property was in
Chapter 11 and was considered a
distressed sale, there were several
offers from large franchises. (e.g.
Red Roof Inn, Motel 6) The offers
ranged in price, on average,
between $2.2 million and $2.4
million.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 64
<PAGE>
IMPROVED SALE 2 -- KINGS INN
Property Address: 1333 Hotel Circle
San Diego, CA
TRANSACTION DATA
Date of Sale: March 15, 1994
Grantor: Hospitality Asset III L.P.
Grantee: Valley Ho Hotels, Inc.
Property Rights Transferred: Fee Simple
Sale Price: $3,100,000
Cash Equivalent Sales Price: $3,100,000
Sales Price/Room: $22,143
Personal Property Included in Sales Price: Yes
Financing/Terms of Sale: All cash sale
PHYSICAL FEATURES:
Year Completed: 1959
Number of Units: 140
Property Description: Two story, wood frame/stucco
construction. Pool, spa, meeting
rooms, restaurant, and coffee shop.
CONFIRMATION
REMARKS: The property was renovated in 1987.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 65
<PAGE>
IMPROVED SALE 3 -- ECONOLODGE
Property Address: 3880 Grennwood Street
San Diego, CA
TRANSACTION DATA
Date of Sale: December 29, 1993
Grantor: Great Western Bank
Grantee: Singod Hotel, Inc.
Property Rights Transferred: Fee Simple
Sale Price: $2,300,000
Cash Equivalent Sales Price: $2,300,000
Sales Price/Room: $15,333
Personal Property Included in Sales Price: Yes
Financing/Terms of Sale: 1st Great Western Bank $1,725,000
PHYSICAL FEATURES:
Year Completed: 1987
Number of Units: 150
Property Description: Three-story, wood frame/stucco
construction; exterior room
entrance, continental breakfast
CONFIRMATION
REMARKS: Just North of sports arena on a
one-way street with no visibility.
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 66
<PAGE>
IMPROVED SALE 4 -- GOOD NITE INN
Property Address: 4545 Waring Road
San Diego, CA
TRANSACTION DATA
Date of Sale: December 1, 1993
Grantor: Supreme Hotels Limited Partnership
Grantee: Good Nite Inn
Property Rights Transferred: Fee Simple
Sale Price: $2,000,000
Cash Equivalent Sales Price: $2,000,000
Sales Price/Room: $21,505
Personal Property Included in Sales Price: Yes
Financing/Terms of Sale: 1st Chang Hwa Commercial Bank
$1,600,000
PHYSICAL FEATURES:
Year Completed: 1970
Number of Units: 93
Property Description: Single and two story buildings,
with wood frame and stucco
exterior. Heated pool, coin
operated laundry, meeting rooms,
and restaurant.
CONFIRMATION
REMARKS: Minimal exposure from access roads
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 67
<PAGE>
[Color Photographes showing
the Main Entrance and a
typical Guest Room]
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ARTHUR ANDERSEN LLP - REAL ESTATE SERVICES GROUP 68
<PAGE>
EXHIBIT 10.10
<PAGE>
POST-FORMATION ACQUISITION AGREEMENT
THIS AGREEMENT is entered into this ___ day of _________, 1995, by and
between Host Funding, Inc., a Maryland corporation (the "REIT") and Host
Acquisition Group, LLC, a Delaware limited liability company (the "Acquisition
Manager") with reference to the following facts.
A. WHEREAS, REIT wishes to undertake an acquisition program which will
lead to the acquisition of hotel and motel properties which will be economically
rewarding to REIT;
B. WHEREAS, neither REIT nor Host Funding Advisors, Inc. (the REIT
"Advisor") currently has the resources and personnel to undertake such an
acquisition program;
C. WHEREAS, Both the REIT and the Advisor have the authority to delegate
certain acquisition responsibilities to third party service providers; and
D. WHEREAS, Acquisition Manager is willing and qualified to serve as the
manager of REIT's acquisition program;
NOW, THEREFORE, by execution of this Agreement, the REIT and the Advisor
appoint Acquisition Manager as its manager of acquisition services and
Acquisition Manager hereby accepts the appointment as Manager of acquisition
services and acknowledges that it will perform said services on behalf of REIT.
Accordingly,
<PAGE>
REIT and Acquisition Manager agree as follows:
1. ENGAGEMENT. REIT hereby engages Acquisition Manager to provide
continuing real estate investment search and acquisition services on behalf of
REIT pursuant to the terms and conditions set forth in this Agreement.
In the performance of its duties under this Agreement, Acquisition Manager
shall have full, complete, and exclusive discretion to search for, negotiate for
and prepare acquisition documentation for hotel and motel acquisitions.
However, REIT shall make the actual ultimate investment decision as to any such
property and after Acquisition Manager shall have presented such property to the
REIT, the REIT has no obligation to acquire such property.
2. OBJECTIVES. In order to satisfy the principal investment objective
of REIT pursuant to this Agreement, Acquisition Manager shall identify and
acquire hotel and motel properties which will perform on an above-average level
in REIT. Acquisition Manager is also authorized, as a secondary objective, to
identify favorable investment opportunities in and mortgage loans to hotel and
motel projects.
3. COVENANTS.
(a) Acquisition Manager is, and throughout the term of this Agreement
shall remain, qualified to provide acquisition
2
<PAGE>
services to REIT; and
(b) To the extent of the responsibility allocated to Acquisition
Manager under this Agreement, Acquisition Manager shall not, without the written
consent of REIT (i) deal or act as an agent or broker for, or represent or act
on behalf of, any party whose interests are adverse to the interests of REIT in
any transaction, and (ii) shall not receive any consideration for Acquisition
Manager's own account from any party dealing with REIT in connection with a
transaction involving REIT.
4. RELATIONSHIP OF PARTIES. It is agreed that REIT's acquisition of hotel
and motel properties will be limited to acquisitions negotiated by Acquisition
Manager, and that REIT and its Advisor will not in any case take part or be
active in the negotiations and preliminary steps leading to an acquisition under
this Agreement. Nothing contained in this Agreement is to be construed as
creating a partnership, joint venture or agency relationship between REIT and
Acquisition Manager. Acquisition Manager is engaged under this Agreement and
its relationship to REIT during the term of this Agreement is limited to that of
independent contractor.
5. PAYMENT OF FEES AND REIMBURSEMENT OF EXPENSES.
(a) FEES: REIT shall pay to Acquisition Manager an acquisition fee
of six percent (6%) of the gross purchase price of any hotel and motel
properties acquired by REIT during the term of
3
<PAGE>
this Agreement. Such fees will be computed and billed monthly immediately after
a closed acquisition and REIT agrees to remit payment promptly. The fee for
services contemplated hereunder shall be paid by REIT in REIT common shares or
cash (at the election of REIT). REIT common shares issued to Acquisition
Manager as payment for services hereunder shall be valued at their current
(i.e., last trade) value. In the event this Agreement is terminated, all fees
from any acquisition of property by the REIT where there has been a presentation
of the property by the Acquisition Manager to the REIT prior to said termination
shall be deemed earned as of said termination.
(b) EXPENSES: In addition to the fees described in 5(a) above, REIT
shall pay for pre-approved expenses reasonably and necessarily incurred in the
performance of the acquisition services provided under this Agreement. Such
expenses include, but are not limited to, the following: (i) fees and expenses
paid to independent contractors, engineers, and consultants engaged by
Acquisition Manager in connection with an acquisition of a hotel or motel
property; (ii) costs of obtaining independent appraisals of such properties;
(iii) costs and expenses connected with title to properties; (iv) all other
expenses and costs connected with an acquisition, except that legal fees
incurred in the documentation of any acquisition transaction shall be billed
directly to REIT and paid directly by REIT to the provider of such legal
services and except that any costs and/or fees incurred by REIT or Acquisition
Manager for other real estate brokers or commission-type fees shall
4
<PAGE>
not be reimbursed by REIT but shall either be paid directly by Acquisition
Manager from its fee described in Section 5(a) or if paid by REIT said fees
shall be credited against Acquisition Manager's fee under Section 5(a).
(c) STATEMENTS: A statement showing the amount of fees and
reimbursable expenses payable will be submitted to REIT by Acquisition Manager
promptly after the close of each calendar month.
6. REPORTS. Acquisition Manager will provide to REIT monthly reports
which will include a list of all hotel and motel properties identified and
targeted as potential acquisitions and the acquisition status of each such
potential targeted property.
7. ACCOUNTING. During the term of this Agreement, Acquisition Manager
will maintain complete and accurate books, accounts, and records including all
charges made for its services and expenses incurred on behalf of REIT. REIT, or
its duly authorized agent, may have access at all reasonable times to such
books, accounts and records for the purpose of inspecting and auditing them.
8. REPRESENTATION. Acquisition Manager represents that, with respect
to acquisitions of hotel and motel properties, under this Agreement:
(a) Acquisition Manager shall not have an interest in
5
<PAGE>
any such property nor participate in the proceeds of the sale of such property
except as provided for and disclosed under this Agreement; and
(b) Acquisition Manager shall identify and negotiate for the
acquisition of hotel and motel properties in accordance with the "Acquisition
Guidelines", a copy of which is attached hereto as Schedule A.
9. LIABILITY AND INDEMNIFICATION.
(a) LIABILITY: REIT, its officers and directors, and REIT's Advisor,
if any, shall have the obligation or duty to make the final investment decisions
with respect to any property disclosed to REIT by Acquisition Manager pursuant
to this Agreement. Acquisition Manager shall not be liable for any act or
omission of REIT in connection with such determination.
Acquisition Manager's responsibilities under this Agreement are
limited to the duties and responsibilities allocated to Acquisition Manager
under this Agreement and the duties and responsibilities, if any, imposed by
applicable Federal and state law.
(b) INDEMNIFICATION: REIT agrees to hold harmless Acquisition
Manager and each of its officers, directors, employees, agents and other
representatives from any claims, actions, debts, liabilities, obligations,
losses, damages, costs and expenses (including reasonable attorneys' fees) that
arise as a result of the performance of the services required by this Agreement.
6
<PAGE>
(c) COSTS AND ATTORNEYS' FEES: In the event of a breach of any
provision or default under this Agreement, the prevailing party in any lawsuit
thereon shall be entitled to reasonable attorneys' fees in addition to any award
of damages for such breach or default.
10. COMPENSATION LIMITED. The only compensation which Acquisition
Manager shall receive in connection with any acquisition for REIT shall be the
fees specified in Section 5 of this Agreement. Acquisition Manager agrees that
it will not accept, or knowingly permit any officers or employees, or any member
of their immediate families (i.e., spouses or children), of itself or of any
affiliates or subsidiaries, to accept any compensation, bonuses, commissions,
rebates, discounts, gifts, or any other thing of value from any other person or
party in connection with any acquisition for REIT.
If there should be any violations of this provision, REIT shall have the right
to immediately terminate this Agreement, and further, to recover from
Acquisition Manager, or other parties involved, any compensation which may have
been wrongfully realized.
11. COUNTERPARTS. This Agreement may be signed or executed in separate
counterparts and the signing or execution of each counterpart shall have the
same effect as the signing or execution of a single original document.
7
<PAGE>
12. ASSIGNMENT: No assignment of this Agreement may be made by
Acquisition Manager without the written consent of REIT.
13. MODIFICATIONS. All modifications of this Agreement shall be in
writing, signed by REIT and Acquisition Manager.
14. BENEFIT. This Agreement and all of the terms and conditions contained
in this Agreement shall be binding upon and inure to the benefit of the parties
and their respective heirs, executors, administrators, successors and assigns.
15. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties relating to the subject matter hereof and supersedes all
prior and contemporaneous agreements, understandings and negotiations, whether
oral or written, and there are no other general or specific warranties,
representations or other agreements except as herein specifically set forth.
16. TERM OF AGREEMENT. The term of this Agreement shall begin on the date
first above specified and shall terminate on the earlier of the (i) fifth annual
anniversary date of this Agreement, or (ii) when the net fees earned by
Acquisition Manager shall equal or exceed $9 million. Notwithstanding the
foregoing, the REIT may cancel this Agreement by giving sixty (60) days written
notice of such cancellation to the Acquisition Manager provided that such
proposed cancellation date is within six (6) months of the
8
<PAGE>
effective date of this Agreement.
17. NOTICES. All notices given pursuant to this Agreement shall be in
writing. All notices shall be deemed to have been properly given or served (i)
on the date of delivery if delivered personally or by courier, (ii) three days
following the date of deposit if mailed by registered or certified mail within
the United States, postage prepaid, (iii) the next business day following
deposit with an overnight air courier service which guarantees next day
delivery, or (iv) when sent by facsimile or telex. Notices shall be sent to the
parties to this Agreement at the addresses set forth on the signature page (or
to such person or persons at such address or addresses as a party may specify by
notice pursuant to this Section 17).
18. SEVERABILITY. In the event any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, such holding
shall not invalidate or render unenforceable any other provision of this
Agreement.
19. GOVERNING LAW. This Agreement and all rights under it, including
enforcement by litigation, shall be governed by and construed in accordance with
the laws of the State of Delaware.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
"REIT" HOST FUNDING, INC.,
a Maryland corporation
7825 Fay Avenue, Suite 250
La Jolla, CA 92037
------------------------------
By: Michael S. McNulty
Its: President
"ACQUISITION MANAGER" HOST ACQUISITION GROUP, LLC
a Delaware limited liability company
------------------------------
By: Ian Gardner-Smith
Its: President
10
<PAGE>
SCHEDULE A
ACQUISITION GUIDELINES
Host Funding, Inc. hereby adopts and affirms the following acquisition
policies and criteria:
1. [___ to provide]
2. [___ to provide]
<PAGE>
EXHIBIT 10.11
<PAGE>
LA JOLLA SECURITIES CORPORATION
- -------------------------------------------------------------------------------
August 22, 1995
Host Funding, Inc.
7825 Fay Avenue, Suite 250
La Jolla, CA 92037
Attn: Guy E. Hatfield, Chairman of the Board
Gentlemen:
This letter of agreement (the "Agreement") sets forth terms and conditions under
which Host Funding, Inc. (The "Company") hereby appoints La Jolla Securities
Corporation ("La Jolla") to serve as investment banker/underwriter for the
purpose of syndicating the underwriting of Host Funding, Inc's initial public
offering (the "IPO").
1. IPO Underwriting Syndication
The Company will prepare, and La Jolla will review and approve, a (form S-11)
registration statement for the purpose of registering, under prospectus, a
minimum of $5,000,000 and a maximum of $,7,500,000 in value of shares in the
Company's initial public offering (IPO). The shares shall be priced at $10.00.
It is intended that the company, a Maryland Corporation, will qualify as a real
estate investment trust (REIT).
La Jolla will select an underwriting syndicate which will be acceptable to the
Company, and the Company shall make application for listing the shares on the
American Stock Exchange. The managing underwriter, La Jolla or its designee as
approved by the Company, shall perform such due diligence required to satisfy
themselves that the technical, legal, and financial position of the Company, as
represented through preliminary fact-finding prior to the signing of the
Underwriting Agreement, is generally true and correct. The Company shall
provide La Jolla and/or its designee with full authority to talk to the
Company's auditors and access to the Company's files and records as required to
accomplish due diligence fact finding. Compensation to La Jolla, and the
underwriting syndicate they form, shall be 10% of such total (gross) funds
raised plus 2% of
1020 PROSPECT STREET, SUITE 200, LA JOLLA, CALIFORNIA 92037
(619) 456-8200 (800) 833-3504 FAX (619) 456-8211
MEMBER NASD & SIPC
<PAGE>
such funds as a non-accountable expense allowance. Additionally, La Jolla and
the underwriting syndicate will receive, for a consideration of $100, a 5 year
warrant to purchase a minimum of
50,000 shares and a maximum of 75,000 shares at a price of $13.00 per share.
2. Prospective Underwriting Selling Group Briefings
La Jolla, or its designee, will arrange for briefings (road shows) during which
the Company's senior officers will deliver an appropriate presentation to
prospective underwriting syndicate/selling group members. The Company will pay
all expenses incurred in connection with these road shows and will make key
officers and employees of the Company available as requested.
3. Underwriting Counsel
La Jolla, or its managing underwriter designee, will retain, as counsel, a law
firm that is knowledgeable and experienced in securities law. The fees of such
counsel will be paid by the managing underwriter subject to paragraph 4 below.
4. Issuer's Expenses
The Company will be responsible for paying all costs typically borne by the
Issuer. These include, but are not limited to, the costs of preparing the
Registration Statement and Offering prospectus, all printing costs, filing and
related expenses, the fees and expenses of the Company's attorneys and
accountants, and all Blue Sky and related costs, whether incurred by counsel to
the Company or La Jolla. In the event that the proposed offering is aborted for
any reason, including, but not limited to adverse market conditions or a
unilateral decision by the Company or La Jolla not to proceed, the Company shall
promptly reimburse La Jolla for its itemized expenses in excess of $10,000 as
included in this paragraph and paragraph 3.
5. "Blue Sky" Law Qualifications
The Company will register, in each state designated by La Jolla, the securities
included in the IPO. The cost of registration and fees of counsel in completing
the applications and in clearing the underwriting through the various state
"Blue Sky" commissions will be paid by the Company.
6. Indemnification
Each party hereto hereby indemnifies and holds harmless the other from and
against any and all losses, claims, damages, or
2
<PAGE>
liabilities to which the other may become subject as a result of
the indemnifying party's violation of any federal or state securities law, and
shall reimburse the other for any legal or other expenses reasonably incurred by
the other in connection with investigating or defending any such loss, claim,
damages, liability or action. This Paragraph 6 shall survive the termination or
expiration of this Agreement provided that this Paragraph 6 shall be superseded
by the indemnification provisions of the Underwriting Agreement.
7. Governing Law
This Agreement shall be governed by the laws of the State of California, without
regard to any conflict of law provisions thereof, and may not be amended or
modified except in writing signed by both parties. All actions brought to
enforce or construe this Agreement shall be brought, tried and heard before
courts of appropriate jurisdiction in the State of California.
8. Assignment
This Agreement and all rights and obligations thereunder shall be binding upon
and inure to the benefit of each party's successors.
Please confirm your agreement to the foregoing by signing and returning to us
the enclosed copy of this letter.
Agreed to and Accepted this 24th. day of August, 1995.
HOST FUNDING INC. LA JOLLA SECURITIES CORP.
By: /s/ Guy E. Hatfield By: /s/ Bruce A. Biddick
------------------------- --------------------------
Guy E. Hatfield Bruce A. Biddick
Chairman of the Board President and CEO
3
<PAGE>
AMENDMENT TO UNDERWRITING AGREEMENT
This amendment dated September 21, 1995 (the "Amendment") amends the terms
and conditions of the Agreement dated August 22, 1995 and agreed to and accepted
on August 24, 1995 (the "Underwriting Agreement") under which Host Funding,
Inc., (the "Company") appointed La Jolla Securities Corporation ("La Jolla") to
serve as investment banker/underwriter for the purpose of syndicating the
underwriting of the Company's initial public offering ("IPO"), with reference to
the following facts:
A. The underwriting duties and obligations of La Jolla are conditioned
upon the consummation of the Mission Bay Acquisition.
B. On September 19, 1995, Ray Burg, Senior Corporate Counsel for the
California Department of Corporations, indicated to the Company that the
Department of Corporations had reviewed the Company's application filed with the
Department of Corporations and that a permit indicating satisfaction of the
California Roll-up Rules would be forthcoming.
C. La Jolla wishes to insure that the Mission Bay Acquisition will
satisfy the Federal Roll-up Rules.
NOW, THEREFORE, in consideration of the mutual covenants, promises and
conditions contained herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as that the Underwriting Agreement shall be amended by the addition of the
following new paragraph 9:
9. CONDITIONS TO PERFORMANCE OF UNDERWRITER
The obligations and duties of La Jolla under this Agreement are specifically and
expressly conditioned upon the receipt by La Jolla of a written legal opinion
letter from counsel of the Company stating that either:
A. The Mission Bay Acquisition, as implemented and approved, falls within
a recognized statutory exemption to the Federal Roll-up Rules,
B. The Mission Bay Acquisition has received an administrative exemption
from the Federal Roll-up Rules from the Securities and Exchange Commission, or
C. The Company has demonstrated compliance with the statutory
requirements of the Federal Roll-up Rules.
Unless and until La Jolla receives such opinion letter from counsel of the
Company, La Jolla has no obligation to perform under the terms of this
Agreement.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed as of the date first
hereinabove written.
"THE COMPANY"
HOST FUNDING, INC.
A Maryland corporation
/s/ Michael S. McNulty
-----------------------------
By: Michael S. McNulty
Its: President
"LA JOLLA"
LA JOLLA SECURITIES CORPORATION
A California corporation
/s/ Bruce A. Biddick
-----------------------------
By: Bruce A. Biddick
Its: President and CEO
2
<PAGE>
SECOND AMENDMENT TO UNDERWRITER AGREEMENT
This amendment dated October 25, 1995 (the "Second Amendment") amends the
terms and conditions of the Amendment dated September 21, 1995, and the
Agreement dated August 22, 1995 and agreed to and accepted on August 24, 1995
(the "Underwriting Agreement") under which Host Funding, Inc., (the "Company")
appointed La Jolla Securities Corporation ("La Jolla") to serve as investment
banker/underwriter for the purpose of syndicating the underwriting of the
Company's initial public offering ("IPO"), with reference to the following
facts:
A. The underwriting duties and obligations of La Jolla are conditioned
upon the consummation of the Mission Bay Acquisition.
B. On September 19, 1995, Ray Burg, Senior Corporate Counsel for the
California Department of Corporations, indicated to the Company that the
Department of Corporations had reviewed the Company's application filed with the
Department of Corporations and that a permit indicating satisfaction of the
California Roll-up Rules would be forthcoming.
C. La Jolla wishes to insure that the Mission Bay Acquisition will
satisfy the Federal Roll-up Rules.
NOW, THEREFORE, in consideration of the mutual covenants, promises and
conditions contained herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as that the Underwriting Agreement shall be amended by the addition of
the following new paragraph 9:
9. CONDITIONS TO PERFORMANCE OF UNDERWRITER
The obligations and duties of La Jolla under this Agreement are specifically and
expressly conditioned upon:
A. The receipt by La Jolla of a written legal opinion letter from
counsel of the Company stating that the Mission Bay Acquisition, as
implemented and approved, falls within a statutory exemption to the Federal
Roll-up Rules (Section 14(h)(5)(E) of the Securities and Exchange Act of
1934), which requires, inter alia, at least 67% actual affirmative votes
(i.e. non-votes deemed approving votes pursuant to the Mission Bay Agreement
of Limited Partnership will not be counted towards this 67% approval
requirement) of the limited partners of Mission Bay Super 8, Ltd.; and
B. A when issued listing of the Company's stock on either the American
Stock Exchange or the NASDAQ National Market.
Unless and until La Jolla receives such opinion letter from counsel of the
Company, La Jolla has no obligation to perform under the terms of this
Agreement. In addition, the requirement that La Jolla receive such an opinion
letter from Counsel of the Company cannot and will not be waived by either
party.
<PAGE>
IN WITNESS WHEREOF, this Second Amendment has been executed as of the date
first hereinabove written.
"THE COMPANY"
HOST FUNDING, INC.
A Maryland corporation
/s/ Michael S. McNulty
--------------------------------
By: Michael S. McNulty
Its: President
"LA JOLLA"
LA JOLLA SECURITIES CORPORATION
A California corporation
/s/ Bruce A. Biddick
---------------------------------
By: Bruce A. Biddick
Its: President and CEO
2
<PAGE>
EXHIBIT 10.12
<PAGE>
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT, ("Agreement") is entered into and is
effective on this 30th day of September, 1995, by and between Host Funding,
Inc., a Maryland corporation, (the "Company") and Guy E. and Dorothy Hatfield
("Hatfield"), with reference to the following facts:
A. On April 1, 1995, the Company acquired four limited-service hotels
from an affiliate of Hatfield pursuant to an agreement known as the Contribution
and Assumption Agreement.
B. Late in 1995, the Company will consummate various transactions (the
"Formation Transactions") which will cause the Company to become involved in the
acquisition of hotel properties throughout the United States, with an emphasis
on the limited-service segment of the hotel industry.
C. Guy E. Hatfield is a Non-Independent Director of the Company and
Dorothy Hatfield is the wife of Guy E. Hatfield.
D. Hatfield and/or his affiliates own numerous limited-services hotels
throughout the United States.
NOW, THEREFORE, in consideration of the mutual covenants, promises and
conditions contained herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. PURPOSE
The purpose of this Agreement is to establish guidelines for the
competitive relationship between the Company and Hatfield and/or his affiliates.
<PAGE>
2. NON-COMPETITION
Hatfield agrees that, for a period of five (5) years from the date of this
Agreement, he shall not:
(A) Enter, directly or indirectly, into the employment of, or
render, directly or indirectly, any services (whether as a
director, officer, agent, representative, independent contractor,
consultant or advisor or any other similar relationship or
capacity),to any Person (such person is referred to as a
"Competitor") which provides those services, or which otherwise
competes with, or carries on a similar business to any business
now carried on by the Company within five (5) miles of the
counties in which the Company carries on a similar business (the
"Territory"), whether such business is carried on by the Company
or by a successor or assign in any of these counties;
(B) Engage, directly or indirectly, in any such business in the
Territory as a Competitor;
(c) Become interested, directly or indirectly, in any such
Competitor as an individual proprietor, franchisee, partner,
joint venturer, stockholder, principal, member, investor, trustee
or any other similar other relationship or capacity;
(D) Directly or indirectly, by sole action or in concert with
others, solicit, induce or influence, or seek to solicit, induce
or influence, any Person who is engaged by the Company as an
employee, agent, independent contractor or otherwise, to leave
the employ of the Company or any successor or assign;
(E) Directly or indirectly, by sole action or in concert with
others, solicit,
2
<PAGE>
induce or influence, or seek to solicit, induce or influence, any
customer or client of the Company; and
(F) Use, divulge, furnish or make accessible to any Person
(other than at the written request of the Company) any secret,
confidential or proprietary knowledge or information of the
Company including, but not limited to, any trade secrets,
financial information, customer or client lists, marketing
methods, data, properties, specifications, personnel
organization or internal affairs of the Company.
3. SEPARATE COVENANTS
The agreements contained in Section 2 shall be construed as a series of
separate covenants, one for each activity Hatfield and his affiliates, capacity
in which Hatfield and his affiliates are prohibited from competing and each part
of the Territory in which the Company is carrying on in such activity.
4. INTENT; SEVERABILITY
The parties to this Agreement recognize that the territorial and time
restrictions set forth herein are reasonable, not burdensome and are properly
required for the adequate protection of the Company and its stockholders. If
such territorial or time restrictions or any other provision contained herein
shall be deemed to be illegal, unenforceable or unreasonable by a court of
competent jurisdiction, Hatfield agrees to submit to the reduction of such
territorial or time restriction or other provision to such an area or period as
such court shall deem reasonable.
5. INJUNCTIVE RELIEF
Hatfield acknowledges that (i) the covenants and the restrictions contained
in Section 2 are
3
<PAGE>
a material factor to his execution of the Agreement and are necessary and
required for the protection of the Company, (ii) such covenants relate to
matters that are of a special, unique and extraordinary character that gives
each of such covenants a special, unique and extraordinary value, and (iii) a
breach of any of such covenants will result in irreparable harm and damages to
the Company in an amount difficult to ascertain and which cannot be adequately
compensated by a monetary award. Accordingly, in addition to any of the relief
to which the Company may be entitled at law or in equity, the Company shall be
entitled to temporary and/or permanent injunctive relief from any breach or
threatened breach by Hatfield of the provisions of Section 2 without proof of
actual damages that have been or may be caused to the Company by such breach or
threatened breach.
6. EXCEPTION TO COVENANTS
The parties hereby agree that there shall be one (1) exception to the
covenants made by Hatfield in Section 2 of this Agreement. The terms of the
exception are the following:
(A) Notwithstanding the terms of this Agreement, and more
specifically, the covenants contained in Section 2 of this
Agreement, Hatfield and/or his affiliates shall have the right to
own, operate, and manage the hotel known as the Hatfield Inn
located in Sikeston, Missouri.
(B) Additionally, Hatfield and/or his affiliates are not subject
to the covenants contained in Section 2 of this Agreement with
respect to and only with respect to the Hatfield Inn located in
Sikeston, Missouri.
7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Hatfield as follows:
(A) Host Funding has full power and authority to enter into this
4
<PAGE>
Agreement.
(B) This Agreement constitutes a legal, valid and binding
obligation of the Company enforceable against the Company in
accordance with its terms.
8. GENERAL.
(A) The parties hereby confirm and ratify the matters contained
and referred to in the preamble to this Agreement and agree that
the same are expressly incorporated into this Agreement.
(B) This Agreement constitutes the entire agreement between the
parties relating to the subject matter hereof and supersedes all
prior and contemporaneous agreements, understandings and
negotiations, whether oral or written, and there are no other
general or specific warranties, representations or other
agreements except as herein specifically set forth.
(c) Whenever the singular, plural, masculine, feminine or neuter
is used throughout this Agreement the same shall be construed as
meaning the singular, plural, masculine, feminine or neuter
wherever the fact or context so requires.
(D) All of the covenants, warranties and representations
contained in this Agreement shall survive the closing and
completion of this transaction and shall not merge on the closing
of the transaction, but shall continue to be in full force and
effect for the benefit of the parties.
(E) The parties hereto covenant and agree to do such things and
execute such further documents, agreements, instruments or
assurances as may
5
<PAGE>
reasonably be required by any other party hereto from time to
time in order to carry out the terms of this Agreement in
accordance with their true intent.
(F) This Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland. The parties
hereto submit to the jurisdiction of the Courts of the State of
Maryland in connection with any dispute under this Agreement.
(G) Time shall be of the essence of this Agreement.
(H) This Agreement shall be binding upon and inure to the
benefit of the parties and their respective heirs, executors,
administrators, successors and assigns.
(I) This Agreement may be signed or executed in separate
counterparts and the signing or execution of each counterpart
shall have the same effect as the signing or execution of a
single original document.
(J) Representations and warranties of the parties hereto shall
survive the closing of the transaction contemplated herein.
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
hereinabove written.
"HATFIELD"
/s/ Guy E. Hatfield
-------------------------------------
Guy E. Hatfield
/s/ Dorothy Hatfield
-------------------------------------
Dorothy Hatfield
"THE COMPANY"
HOST FUNDING, INC.
a Maryland corporation
/s/ Michael S. McNulty
-------------------------------------
By: Michael S. McNulty
Its: President
7
<PAGE>
EXHIBIT 10.13
<PAGE>
STOCK PLEDGE AGREEMENT
This agreement entered into as of April 1, 1995, between All American
Group, Inc., a Delaware corporation, Dorothy Hatfield, Guy E. Hatfield, Julia
Hatfield King, Scott Jeffrey Hatfield (collectively referred to as
"Pledgor" and sometimes individually referred to as the "Obligors"), and
Host Funding, Inc., a Maryland corporation, ("Pledgee").
1. UNDERLYING FACTS/RECITALS.
1.1 Pursuant to the terms of a Contribution and Assumption
Agreement executed by Pledgor and Pledgee concurrently with this agreement
(the "Contribution and Assumption Agreement"), Pledgor has agreed to
purchase from Pledgee 26.2 fractional shares ("Shares") of the issued and
outstanding voting common stock of Host Funding, Inc., a Maryland corporation
(the "Company").
1.2 As payment for the purchase price of such Shares, each of
the Obligors has agreed to execute and deliver to Pledgee a promissory note
("Note") dated the same date as this agreement, in the principal sum of
$1,805,675.
1.3 In consideration of Pledgee's execution of the Contribution
and Assumption Agreement and acceptance of the Note, Pledgor has agreed to
secure the Note by a pledge of the Shares. Pledgee is willing to secure the
Note by a pledge of the Shares. Pledgee is willing to accept the Note as
payment for the Shares, if payment of the Note is secured by Pledgor's pledge
of the Shares.
2. PLEDGE OF SHARES. Pledgor hereby grants to Pledgee a security
interest in the Shares, together with all additional shares issued to Pledgor
by reason of a stock split or stock dividend, which additional shares are
related to the Shares. Any
1
<PAGE>
additional shares deposited by Pledgor with the Pledgeholder named below for
the benefit of Pledgee shall be immediately subject to this agreement and
shall be included in the word "Shares" for all purposes of this agreement
with the same force and effect as the original Shares pledged by Pledgor.
3. DEBTS AND OBLIGATIONS. The security interest in the Shares granted
pursuant to this agreement shall secure Pledgor's full and prompt performance
of all terms and payment of all sums required under the Note.
4. PLEDGEHOLDER, DELIVERY OF SHARE CERTIFICATES.
4.1 Pledgor and Pledgee hereby designate Hotel Mortgage
Resources, Inc., a Delaware corporation, to act as the pledgeholder
("Pledgeholder") of the Shares during the term of this agreement. Except as
provided above, Pledgeholder may be changed only upon the mutual consent of
the parties. Concurrently with the execution of the Note and this agreement,
Pledgor shall deliver to Pledgeholder a certificate registered in the name of
Pledgor with a separate stock assignment form endorsed in blank and undated
evidencing the Shares to be held by Pledgeholder in accordance with the terms
of this agreement. Pledgor agrees to deposit with Pledgeholder in the same
manner all additional share certificates evidencing additional Shares which
may from time to time be issued by Company to Pledgor during the term of this
agreement.
4.2 Pledgeholder is not the agent of Pledgee or Pledgor and is
not responsible for knowing or interpreting any provision of the Note or this
agreement. Pledgeholder shall perform its duties and obligations under this
agreement only upon receipt of written instructions of either Pledgee or
Pledgor, as the case may be, or their authorized agents or representatives.
Copies of all instructions delivered to Pledgeholder shall concurrently be
2
<PAGE>
delivered to the noninstructing party at its address set forth below.
4.3 In the event Pledgeholder receives conflicting instructions
or demands or an objection to any one set of instructions, Pledgeholder shall
immediately notify the parties of such conflict or objection and shall take
no action of any nature whatsoever so long as such conflict or objection
continues. In so doing, Pledgeholder shall not be or become liable for any
damages to the parties for Pledgeholder's failure to comply with conflicting
demands or instructions. Pledgeholder shall continue to refrain from taking
any action until all differences have been resolved by the mutual agreement
of the parties, a copy of which shall be delivered to Pledgeholder, or until
the rights of the parties have been finally adjudicated in a court of proper
jurisdiction. In the event the parties are unable to resolve such differences
within a reasonable period of time, Pledgeholder, at its sole discretion and
at the expense of the parties, shall have the right, but not the obligation,
to file a suit in interpleader or for a declaratory judgment for the purpose
of having the respective rights of the parties adjudicated in respect to this
agreement and Shares held by Pledgeholder. The parties jointly and
severally agree to pay all costs, expenses and reasonable attorneys' fees
incurred by Pledgeholder in connection with the resolution of such
differences, and in any resulting interpleader proceeding; provided, however,
the prevailing party in any such action shall have the right to reimbursement
from the other party for all costs and expenses including attorneys' fees
paid by such prevailing party to the Pledgeholder pursuant to this agreement.
4.4 The parties shall jointly and severally indemnify, defend
and hold the Pledgeholder harmless from and against any and all claims,
losses and liabilities, including attorneys' fees, arising out of or in
connection with serving as Pledgeholder, provided, however, that Pledgeholder
shall not be indemnified for bad faith or intentional misconduct.
3
<PAGE>
5. DIVIDEND AND VOTING RIGHTS. The parties agree so long as there is
no default in payment of the Note or a default under this agreement, the
dividend and voting rights for the Shares shall be as follows:
a. All cash or property dividends paid with respect to the
Shares shall be paid to Pledgor;
b. The Shares shall be held of record by Pledgor.
6. DEFAULT. The occurrence of any one of the following events shall
constitute an event of default under this agreement:
6.1 Pledgor's failure to pay any indebtedness secured hereby
in accordance with its terms, and such failure continues for a period of more
than thirty (30) days after written notice by Secured Party to Debtor.
6.2 A court of competent jurisdiction enters a decree or order
for relief in favor of Pledgor in any involuntary case under applicable
bankruptcy, insolvency or similar law, state or federal, now or hereinafter
in effect or a decree or order appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of Pledgor or for any
substantial part of the assets or property of Pledgor, or ordering the
winding-up or liquidation of the affairs of Pledgor, and such decree or order
remains unstayed and in effect for a period of sixty (60) consecutive days,
or Pledgor commences a voluntary case under any applicable bankruptcy,
insolvency, or similar law, state or federal, now or hereafter in effect, or
consents to the entry of an order for relief in any involuntary case under
any such law, or consents to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custodian sequestrator (or similar
official) of Pledgor or for any substantial part of the assets or
4
<PAGE>
property of Pledgor, or shall make any general assignment for the benefit of
creditors, or shall fail generally to pay its or his debts in the ordinary
course or as they become due, or shall take any action in furtherance of any
of the foregoing;
6.3 Pledgor's failure to perform or cause to be performed any
term or covenant of this agreement to be performed by Pledgor, or to
discharge or cause to be discharged any liability to Pledgee; or
6.4 The occurrence or any event of default by Pledgor under
the Note.
7. REMEDIES. Upon the occurrence of any event of default, Pledgee may
exercise any and all rights and remedies available to Pledgee under the
California Commercial Code or other applicable laws, except as limited in
this paragraph or the terms of the Note, including without limitation the
right to:
7.1 Accelerate the maturity of any indebtedness secured by
this agreement and any other obligations of Pledgor to Pledgee, regardless of
the terms of any promissory note or instrument evidencing the same; or
7.2 Either in person or by agent with or without bringing any
action or proceeding, or by a receiver to be appointed by a court, take
possession of all or part of the Shares.
Any notice of sale, disposition of other intended action by Pledgee sent
to Pledgor at least five (5) days prior to such action shall constitute
reasonable notice to Pledgor. Pledgor expressly waives all rights to
possession of the Shares after an event of default which has not been cured
within the time allowed by Pledgee, and all claims for injuries suffered as a
result of any damage or loss caused by entry or repossession. Pledgee and
5
<PAGE>
Pledgor agree that Pledgee's sole remedy with respect to a default by Pledgor
under this agreement shall be retention of the Shares in full satisfaction of
the indebtedness and performance secured by this agreement and that Pledgee
shall not have any rights against Pledgor for any deficiency remaining after
sale or other disposition or repossession of the Shares.
8. TERMINATION. This agreement shall terminate when all obligations of
Pledgor under the terms of the Note have been performed in full and Pledgor
is not otherwise in breach or default under the Note or this agreement.
Immediately upon termination of this agreement, Pledgeholder shall deliver,
or cause to be delivered to Pledgor any share certificates evidencing any
Shares held by Pledgeholder for the benefit of Pledgee pursuant to the terms
of this agreement.
9. MISCELLANEOUS.
9.1 ATTORNEY'S FEES. If either party commences or is made a
party to any litigation, arbitration, mediation or other judicial or
administrative proceeding ("proceeding") for interpleader or to enforce,
interpret or obtain a declaration of rights under this agreement, the
prevailing party in such proceedings shall be entitled to recover from the
other party all attorneys' fees, costs (whether otherwise taxable or
recoverable) and expenses incurred in connection with such proceeding or any
appeal or enforcement of any judgment obtained in any such proceeding,
including, without limitation, fees incurred in connection with post-judgment
motions, contempt proceedings, garnishment, levy, debtor and third party
examinations, discovery and bankruptcy litigation. Any judgment or order
entered in any proceeding shall contain a specific provision providing for
the recovery of attorneys' fees and costs incurred in enforcing such
judgment or order. This attorneys' fees provisions is intended to be
severable from the other provisions of this agreement, shall
6
<PAGE>
survive any judgment or order entered in any proceeding and shall not be
deemed merged into any such judgment or order.
9.2 NOTICES. All notices, requests, demands and other
communications under this agreement shall be in writing and shall be deemed
duly given (i) on the date of delivery if personally delivered, (ii) one
business day after delivery by overnight courier, telegram or facsimile, or
(iii) three business days after mailing if mailed by first-class mail,
postage prepaid, to the parties at their addresses set forth below, or such
other address designated from time to time in writing by such party to all
other parties.
9.3 AMENDMENT AND WAIVER. This agreement may be amended only
by a written agreement signed by all parties to this agreement. Waiver of
any provision of this agreement shall not be deemed or constitute a waiver of
any other provision, nor shall such waiver constitute a continuing waiver.
9.4 SUCCESSORS AND ASSIGNS. This agreement shall be binding
upon and inure to the benefit of the parties and their respective heirs,
beneficiaries, legal representatives, successors and assigns.
9.5 COUNTERPARTS. This agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original instrument.
9.6 GOVERNING LAW AND SEVERABILITY. This agreement shall be
governed by and construed under the laws of the State of California. If any
provision of this agreement is invalid or contravenes California law, such
provision shall be deemed not to be a part of this agreement and shall not
affect the validity or enforceability of the remaining provisions.
7
<PAGE>
9.7 ENTIRE AGREEMENT. This agreement represents the entire
agreement between the parties with respect to the subject matter set forth
above, and supersedes all previous oral and written agreements,
communications, representations or commitments.
9.8 FURTHER ASSURANCES. The parties covenant and agree that
they will execute such other and further instruments and documents as are or
may become necessary or convenient to effectuate and carry out this agreement.
9.9 TIME. Time is of the essence under this agreement.
9.10 CONSTRUCTION. This agreement has been negotiated at arms
length and each party has been represented by legal counsel. Accordingly,
any rule of law (including without limitation California Civil code Section
1654) or legal decision that would require interpretation of any ambiguities
in this agreement against the party drafting it is not applicable and is
waived. The provisions of this agreement shall be interpreted in a
reasonable manner to effect the intent of the parties and the purpose of this
agreement.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this agreement on
the date first hereinabove written.
PLEDGOR:
THE ALL AMERICAN GROUP, INC.
a Delaware corporation
By: /s/ GUY E. HATFIELD
----------------------------------------------------------
GUY E. HATFIELD, Its President
/s/ DOROTHY HATFIELD
----------------------------------------------------------------
DOROTHY HATFIELD
/s/ GUY E. HATFIELD
----------------------------------------------------------------
GUY E. HATFIELD
/s/ JULIA HATFIELD KING
----------------------------------------------------------------
JULIA HATFIELD KING
/s/ SCOTT JEFFREY HATFIELD
----------------------------------------------------------------
SCOTT JEFFREY HATFIELD
Address: P.O. Box 891540
Temecula, CA 92589-1540
PLEDGEE:
HOST FUNDING, INC.
a Maryland corporation
By: /s/ GUY E. HATFIELD
----------------------------------------------------------
GUY HATFIELD, Its President
Address: P.O. Box 891540
Temecula, CA 92589-1540
PLEDGEHOLDER:
HOTEL MORTGAGE RESOURCES, INC.
a Delaware corporation
By: /s/ IAN GARDNER-SMITH
----------------------------------------------------------
IAN GARDNER-SMITH, Chief Executive Officer
Address: 7825 Fay Avenue, Suite 250
La Jolla, CA 92037
9
<PAGE>
AMENDMENT TO PLEDGE AGREEMENT
THIS AMENDMENT ("Amendment") is entered into and is effective on this
28th day of September, 1995, by and between Host Funding, the Obligor the
Note entered into between the Obligor and Host Funding on April 1, 1995, with
reference to the following facts:
A. On March 31, 1995, Obligor executed the Note in the amount of
$1,805,675, payable to the order of AAG, which Note was subsequently assigned
to Host Funding on April 1, 1995 by AAG in exchange for the Received Shares.
B. Pursuant to the Financing Agreement, effective March 31, 1995,
Obligor caused four (4) Mortgages on the Qualified Real Property to be
conveyed as collateral for the obligations contained in the Financing
Agreement and the Note.
C. The purpose of this Amendment is to amend the Pledge Agreement in
accordance with this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, promises and
conditions contained herein and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties
hereto agree as that the Pledge Agreement shall be amended by the addition of
the following new paragraph 1.4:
1.4 Upon closing of the transactions referred to as the "Formation
Transactions" in the Host Funding Form S-4 (Registration No. 33-60011 as
originally filed on June 6, 1995) and the Host Funding Form S-11
(Registration No. 33-92772 as originally filed on May 26, 1995), the term
"Shares" shall no longer mean the 26.2 Fractional Shares as defined above,
but rather shall mean 140,000 shares of Class B Common Stock and 140,000
shares of Class C Common Stock of Host Funding.
10
<PAGE>
PLEDGOR:
THE ALL AMERICAN GROUP, INC.
a Delaware corporation
By: /s/ GUY E. HATFIELD
----------------------------------------------------------
GUY E. HATFIELD, Its President
/s/ DOROTHY HATFIELD
----------------------------------------------------------------
DOROTHY HATFIELD
/s/ GUY E. HATFIELD
----------------------------------------------------------------
GUY E. HATFIELD
/s/ JULIA HATFIELD KING
----------------------------------------------------------------
JULIA HATFIELD KING
/s/ SCOTT JEFFREY HATFIELD
----------------------------------------------------------------
SCOTT JEFFREY HATFIELD
Address: P.O. Box 891540
Temecula, CA 92589-1540
PLEDGEE:
HOST FUNDING, INC.
a Maryland corporation
By: /s/ MICHAEL S. MCNULTY
----------------------------------------------------------
MICHAEL S. MCNULTY, Its President
Address: 8235 Douglas Avenue, Suite 1300
Dallas, TX 7522
PLEDGEHOLDER:
HOTEL MORTGAGE RESOURCES, INC.
a Delaware corporation
By: /s/ IAN GARDNER-SMITH
----------------------------------------------------------
IAN GARDNER-SMITH, Chief Executive Officer
Address: 7825 Fay Avenue, Suite 250
La Jolla, CA 92037
11
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1994
Commission File No.: 33-9075-LA
Mission Bay Super 8 Ltd., A California Limited Partnership
- ----------------------------------------------------------
(Name of small business issuer in its charter)
California 33-0202890
- ----------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3145 Sports Arena Blvd., San Diego, California 92110
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (619) 226-1212
----------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Limited Partnership Interests
-----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. X Yes No
----- ----
State issuer's revenues for its most recent fiscal year: $1,054,819.
The aggregate market value of the voting securities held by non-affiliates is
not determinable as there is no established market and the securities have only
limited voting rights.
State the number of limited partnership interests outstanding as of December 31,
1994: 6,600 interests held by 1,149 limited partners.
<PAGE>
DOCUMENT INCORPORATED BY REFERENCE
Definitive Prospectus dated November 19, 1986 is incorporated by reference into
Part III.
<PAGE>
PART I
Item 1. BUSINESS
Mission Bay Super 8 Ltd., A California Limited Partnership, formerly Motels
of America Series IX, A California Limited Partnership, (the Partnership) was
formed on February 5, 1987 pursuant to the California Revised Uniform Limited
Partnership Act. As of December 31, 1994, the Partnership consisted of a
general partner, GHG Hospitality, Inc. (GHG), and 1,149 limited partners owning
6,600 limited partnership interests. The limited partnership interests sold at
a public offering price of $1,000 each commencing November 19, 1986 pursuant to
a Registration Statement on Form S-18 under the Securities Act of 1933
(Registration 33-9075-LA). The offering of $6,600,000 was fully subscribed and
closed on June 15, 1987.
The Partnership was organized to acquire a parcel of property in the
Mission Bay area of San Diego, California, and build and operate thereon a 117-
room "economy" motel as a franchise of Super 8 Motels, Inc. The motel was
opened for business in November 1987 under a twenty-year franchise agreement
with Super 8 Motels, Inc. which required the payment of initial franchise fees
of $20,000 and requires ongoing royalties equal to 4% of gross room revenues and
chain-affiliated advertising fees equal to 2% of gross room revenues. Since
January 1, 1990, the motel has been operated pursuant to a management agreement
with GHG.
The profitability of a motel is subject to general economic risks, the
management ability of the operator, intense competition, desirability of a
particular location, and other factors relating to its operations. The demand
for particular accommodations may vary seasonally and may be affected by
economic recessions, changes in travel patterns caused by changes in energy
prices, strikes, relocation of highways, the construction of additional highways
and other factors. To meet competition in the industry and to maintain economic
values, continuing expenditures must be made for modernizing, refurnishing, and
maintaining existing facilities prior to the expiration of their anticipated
useful lives.
There is no assurance that the Partnership's motel can be profitably
operated. Further, there is no assurance the motel can be sold at a profit.
Consequently, there is no guarantee of any profit or that the limited partners'
investments will be preserved against loss.
3
<PAGE>
There is significant competition in the lodging market. The Partnership is
in competition either directly or indirectly with a large number of hotels and
motels of varying quality and sizes, including other motels which are part of
national or regional chains. Such hotels and motels may have greater financial
resources and personnel with more experience than the Partnership and the
general partner. The San Diego area in particular has a large number of hotel
and motel projects that in the aggregate could dilute average occupancy and
affect profitability. The Partnership's motel does not compete directly with
any large budget motel chains, but competes indirectly in the greater San Diego
area with such budget motels as Comfort Inns and E-Z "8" Motels.
The Partnership has no employees.
Item 2. PROPERTY
The Partnership acquired the following property on February 5, 1987. The
Partnership does not intend to acquire any additional property.
Property name and address Property description
------------------------- --------------------
Mission Bay Super 8 Motel A 117-room "economy" motel on
4540 Mission Bay Drive approximately 1.056 acres of land.
San Diego, CA 92109
The Partnership purchased the land for $2,352,000, including closing costs,
demolished the structure on the land, and constructed the motel.
In the opinion of the Partnership's management, the property is adequately
covered by insurance.
Item 3. LEGAL PROCEEDINGS
The Partnership is not subject to any pending legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
4
<PAGE>
Item 5. MARKET FOR LIMITED PARTNERSHIP INTERESTS AND RELATED PARTNER MATTERS
There is no public trading market for the Partnership's limited partnership
interests. There were approximately 1,149 holders of the Partnership's 6,600
limited partnership interests as of December 31, 1994. Cash distributions to
holders of limited partnership interests totalled $180,000 ($27.27 per interest)
in 1994 and $162,000 ($24.55 per interest) in 1993.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition:
On November 19, 1986, the Partnership commenced its public offering
pursuant to its Prospectus. On June 15, 1987, the Partnership completed the
public offering. The Partnership received $5,761,115 (net of offering costs of
$838,885) from the sale of limited partnership interests. These funds were
available for investment in property, to pay legal fees and other costs related
to the investments, to pay operating expenses, and for working capital. The
majority of the proceeds were used to acquire and construct the property
identified in Item 2 above.
The Partnership's liquidity is indicated by net working capital which was
$83,161 at December 31, 1994 and $37,145 at December 31, 1993. The increase in
net working capital is due to cash flow from operations of $250,369, less
investment property expenditures of $16,610 and cash distributions to partners
of $200,000, in 1994.
Management is presently considering the possibility of exchanging
substantially all of the Partnership's investment property for common stock in a
real estate investment trust (REIT). Under this proposal, the common stock in
the REIT would be distributed to the limited partners and the Partnership would
be dissolved. The proposed transaction is contingent upon management reaching a
satisfactory agreement with the REIT and is subject to the approval of the
limited partners.
In connection with this proposed transaction, an independent appraiser
valued the Partnership's investment property at $2,810,000 as of August 1, 1994.
5
<PAGE>
Because of the significant decrease in the market value of investment property,
and the proposed exchange of investment property for common stock in a REIT,
management has elected to writedown the Partnership's investment property to its
appraised value of $2,810,000 as of December 31, 1994.
Results of Operations:
Net income (loss) was $(1,381,028) in 1994 and $73,760 in 1993. Total
revenues were $1,054,819 in 1994 and $1,021,785 in 1993. The property operated
at an occupancy rate of 54.9% in 1994 and 52.5% in 1993. The average daily room
rate was $42.20 in 1994 and $42.84 in 1993. The net loss for 1994 resulted from
an unrealized loss due to decline in value of investment property of $1,534,950
as discussed above.
A leading industry publication has reported that, in the economy and budget
market, occupancies in this region are expected to increase by 1% and average
daily room rates are expected to increase by $2.00 in 1995. Management feels
the first quarter of 1995 will show a downward trend that will not reverse until
later in the second quarter. San Diego is hosting several city-wide conventions
during the summer months that will boost occupancy and average daily room rates.
The effect of current operations on liquidity was net cash provided by
operating activities of $250,369 in 1994 and $160,833 in 1993. The cash was
used primarily for cash distributions to partners which were $200,000 in 1994
and $180,000 in 1993 and for investment property expenditures which were $16,610
in 1994 and $93,265 in 1993.
Seasonality:
The motel business is seasonal with the third quarter being the strongest
due to the tourist business and the last half of the fourth quarter and the
first half of the first quarter being the weakest. It is not unusual for the
motel operations to have negative cash flow during this weak period.
6
<PAGE>
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
I N D E X
Pages
-----
Independent Auditor's Report 7
Balance Sheets, December 31, 1994 and 1993 8
Statements of Operations, Years Ended December 31, 1994
and 1993 9
Statements of Partners' Capital, Years Ended December 31,
1994 and 1993 10
Statements of Cash Flows, Years Ended December 31, 1994
and 1993 11
Notes to Financial Statements 12-14
7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Partners
Mission Bay Super 8 Ltd.,
A California Limited Partnership
We have audited the balance sheets of Mission Bay Super 8 Ltd., A
California Limited Partnership, as of December 31, 1994 and 1993, and the
related statements of operations, partners' capital, and cash flows for the
years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mission Bay Super 8 Ltd., A
California Limited Partnership, as of December 31, 1994 and 1993, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
8
<PAGE>
San Diego, California
February 3, 1995
9
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Balance Sheets
December 31, 1994 and 1993
...ASSETS...
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 43,260 $ 9,501
Accounts receivable 15,428 11,539
Operating supplies 19,204 18,521
Prepaid expenses 9,884 18,171
Due from affiliates 27,431 -0-
---------- ----------
Total current assets 115,207 57,732
---------- ----------
Investment property, at carrying value:
Land 1,212,000 2,620,612
Building and improvements 2,024,033 2,161,590
Furniture, fixtures and equipment 702,412 698,083
---------- ----------
3,938,445 5,480,285
Less accumulated depreciation 1,128,445 1,044,241
---------- ----------
Investment property, net 2,810,000 4,436,044
---------- ----------
Franchise fees, net 12,829 13,829
---------- ----------
Total assets $2,938,036 $4,507,605
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statemaents.
10
<PAGE>
...LIABILITIES AND PARTNERS' CAPITAL...
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 20,782 $ 10,943
Accrued expenses 11,264 8,618
Due to affiliates -0- 1,026
---------- ----------
Total current liabilities 32,046 20,587
---------- ----------
Partners' Capital:
General partner:
Cumulative net income 7,953 146,056
Cumulative cash distributions (286,197) (266,197)
---------- ----------
(278,244) (120,141)
---------- ----------
Limited partners (6,600 interests):
Capital contributions, net of offering costs 5,761,115 5,761,115
Cumulative net income 71,565 1,314,490
Cumulative cash distributions (2,648,446) (2,468,446)
---------- ----------
3,184,234 4,607,159
---------- ----------
Total partners' capital 2,905,990 4,487,018
---------- ----------
Total liabilities and partners' capital $2,938,036 $4,507,605
---------- ----------
---------- ----------
</TABLE>
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Statements of Operations
Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1992
---------- ----------
<S> <C> <C>
Revenues:
Room revenues $ 989,703 $ 960,166
Phone revenues 41,459 27,649
Interest income 1,207 2,618
Other 22,450 31,352
---------- ----------
Total revenues 1,054,819 1,021,785
---------- ----------
Expenses:
Unrealized loss due to decline in value of
investment property (Note 5) 1,534,950 -0-
Property operating expenses 377,255 391,470
General and administrative 133,567 156,769
Depreciation 84,204 89,706
Management fees 63,215 61,150
Royalties and advertising 59,391 57,610
Marketing 57,478 59,936
Repairs and maintenance 56,895 58,924
Real estate taxes 44,448 45,588
Property and liability insurance 23,444 25,872
Amortization 1,000 1,000
---------- ----------
Total expenses 2,435,847 948,025
---------- ----------
Net income (loss) $(1,381,028) $ 73,760
---------- ----------
---------- ----------
Net income (loss) per interest $ (188.32) $ 10.06
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statemaents.
9
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Statements of Partners' Capital
Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
General Partner
----------------------------------------
Cumulative
Cumulative Cash
Net Income Distributions Total
---------- ------------- ---------
<S> <C> <C> <C>
Balance, December 31, 1992 $ 138,680 $(248,197) $(109,517)
Net income, year ended December 31, 1993 7,376 -0- 7,376
Cash distributions ($24.55 per interest) -0- (18,000) (18,000)
--------- --------- ----------
Balance, December 31, 1993 146,056 (266,197) (120,141)
Net loss, year ended December 31, 1994 (138,103) -0- (138,103)
Cash distributions ($27.27 per interest) - 0- (20,000) (20,000)
--------- --------- ---------
Balance, December 31, 1994 $ 7,953 $(286,197) $(278,244)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
Limited Partners
-------------------------------------------------------------------
Cumulative Total
Capital Cumulative Cash Partners'
Contributions Net Income Distributions Total Capital
------------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $5,761,115 $1,248,106 $(2,306,446) $4,702,775 $4,593,258
Net income, year ended December 31, 1993 -0- 66,384 -0- 66,384 73,760
Cash distributions ($24.55 per interest) -0- -0- (162,000) (162,000) (180,000)
---------- ---------- ------------ ---------- ----------
Balance, December 31, 1993 5,761,115 1,314,490 (2,468,446) 4,607,159 4,487,018
Net loss, year ended December 31, 1994 -0- (1,242,925) -0- (1,242,925) (1,381,028)
Cash distributions ($27.27 per interest) -0- -0- (180,000) (180,000) (200,000)
---------- ---------- ------------ ---------- ----------
Balance, December 31, 1994 $5,761,115 $ 71,565 $(2,648,446) $3,184,234 $2,905,990
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Statements of Cash Flows
Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,381,028) $ 73,760
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Unrealized loss due to decline in value of
investment property 1,534,950 -0-
Depreciation and amortization 85,204 90,706
(Increase) decrease in:
Accounts receivable (3,889) 3,228
Operating supplies (683) (1,223)
Prepaid expenses 8,287 7,272
Due from affiliates (3,931) -0-
Increase (decrease) in:
Accounts payable 9,839 (7,431)
Accrued expenses 2,646 (4,381)
Due to affiliates (1,026) (1,098)
----------- ---------
Net cash provided by operating
activities 250,369 160,833
----------- ---------
Cash flows from investing activities:
Investment property expenditures (16,610) (93,265)
----------- ---------
Net cash used in investing activities (16,610) (93,265)
----------- ---------
Cash flows from financing activities:
Cash distributions to partners (200,000) (180,000)
----------- ---------
Net cash used in financing activities (200,000) (180,000)
----------- ---------
Net increase (decrease) in cash and
cash equivalents 33,759 (112,432)
See accompany notes to financial statements.
11
<PAGE>
Cash and cash equivalents, beginning of year 9,501 121,933
----------- ---------
Cash and cash equivalents, end of year $ 43,260 $ 9,501
----------- ---------
----------- ---------
</TABLE>
Schedule of noncash investing and financing activities:
Sale of carpeting to related party (Note 4).
See accompany notes to financial statements.
12
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Notes to Financial Statements
Note 1. THE PARTNERSHIP AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mission Bay Super 8 Ltd., A California Limited Partnership (the
Partnership), formerly Motels of America Series IX, A California Limited
Partnership, was formed on February 5, 1987 pursuant to the California
Revised Uniform Limited Partnership Act. The purpose of the Partnership is
to construct, own, and operate a 117-room "economy" motel under a Super 8
franchise. The motel was opened in November 1987.
The following is a summary of the Partnership's significant accounting
policies:
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
INVESTMENT PROPERTY
Investment property is recorded at cost. Depreciation is computed using
the straight-line method based on estimated useful lives of 5 to 35 years.
Maintenance and repairs costs are expensed as incurred, while significant
improvements, replacements, and major renovations are capitalized.
FRANCHISE FEES
Franchise fees are amortized over the 20-year life of the franchise
agreement.
INCOME TAXES
13
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Notes to Financial Statements
(Continued)
No provision for income taxes has been made as any liability for such
taxes would be that of the partners rather than the Partnership.
NET INCOME (LOSS) PER INTEREST
Net income (loss) per interest is based upon the 90% allocated to
limited partners divided by 6,600 limited partner interests
outstanding throughout the year.
Note 2. PARTNERSHIP AGREEMENT
Net income or loss and cash distributions from operations of the
Partnership are allocated 90% to the limited partners and 10% to the
general partner. Profits from the sale or other disposition of
Partnership property are to be allocated to the general partner until
its capital account equals zero; thereafter, to the limited partners
until their capital accounts equal their capital contributions reduced
by prior distributions of cash from sale or refinancing plus an amount
equal to a cumulative but not compounded annual 8% return thereon
which cumulative return shall be reduced (but not below zero) by the
aggregate amount of prior distributions of cash available for
distribution; thereafter, gain shall be allocated 15% to the general
partner and 85% to the limited partners. Loss from sale shall be
allocated 1% to the general partner and 99% to the limited partners.
Note 3. FRANCHISE AGREEMENT
The Partnership has entered into a twenty-year franchise agreement
with Super 8 Motels, Inc. to provide the Partnership with consultation
in the areas of design, construction, and operation of the motel. The
agreement required the payment of initial franchise fees of $20,000
and requires ongoing royalties equal to 4% of gross room revenues and
chain-affiliated advertising fees equal to 2% of gross room revenues.
14
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Notes to Financial Statements
(Continued)
Note 4. RELATED PARTY TRANSACTIONS
The motel is operated pursuant to a management agreement with the
general partner, GHG Hospitality, Inc. (GHG). The agreement provides
for the payment of monthly management fees of 6% of gross revenues.
The Partnership has agreed to reimburse GHG for certain expenses
related to services performed in maintaining the books and
administering the affairs of the Partnership.
GHG and an affiliate, Grosvenor Management Services, Inc. (GMS),
allocate to the Partnership certain marketing, accounting, and
maintenance salaries and certain other expenses directly related to
the operation of the Partnership.
Note 4. RELATED PARTY TRANSACTIONS (continued)
Fees, reimbursements, salaries, and other expenses paid to GHG and GMS
and included in total expenses for the years ended December 31, 1994
and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Management fees $ 63,215 $ 61,150
Reimbursement for partnership
administration expenses 40,423 50,987
Salaries and other allocated
expenses 108,740 131,466
-------- --------
$212,378 $243,603
-------- --------
-------- --------
</TABLE>
15
<PAGE>
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
Notes to Financial Statements
(Continued)
In addition, all motel employees are paid by GMS. The Partnership
reimbursed GMS $232,629 in 1994 and $210,693 in 1993, including a one
percent processing fee, for the wages of these employees.
During 1994, the Partnership transferred carpeting to GMS at the
Partnership's cost of $23,500 and recorded a receivable from GMS.
Note 5. PROPOSED EXCHANGE OF INVESTMENT PROPERTY AND
WRITEDOWN TO APPRAISED VALUE
Management is presently considering the possibility of exchanging
substantially all of the Partnership's investment property for common
stock in a real estate investment trust (REIT). Under this proposal,
the common stock in the REIT would be distributed to the limited
partners and the Partnership would be dissolved. The proposed
transaction is contingent upon management reaching a satisfactory
agreement with the REIT and is subject to the approval of the limited
partners.
In connection with this proposed transaction, an independent appraiser
valued the Partnership's investment property at $2,810,000 as of August
1, 1994. Because of the significant decrease in the market value of
investment property, and the proposed exchange of investment property
for common stock in a REIT, management has elected to writedown the
Partnership's investment property to its appraised value of $2,810,000
as of December 31, 1994.
16
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The general partner has general responsibility and ultimate authority
in all matters affecting the business of the Partnership.
The general partner and its directors and executive officers as of
December 31, 1994 are as follows:
GHG HOSPITALITY, INC. (GHG) was incorporated in November 1989 under the
laws of the state of Delaware. GHG was elected as general partner effective
January 1, 1990.
J. MARK GROSVENOR, 47, is President and a Director of GHG. From 1976
to 1988, he served as chief executive officer of Nite Lite Inns, a California
corporation, which owned Grosvenor Enterprises, a California limited
partnership, which owns Grosvenor Inn. In 1984, he acquired Medallion Foods,
Inc., a food processing company, located in Newport, Arkansas. Mr. Grosvenor
graduated from San Diego State University with a bachelor's degree in business
and finance.
STEPHEN D. BURCHETT, 35, is General Counsel and a Director of GHG.
From 1984 to 1991 he worked in private business law practice in San Diego,
California with Schall, Boudreau & Gore and Kaufman, Lorber, Grady & Farley.
Mr. Burchett graduated from California State University Fullerton in 1981 with a
bachelor's degree in finance and from the University of Santa Clara School of
Law in 1984 with a juris doctorate.
SYLVIA MELLOR CLARK, 50, is Controller and a Director of GHG. In 1978,
she joined Grosvenor Industries, Inc., where she is controller and a director.
Prior to joining Grosvenor Industries, Inc., she operated her own accounting
firm from 1976 to 1978. Ms. Clark graduated from San Diego State University and
National University.
17
<PAGE>
Item 10. EXECUTIVE COMPENSATION
The Partnership has not paid and does not propose to pay any executive
compensation to the general partner or any of its affiliates (except as
described in Item 12 below). There are no compensatory plans or arrangements
regarding termination of employment or change of control.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) No person or group is known to the Partnership to be the beneficial
owner of more than 5% of the outstanding limited partnership interests in the
Partnership.
(b) The general partner does not directly or indirectly own any limited
partnership interests in the Partnership. The general partner does not possess
a right to acquire beneficial ownership of limited partnership interests in the
Partnership.
(c) There are no arrangements, known to the Partnership, which may result
in a change in control of the Partnership other than the proposal to exchange
the Partnership's investment property for common stock in a REIT as discussed in
Item 6.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The motel is operated pursuant to a management agreement with GHG. The
agreement provides for the payment of monthly management fees of 6% of gross
revenues.
The Partnership has agreed to reimburse GHG for certain expenses related to
services performed in maintaining the books and administering the affairs of the
Partnership.
GHG and an affiliate, Grosvenor Management Services, Inc. (GMS), allocate
to the Partnership certain marketing, accounting, and maintenance salaries and
other expenses directly related to the operation of the Partnership.
18
<PAGE>
Fees, reimbursements, salaries, and other expenses paid to GHG and GMS and
included in total expenses for the years ended December 31, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Management fees $ 63,215 $ 61,150
Reimbursement for partnership
administration expenses 40,423 50,987
Salaries and other allocated expenses 108,740 131,466
-------- --------
$212,378 $243,603
-------- --------
-------- --------
</TABLE>
In addition, all motel employees are paid by GMS. The Partnership
reimbursed GMS $232,629 in 1994 and $210,693 in 1993, including a one percent
processing fee, for the wages of these employees.
During 1994, the Partnership transferred carpeting to GMS at the
Partnership's cost of $23,500 and recorded a receivable from GMS.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements (see Index to Financial Statements filed
with this annual report).
2. Exhibits:
3-A. The Prospectus of the Partnership dated November 19, 1986,
as filed with the Commission, is hereby incorporated herein
by reference.
3-B. Agreement of Limited Partnership set forth as Exhibit B to
the Prospectus, as filed with the Commission, is
incorporated herein by reference.
19
<PAGE>
3-C. Amendment to Agreement of Limited Partnership dated January
1, 1990, as filed with the Commission, is incorporated
herein by reference.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
No annual report or proxy material for the fiscal year 1994 has been sent
to the limited partners of the Partnership. An annual report will be sent to
the limited partners subsequent to this filing and the Partnership has
incorporated such reports in this filing.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
By: GHG Hospitality, Inc.
Corporate General Partner
By: Date: March 27, 1995
J. Mark Grosvenor
President and Director of GHG
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: GHG Hospitality, Inc.
Corporate General Partner
By: Date: March 27, 1995
J. Mark Grosvenor
President and Director of GHG
By: Date: March 27, 1995
Stephen D. Burchett
General Counsel and Director of GHG
21
<PAGE>
By: Date: March 27, 1995
Sylvia Mellor Clark
Controller and Director of GHG
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MISSION BAY SUPER 8 LTD.,
A California Limited Partnership
By: GHG Hospitality, Inc.
Corporate General Partner
By: J. Mark Grosvenor Date: March 27, 1995
-----------------------------
J. Mark Grosvenor
President and Director of GHG
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: GHG Hospitality, Inc.
Corporate General Partner
By: J. Mark Grosvenor Date: March 27, 1995
-----------------------------
J. Mark Grosvenor
President and Director of GHG
By: Stephen D. Burchett Date: March 27, 1995
-----------------------------
Stephen D. Burchett
General Counsel and Director of GHG
18
<PAGE>
By: Sylvia Mellor Clark Date: March 27, 1995
-----------------------------
Sylvia Mellor Clark
Controller and Director of GHG
19
<PAGE>
EXHIBIT 23.4
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANT
I consent to the inclusion in Host Funding Inc.'s Amendment 4 to
Registration Statement on Form S-4 (File No. 33-60011) of my report dated July
11, 1995, except for paragraph 2 of note 4 and paragraphs 2 and 4 through 7
of note 5 as to which the date is September 30, 1995, on my audit of the
balance sheet of Host Funding, Inc as of April 1, 1995, and of my report
dated July 11, 1995, except for paragraph 2 of note 4 and paragraphs 2 and 4
through 7 of note 5 as to which the date is September 30, 1995, relating to
the financial statement schedule for Host Funding Inc. appearing elsewhere in
this Amendment 4 to Registration Statement on Form S-4 (File No. 33-60011),
and of my report dated April 4, 1995, except for paragraphs 2 and 8 through
11 of note 6 as to which the date is September 30, 1995, on my audits of the
Financial Statements of Initial Hotels as of December 31, 1994 and 1993 and
for the years ended December 31, 1994, 1993, and 1992. I also consent to the
reference to my Firm under the caption "Experts".
/s/ William H. Ling
San Diego, California ----------------------------------
November 28, 1995 William H. Ling
Certified Public Accountant
<PAGE>
EXHIBIT 23.5
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the inclusion in Host Funding, Inc.'s Registration
Statements on Form S-4 (File No. 33-60011): (1) of our independent
auditor's report dated February 3, 1995, on our audits of the financial
statements of Mission Bay Super 8, Ltd., a California limited partnership,
for the years ended December 31, 1994 and 1993, and (2) our independent
auditor's report dated February 21, 1994, on our audits of the financial
statements of Mission Bay Super 8, Ltd., a California limited partnership,
for the years ended December 31, 1993 and 1992. We also consent to the
reference to us under the heading "Experts".
/s/ Levitz, Zacks & Ciceric
San Diego, California ----------------------------
November 15, 1995 Levitz, Zacks & Ciceric
Certified Public Accountants
<PAGE>
EXHIBIT 23.6
<PAGE>
[ARTHUR ANDERSEN LLP LETTERHEAD]
November 16, 1995
Mr. Peter Aylward
3250 Vista Diego Road
Jamul, CA 91935
Dear Mr. Aylward:
We hereby consent to the inclusion in the Host Funding, Inc.
registration statement on Form S-4 (Commission File No. 33-60011) of (1) our
appraisal report dated December 1, 1994 on the Super 8 hotel located in
Miner, Missouri, (2) our appraisal report dated December 1, 1994 on the Super
8 hotel located in Poplar Bluff, Missouri, (3) our appraisal report dated
December 1, 1994 on the Super 8 hotel located in Somerset, Kentucky, (4) our
appraisal report dated December 1, 1994 on the Super 8 hotel located in Rock
Falls, Illinois, and (5) our appraisal report dated December 1, 1994 on the
Mission Bay Super 8 hotel located in San Diego, California. We also consent
to the reference to us under the headings "Experts" and "Appraisals".
Very truly yours,
ARTHUR ANDERSEN LLP
/s/ William J. Carter
By
William J. Carter
BE
<PAGE>
EXHIBIT 99.1
<PAGE>
PROXY CARD
The undersigned hereby acknowledges receipt of the Prospectus/Consent
Solicitation Statement of Host Funding, Inc., dated December 1, 1995, for
the acquisition of the assets of Mission Bay in exchange for Shares of the
Company and the undersigned votes as follows as to such transactions:
VOTE HERE:
FOR AGAINST ABSTAIN
SIGN HERE:
_____________________________ ________ ___________________________ ________
Sign exactly as your name(s) Date Sign exactly as your name(s) Date
appears(s) appears(s)
LABEL WILL CONTAIN PERTINENT PARTNER INFORMATION
<PAGE>
EXHIBIT 99.2
<PAGE>
CONSENT TO BE NAMED AS A DIRECTOR
I, Don W. Cockroft, hereby consent to be nominated as a director of Host
Funding, Inc. and to be named as a nominated director in the Registration
Statement on Form S-4 to be filed with the Securities and Exchange Commission by
Host Funding, Inc.
Dated September 28, 1995 /s/ Don W. Cockroft
---------------------------------
Don W. Cockroft
<PAGE>
CONSENT TO BE NAMED AS A DIRECTOR
I, William Birdsall, hereby consent to be nominated as a director of Host
Funding, Inc. and to be named as a nominated director in the Registration
Statement on Form S-4 to be filed with the Securities and Exchange Commission by
Host Funding, Inc.
Dated September 28, 1995 /s/ William Birdsall
---------------------------------
William Birdsall
<PAGE>
CONSENT TO BE NAMED AS A DIRECTOR
I, Charles R. Dunn, hereby consent to be nominated as a director of Host
Funding, Inc. and to be named as a nominated director in the Registration
Statement on Form S-4 to be filed with the Securities and Exchange Commission by
Host Funding, Inc.
Dated September 28, 1995 /s/ Charles R. Dunn
---------------------------------
Charles R. Dunn
<PAGE>
CONSENT TO BE NAMED AS A DIRECTOR
I, Guy E. Hatfield, hereby consent to be nominated as a director of Host
Funding, Inc. and to be named as a nominated director in the Registration
Statement on Form S-4 to be filed with the Securities and Exchange Commission by
Host Funding, Inc.
Dated September 28, 1995 /s/ Guy E. Hatfield
---------------------------------
Guy E. Hatfield
<PAGE>
CONSENT TO BE NAMED AS A DIRECTOR
I, Michael S. McNulty, hereby consent to be nominated as a director of Host
Funding, Inc. and to be named as a nominated director in the Registration
Statement on Form S-4 to be filed with the Securities and Exchange Commission by
Host Funding, Inc.
Dated September 28, 1995 /s/ Michael S. McNulty
---------------------------------
Michael S. McNulty
